Business Organizations in China 1. Evolution

Pre-1978:

Rural Areas: People’s Commune - Production Brigades – Production teams Collectively Owned Enterprises (agriculture-related or non-agricultural business; nature: TVEs?)

Urban Areas: SOEs and Collectively Owned Enterprises

Danwei: work unit

Nature: the basic economic unit for industries and commerce, but not business organization in the real sense (purpose; management; social welfare unit; CCP policy implementation.); not organized and operate in accordance with laws, rather on the basis of party documents, commands and orders.

1979-1993:

Emerged, developed and recognized by laws: the emergence of private economies and liberalization of the state sector.

However, during this period business organizations are distinguished according to types of ownership and nationalities or domiciles of their owners, hence laws are passed in line with these differences.

State-Owned enterprises:

  1. Law on Industrial Enterprises Owned by the Whole People (National People’s Congress, 13 April 1988): independent personality and limited liability; SOEs hold ownership over the assets that have been entrusted to them by the state; fully responsible for its debts to the extent of the value of its assets and the government is no longer responsible; management and operation freedom;
  2. Significance of the law:

Private enterprises:

  1. Provisional Regulation on the Administration of Urban and Rural Individual Industrial and Commercial Households (State Council, 5 August 1987)

  2. Provisional Regulation on Private Enterprises (State Council, 25 June 1988):

  3. Key difference: employing more than 8 or more staff

  4. But a private enterprise can only be set up by farmers, the urban unemployed and the retired.

Collectively Owned Enterprises:

1.Regulation on Collectively Owned Enterprises in Cities and Towns (State Council, 9 September 1991) 2.Law on TVEs (29 October 1996): why was the legislation so late?

Foreign-Invested Enterprises: Law on Sino-Foreign Equity Joint Ventures (1 July 1979) Law on Wholly Foreign-Owned Enterprises (12 April 1986) Law on Sino-Foreign Contractual Joint Ventures (13 April 1988)

Post- 1993

No longer based on ownership or identity differences

 Company Law 1993 (significantly amended in 2005)

 Partnership Law 1997 (amended in 2006)

 Sole Proprietorship Law 1999

With the enactment of Company Law in 1993 and Partnership Law in 1997, a basic legal framework for business organizations has been established in China.

  1. Forms of business organization in China Sole Proprietorship

 Agricultural households: sole proprietorship in nature

 Individual Industrial and Commercial Households: Booming at the early stage of reform, but declined from the late 1990s (the number decreased from 31.6 million in 1999 to 23.5 million in 2004: why?)  Small family business;  No separate personality, unlimited liability,  has to be registered with SAIC

 Sole Proprietorship registered under the Sole Proprietorship Law 1999:  Capital contributed by a natural person or his family  Unlimited liability: to the extent of his personal property or, if indicated on registration as family investments, the property of the family.  Of modest importance: less than 200 thousands registered in 2000. Reasons: unlimited liability; formalities (registration, accounting and annual filing)

Partnership

 General partnership

 Limited Partnership:  Created when the law was amended in 2006.  Partners can enjoy limited liability, but there should be at least a general partner whose liability is unlimited.  A partner can be a legal person, but a legal person, if it is a SOE, listed company, charitable organization or other social welfare institution, shall not become a general partner with unlimited liability.

 Special general partnership:  Created by the new law  Where a partnership incurs debits as a result of intentional misbehaviour or gross omission of one or several partners, other partners bear limited liability. For other debts, all partners assume unlimited liability.

 LLP: still not available in China

Company

 Limited Liability Company (有限责任公司):  Limited Liability Company: in the general sense; with at least two shareholders; other characteristics similar to Limited Liability Company in England

 Solely state-owned company: one-person company with only one shareholder -- a state-authorized investment institution or government agency; only these organizations can set up such a company under the Company Law 1993 (why such a type of company was created?)

 One-person company: the privilege was extended to other legal persons and natural persons when the law was amended in 2005, but with strict restriction: the registered capital shall not be less than 100 thousand RMB and be paid up in lump sum rather than in installment; publicity – the business certificate shall indicate; a natural person can only set up one one-person company and such an one-person company cannot set up another one-person company; audited annual financial report.

 Company Limited by Shares (股份有限公司)  Also called Joint Stock Company  Similar to English public company  Minimum capital requirement: 5 million RMB  Permission from CSRC is needed if a company issues shares publicly.  Listed and non-listed company limited by shares.

Others

 Enterprises registered under the Law on Industrial Enterprises Owned by the Whole People 1988: SOEs have largely been converted into companies but some remain registered under this law. Differences from Solely State-Owned Limited Liability Company?: (governance structure: a Solely State-Owned Company is required to set up the board of directors and supervisory board, while a SOE under the 1988 law is not, with the director (manager) at central stage of management.)

