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	NOTICE OF THE GENERAL OFFICE OF THE STATE COUNCIL ON APPROPRIATE HANDLING THE EXISTING PROJECTS WITH GUARANTEE OF FIXED RETURN TO INVESTMENTS BY FOREIGN PARTIES

	(No. 43 [2002] of the State Council promulgated on September 10, 2002, which shall come into force as of January 1, 2003)


SUBJECT : FOREIGN INVESTMENT; GUARANTEE OF FIXED RETURN
ISSUING DEPARTMENT : THE STATE COUNCIL OF THE PEOPLE'S REPUBLIC OF CHINA
ISSUE DATE : 09/10/2002
IMPLEMENT DATE : 01/01/2003
LENGTH : 1,455 words
TEXT :

Since the Notice of the State Council on Strengthening the Control of Foreign Exchanges and External Debts and Carrying out Inspections on Foreign Exchanges and External Debts (No. 31 [1998] of the State Council) was distributed in September of 1998, the work of clearing up and rectifying the projects guaranteeing the fixed return from investments by the foreign parties (hereinafter referred to projects of fixed return) has been successively carried out in all places. In the past several years, there were quite a number of projects of fixed return rectified, and generally speaking, there were no new projects of fixed return, therefore the benefits of the state and the lawful rights and interests of all investors were effectively maintained; however, there are still some projects of fixed return which have not been appropriately handled. Since the Notice of the State Council on Further Strengthening and Improving the Control of Foreign Exchange Income and Expenditure (No. 10 [2001] of the State Council) was distributed in April of 2001, the existing projects of fixed return have been checked as required and the handling opinions have been proposed in all places.

In order to further regulate attracting foreign investments, appropriately solve the problems left over from history, and promote the healthy development of attracting foreign investments in China, we have been approved by the State Council to hereby give our notice on the relevant issues concerning the handling of the projects of fixed return as follows:

I. BASIC PRINCIPLES FOR HANDLING THE EXISTING PROJECTS OF FIXED RETURN

Guaranteeing the fixed return from the investments by foreign parties does not conform to the principle of sharing benefits and undertaking risks jointly by both the Chinese and foreign investors, which violates the provisions in the relevant laws and regulations on Chinese-foreign equity joint venture and Chinese-foreign contractual joint venture. The local government at each level shall, under the present beneficial conditions of relatively sufficient domestic funds, comparatively low cost of financing and good overall situation for attracting foreign investments, take powerful measures to appropriately handle the existing projects of fixed return.

The basic principles for handling the existing projects of fixed return are: the equality and mutual benefits of, the joint sharing of benefits and undertaking of risks by both the Chinese and foreign parties should be in accordance with the Law on Chinese-foreign Equity Joint Ventures, the Law on Chinese-foreign Contractual Joint Ventures and other relevant policies; all parties shall, for the normal operation of the projects and local economic development, sufficiently negotiate with each other; the relevant local governments and the departments in charge of the projects shall, upon the specific situation on the projects, take effective methods to rectify them, so as to maintain a good environment for China to attract foreign investments.

II. APPROPRIATELY HANDLING DIFFERENT TYPES OF PROJECTS WITH FIXED RETURN IN MULTI-WAYS

According to the above principles, different types of projects of fixed return may be handled in the following ways:

(a) For a project under which the fixed return from investments by a foreign party is paid with the proceeds of the project itself, both the Chinese and foreign parties shall, upon sufficient negotiations, amend the contract or agreement to substitute the method of fixed return with lawful forms of distributing proceeds such as recovering investment ahead of time, etc..

(b) For a project at loss or with insufficient proceeds under which the funds out of the project are used to pay for part or most of the foreign party's return from investment, or the promised return from investment is not paid to the foreign party, it may be handled in the way of "modification", "purchase", "transfer" or "cancellation" on the basis of the particulars of the project:

(1) "Modification". To cancel or amend the clauses on fixed return in the contract through negotiations between the Chinese and foreign parties, and to re-determine the reasonable forms and proportions of distributing proceeds of each party. If the foreign party is to recover its investments ahead of time or to obtain the investment proceeds in priority, it should be clarified that its sources may only be distributable operative income and other lawful income from the project.

