This article is written by Sugandha Nagariya pursuing Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.
The Chinese market is a developing economy that offers investors a lot of potential. To translate my thoughts into numbers, the World Federation of Exchanges estimates that the stock market is worth $10 trillion. Furthermore, according to Bloomberg, the demand increased by $6.7 in the 12 months leading up to June 2020.
Even the National People’s Congress on 15th March, 2019 approved the People’s Republic of China Foreign Investment Law (FIL) to be implemented from 1st January, 2020. The objective of enacting FIL was to regulate foreign investment management by promoting the growth of a socialist market economy, to protect the rights and interests of foreign investors, and to actively promote foreign investment. The FIL aims to refurbish the existing regulatory regime that has governed foreign investment without completely removing the core elements of the limitations imposed on foreign ownerships, making an investment in China more flexible.
Advantages of investing in China
The following are some of the advantages of investing in China:
- Economic Growth that is Solid i.e. over the last two decades, China has experienced high single-digit economic growth, making it the world’s fastest-growing major economy also; FDI in China in 2019 was $ 137 billion, climbing 5.8% from the year prior.
- Global Awareness is growing. China holds a huge amount of US debt and is on track to become the world’s largest economy, giving it increasing political clout.
FDI has played an important role in contributing to the country’s economic/trade development and institutional reform. The Chinese government has already formulated a series of FDI policies, such as tax incentives like the inland regions of China have lower tax rates for foreign companies to encourage MNCs to invest in China and have made the Guiding Directory on Industries Open to Foreign Investment.
Though the present situation of Covid-19 has some effect on investments in China, since the big market players like the US and Japan haven’t cut off their ties with China, its economy will continue to flourish.
Am I allowed to invest in China?
China’s Point of view
FDI in China occurs through joint ventures, cooperative enterprises, and solely foreign-owned enterprises. However, exclusively foreign-owned businesses were not allowed unless they used advanced technology and equipment or exported the bulk of their goods. China lifted these restrictions in 2001, in violation of their WTO obligations, and allowed foreign-owned enterprises to introduce advanced technology and increase their export volume. Thus, Indian enterprises can invest in China in the ways mentioned hereafter in this article.
According to the RBI guidelines, Indian residents may invest in Joint Ventures/Wholly Owned Subsidiaries abroad if they are corporate entities or partnership firms registered under the Indian Partnership Act, 1932. Residents are allowed to make unlimited overseas portfolio investments in listed overseas companies that own at least 10% of an Indian company listed on a registered stock exchange in India as of the 1st January of the investment year.
Restricted sector: The real estate and banking industries are prohibited from foreign investment. However, Indian banks operating in India may form joint ventures or wholly owned subsidiaries (JV/WOS) in other countries if they obtain approval under the Banking Regulation Act 1949.
Funding for overseas investment
Funding for overseas investment could be made by the following sources:
- The balances held in Exchange Earners Foreign Currency account of the Indian party maintained with an authorized dealer,
- Proceeds of ADR (American Depository Receipts are negotiable security instruments issued by a US bank representing a specific number of shares in a foreign company that trades in US financial markets) and, GDR (Global Depositary receipts is a bank certificate that acts as shares in foreign companies. GDR helps companies to raise equity from the international market. It is issued by a depository bank which is located outside the domestic boundaries of the company to the residents of that country) issues.
- Market purchases of foreign exchange,
- Share swap (refers to the acquisition of the shares of an overseas entity by way of exchange of the shares of the Indian entity).
- Capitalisation of exports, royalties, etc.
What guidelines do I need to follow?
RBI says that to invest outside India an Indian Party have to comply with the following:
- Receive share certificates or other documentary proof of investment in the foreign company to the satisfaction of the Reserve Bank within six months, without which an application for extension of time must be made to the Reserve Bank stating reasons for non-receipt.
- Remit to India all dues from the foreign entity, such as dividends, royalties, and technical fees, within 60 days of the due date, or such a long period as the Reserve Bank can allow.