 Private Enterprises registered under the Provisional Regulation on Private Enterprises 1988: the law is still effective but seriously out of date. The law did not create new forms of business organization. Rather, it was provided that a private enterprise could be organized as sole proprietorship, partnership or limited liability.

  1. Foreign Invested Enterprises (FIEs) There are three types of FIEs, which can be set up under the three statutes adopted by the National People’s congress. But these laws do not create new forms of business organization. They just regulate different ways where foreign direct investment in China can be carried out. Enterprises set up with foreign investments take the forms of Limited liability Company, Company Limited by Shares or Partnership (the Company Law is applicable to FIEs, but where a FIE law is different from Company Law in a specific aspect, the FIE law takes priority.)

Equity Joint Venture --Limited Liability Company with Legal person status --With both Chinese and foreign investors --Foreign investor(s) hold(s) at least 25% shares --Profit and losses shared according to investors’ share of the registered capital --With the promulgation by the MOFTEC (now Ministry of Commerce) in 1995 of Provisional Rules on Several Issues Concerning the Establishment of Foreign Companies Limited by Shares, foreign investors can set up Companies Limited by Shares with shares owned by foreign investor no less than 25%.

Contractual Joint Venture --Limited liability Company or Partnership without legal person status --With both Chinese and foreign investors --Contribute capital, distribute income or product and bear risks according to contractual arrangement --flexible in management, can be managed by one party (usually foreigner) --Less popular

Wholly Foreign Owned Enterprises (WFOE) --Limited Liability Company without Chinese partner --The number of shareholders could be one or more --most popular Others Representative Office ----Representing a foreign company: not an independent enterprise, with no legal person status --No direct operational activities --Engage in liaison services, marketing survey, product introduction and technical exchange for its foreign company

Branch of Foreign Company --Can engage in a broader scope of business activities than representative office --Without legal person status and the foreign company is responsible for the branch’s debts

D. Types of Ownership  State-owned enterprises: what are SOEs?

--Ownership belongs to all the people of the nation and is held and exercised on behalf of the nation by, before 2003, the State Council and, after 2003, the state Council, provincial and municipal governments. -- including  Enterprises registered under the Law on Industrial Enterprises Owned by the Whole People 1988 (still effective)  Solely state-owned companies: what the differences?—mainly in the governance structure: a Solely State-Owned Company is required to set up the board of directors and supervisory board while a SOE under the 1988 law is not, with the director (manager) at central stage of management  Companies controlled by the state?: what does ‘control’ exactly mean? 50% or more majority ownership? --Before 1978 the state sector was dominant in the economy, accounting for 77.6% gross value of industrial output. Since the reform, the significance of the state sector has been declining, although the absolute volume of output has increased.

 Collectively owned enterprises --Ownership belongs to all the people of a smaller community in the Country, like village, township and county in the rural area, district and subdistrict in the urban area. --But ordinary people do not have a say in the running of the enterprises. They are in fact quasi SOEs controlled by low level governments. --including: TVEs and collectively owned enterprises in the urban areas. --SOEs and collectively owned enterprises made up the so-called ‘public enterprises’ which were only allowed before 1978. --In 1978, accounting for 22.4% gross value of industrial output. From the beginning of reform the collective sector grew rapidly and created the bulk of new jobs. But since the middle of 1990s, it has experienced difficulties and many have since been privatized.

 Private enterprises --Including:  Individual Industrial and Commercial Households  Registered under the Provisional Regulation on Private Enterprises 1988  Registered under the Sole Proprietorship Law 1999  Companies registered under the Company Law with full or majority private ownership  Agricultural households?  FIEs? --The domestic private sector grows rapidly after 1992. This results from privatisation in the state and collective sector on the one hand and on the other the eventual liberation of ideological constraint. --The foreign invested sector also takes off after 1992. Before 1992, the majority investments came from Hong Kong, Taiwan and Overseas Chinese. After 1992, investments from industrial countries constitute a significant part with MNCs playing leading role.

 Enterprises with hybrid (mixed) ownership --Grow rapidly since the implementation of the SOE corporatization reform and diversification of ownership in the 1990s. --Listed companies are typical enterprises with hybrid ownership. --Before 2004 when the SME Board was opened at Shenzhen Stock Exchange, virtually all listed companies are former SOEs, with the state ownership taking up a majority percentage of shares after a conversion. It is still true that a substantial majority of listed companies are controlled by the state as the majority shareholder.