Government type of the PRS is based on a principle that according to Constitution “the People's Republic of China is a socialist state of democratic dictatorship of people, led by the working class (through the Communist Party of China) and based on the union of workers and peasants. The government system is socialistic. All the power belongs to people. People exercise their state power through National People’s Congress and local congresses of people of different levels.The legislative branch in China is represented by National People’s Congress (NPC). Local congresses are subject to PNC.The head of state, chairman of the PRC, jointly with the Standing Committee of PNC exercise their supreme state power in the country. On the basis of resolutions by PNC and its Standing committee he publishes laws, appoints officials in the State Council, issues orders, etc.The executive bodies are the State Council and local people’s governments of different level.The judicial branch is represented by people’s courts and people’s procuratorates. People’s courts include Supreme People’s Court, local people’s courts, special people’s courts (military courts, etc.). People’s procuratorate is a state body of monitoring law-abidingness and includes Supreme People’s Procuratorate, local people’s procuratorates, special people’s procuratorates.Beside, among supreme state bodies is Central military council, which controls all the armed forces in the PRC.
Since 1980 Chinese economy grew 15% annually. By the end of 1990s rate of economic growth reduced to 8% a tear, but since joining WTO in 2001 inflow of direct investments and expansion of export caused new acceleration. Currently, China ranks second in the world in terms of GDP (8.23 trillion US dollars), overtaking Japan. By 2020, China should catch up with the United States, according to various estimates, in the period 2015-2021, and even become three times larger than the United States by 2040.Free economic zones play a very important role in China’s development. Today there are 4 economic zones in China: Shenzhen, Zhuhai, Shantou, Xiamen, 14 free-trade zones, 53 high-tech zones (including large modern Silicon Valley), more than 70 science and technology parks for experts graduated from foreign universities, 38 export-oriented processing production zones.
Legal system of PRC is of mixed nature. It is a combination of ancient legal traditions and modern law based on the conception of “socialism with Chinese characteristics” and some principles of civil law.
Over the centuries Chinese legal system was influenced by Buddhism, Confucianism and Taoism. Only since the latter half of the 19th century a tradition similar to Western one began to arise. However, this process was disrupted after establishment of PRC in 1949, when the country began to borrow socialistic law.
Since 1979 within the course of liberalization legitimacy system and law protection activity began to restore, basic branches of law were codified again or for the first time in history of PRC (e.g. the first Criminal codex and Criminal procedure code were adopted in 1979, General Provisions of Civil Law were adopted in 1986, labor law was codified in 1994).
As a result of reforms which lasted for about 20 years a new legislation system combining socialist (Soviet) law and some elements of civil law (in economic field) was formed.
The basic sources of law in PRC are laws and other legal acts. Hierarchy is formed by Constitution, legal acts, resolutions by Standing Committee of People’s National Congress, resolutions by State Council, by-laws by other state and local bodies.
PRC legislation allows incorporation of various types of entity, including limited company (with special requirements to one person limited companies and state-owned enterprises) and company limited by shares (divided into public companies and non-public companies).
However, for foreign investors companies with foreign investment are more suitable. They include the following types:
1. Joint Venture – JV, which can be of two types:
EJV and CJV are similar in a lot of aspects (authority approval procedure, management structure, etc.). But there are still some differences:
CJV has a major disadvantage. Since it is compulsory to agree upon the conditions of the contract, establishment of such a company can take a lot of time and money. Besides, there is always a risk that the partners will not reach an agreement.
Joint Venture can be incorporated by one Chinese and one foreign investor. Such type of entity is usually used to hire Chinese labors and apply foreign technologies and know-how.
2. Wholly foreign owned enterprise
After China joined WTO and Chinese government had to weaken regulation towards investments, foreign investors tend to incorporate wholly foreign owned enterprise(WFOE). Such business entities comprised about 67% of all direct investments in China in 2004.
WFOE is a limited company owned by foreign investors. Although liability is limited, a legal representative of such a company should be appointed, his liability is unlimited.
3. Representative office – RO
At present representative office is the cheapest and simplest way to represent a foreign company in China. The goal of a representative office is to arrange contacts with Chinese businessmen and consumers in the name of a company. Therefore, representative office is like an agent between a foreign company and Chinese partners. RO cannot carry on direct business. Its scope of business only covers market studying, promotion action arrangement, exhibition participation, contract conclusion, but only in the name of head office. However, if scope of business is not connected with production, but consulting, RO can provide consulting services.
Depending on a form of activity the most suitable types of business entities to carry on business in China are WHOE and RO.
Advantages of JV - Joint Ventures1. An ability to conclude any kind of contract, carry on business of full value; 2. Application of Chinese labor and equipment; 3. Intellectual property rights of JV are protected by law.
Disaadvantages of JV:
1. Deficit of information on a future Chinese partner; 2. Feasibility study and negotiations with a Chinese partner take a lot of time; 3. Necessity to share profit with a partner.
Advantages of WFOE (Wholly foreign owned enterprise)
1. Wholly owned means independence from Chinese partner, full control over business and management; 2. An ability to operate officially and get profit in RMB, not just represent the interests of a head office; 3. An ability to convert RMB to US dollar during transaction abroad; 4. Intellectual property rights protection.
Disadvantages of WFOE:
1. A foreign company may be short of knowledge and connections of a Chinese partner; 2. Registration is a very complicated procedure, which may take up to 6 months.
Advantages of RO (Representative Office)
Comparatively simple and inexpensive procedure of registration. The whole process may take about 1 month.
Disadvantages of RO:
1. Legal capacity of RO is limited; 2. Although RO does not have an income, it still has to pay taxes. Ro is considered to get income for covering its expenses in Chine, this income is taxable.