If the foreign party's fixed return is guaranteed in the form of an agreement out of the contract, or if the local government, local financial department, or any other administrative organ or entity provides the foreign party with promises or guarantees on fixed return, the relevant agreement and guarantee documents shall be cancelled.

(2) "Purchase". After both parties have reached an agreement through negotiation, the Chinese party may, upon approval by the relevant department, purchase all the foreign party's share rights at a reasonable price, terminate the relevant contract and agreement, and deal with the remaining matters in accordance with the relevant provisions. The relevant enterprise shall be regarded as a domestic enterprise to be managed. In case the purchase of foreign exchanges is involved, that shall be handled by the foreign exchange bureau.

(3) "Transfer". For a project under which the party concerned is able to repay the external debts or the repaying entity of the external debts has been determined, the parties may, upon consent with each other, apply to convert the previous foreign investments into the Chinese party's external debts. External debt registration shall be made after the said conversion has been approved by the State Development Planning Commission jointly with the Ministry of Foreign Trade and Economic Cooperation and the State Administration of Foreign Exchange. After that, the external debts shall be repaid with interest, and the relevant project shall be regarded as a domestic enterprise to be managed.

(4) "Cancellation". For an enterprise at heavy loss or not qualified to continue operation, or for an enterprise meeting the conditions in the contract or articles of association on dissolution, the joint venture contract may, upon approval by the relevant competent department, be terminated in accordance with the legal procedures, and the enterprise shall be liquidated in accordance with the relevant laws and provisions.

(c) The projects under any of which the foreign party's anticipated return from investments is to be realized in the form of the agreement on electric power supply shall not be included in the present scope of handling the projects of fixed return, but shall be appropriately handled step by step in the future in combination with the overall proposal on the reform of electric power system and the relevant coordinative policies.

III. TO COOPERATE CLOSELY AND ENFORCE THE LAW STRICTLY, AND TO MAINTAIN A GOOD ENVIRONMENT FOR CHINA TO ATTRACT FOREIGN INVESTMENTS

If, in any place, the project of fixed return have not been appropriately handled, the people's government of the province (autonomous region or municipality directly under the Central Government) where the project is located shall, pursuant to the above principles and opinions, take effective methods to handle the existing projects of fixed return, and shall complete the rectification by the end of 2002. The departments of planning, foreign trade and economic cooperation, foreign exchange, finance, taxation, industrial and commercial administration, at all levels and the designated foreign exchange banks shall actively cooperate in this work, and shall, in accordance with the relevant regulations and policies of the state, handle the relevant formalities, and appropriately solve all kinds of specific problems involved in the handling of the projects. The local governments at all levels shall make explanations to the foreign parties, and negotiate with them sufficiently, so as to avoid disputes due to simple ways of work. In case of any particular circumstance or problem that cannot be solved through negotiation, they shall timely be reported to the State Development Planning Commission and the Ministry of Foreign Trade and Economic Cooperation.

If any project of fixed return under which the proceeds obtained by a foreign party exceeds the distributable operative income or other lawful income is not approved by the State Administration of Foreign Exchange as of January 1, 2003, the designated foreign exchange bank shall not handle the matters of purchasing foreign exchanges or payment of foreign exchanges abroad for the party.

The local governments at all levels shall, when actively attracting foreign investments to promote the economic development, strictly implement all the laws, regulations and policies of the state, and maintain a good environment for China to utilize foreign investments. From now on, no entity shall violate the state provisions to guarantee the fixed return from investments by foreign parties, nor shall it disguisedly borrow loans from foreign parties in the name of attracting foreign investments. Once any violator is found, he/it shall be punished severely, all the concluded contracts or agreements shall be invalidated, and meanwhile, the relevant leaders and responsible persons shall be investigated for liabilities.