- Every year, within 60 days of the expiration of the statutory period prescribed by the respective laws of the host country for finalization of the audited accounts of the joint venture/wholly owned subsidiary outside India, submit to the Reserve Bank an Annual Performance Report in the form APR for each joint venture or wholly owned subsidiary outside India set up or acquired by the company or Indian party. This APR should be accompanied by
- Copies of FIRCs in support of inward remittances on account of dividends, royalty, etc.
- Audited financial statements of the overseas venture.
- CA’s certificate in support of the realization of export proceeds.
- A note on the working of the joint venture/wholly owned subsidiary during the previous year highlighting the ups and downs, reasons for non-performance, etc. in monetary terms. In case of nonsubmission of APRs within the stipulated time, an application on the due date should be made to the Reserve Bank of India seeking an extension, giving reasons for the same.
The Law of the People’s Republic of China on Foreign Wholly Owned Enterprises, the Law of the People’s Republic of China on Sino-Foreign Joint Ventures, the Law of the People’s Republic of China on Sino-Foreign Cooperative Enterprises, and the Leading Directory on Industries Open to Foreign Investment are all laws and regulations regulating foreign investment in China. China’s FDI laws and regulations contain related preferential policies and stipulations for the country’s special economic zones. China welcomes foreign direct investment (FDI). As a result, FIEs are granted preferential treatment over domestic businesses. In reality, depending on the region and industry, FIEs are entitled to significantly different care, which is outlined by policies.
China has made specific areas of the country special economic zones, each with its own set of policies. To attract FDI into its western and northeast areas, China has implemented two policies: Develop China’s West at Full Blast and Strategy of Reviving Rusty Industrial Bases. As a result, FDI policies in China’s western region provide foreign companies with far more favorable treatment than in other parts of the world.
Is there a limit to investing in China?
As per the RBI, the Indian party’s total financial contribution in joint ventures/wholly owned subsidiaries in any country other than Nepal, Bhutan, and Pakistan in any one financial year is up to US$ 100 million or its equivalent, or 100 percent of net worth, whichever is lower, and the investment is in a lawful operation authorized by the host country. Thus, you can invest in China up to this amount.
In any given financial year, the financial contribution for joint ventures/wholly owned subsidiaries in Myanmar and SAARC countries (other than Nepal, Bhutan, and Pakistan) is up to US$ 150 million or equivalent.
The US$ 100 million capital on investments made with one’s own foreign exchange capital would not apply to investments made with ADR/GDR proceeds, and investments can be made up to the total sum raised with ADR/GDR proceeds.
What are the ways of investing in China?
Due to unnecessary government intervention, Chinese markets are extremely limited, but there are still fewer direct ways to invest in the industry. These can be divided into two categories; let’s take a look at each one separately:
1. Investing in Mutual Funds and Exchange Traded Funds (ETFs)
China Investing in a wider stock index or an Exchange Traded Fund is the most successful method to invest in China (ETF). For those unfamiliar with ETFs, they are mutual funds that follow an entire index or market rather than individual stocks. Alibaba Group Holding Ltd., China Yangtze Power Limited, Baidu, Pinduoduo, JD.com, and other China-based ETFs are among the companies that these ETFs own.
There are currently 14 indices that are followed by ETFs. Both the Indian and the US markets make it easy to invest in these ETFs. In India, some China-based ETFs include those that monitor Hang Seng in real-time. Similarly, you can invest directly in Edelweiss’s only Indian mutual fund dedicated to Chinese markets, as well as other Asian-Pacific Region focused funds.
Popular Chinese ETFs include:
- iShares China Large-Cap ETF (NYSE: FXI)
- iShares MSCI China ETF (NYSE: MCHI)
- SPDR S&P China ETF (NYSE: GXC)
2. American Depository Receipts (ADR)
Indian residents cannot use this tactic, but Indian NRIs living in the United States can. Buying Chinese companies listed on major US stock exchanges as American Depository Receipts is part of the policy. Simply place an order through your broker to purchase these ADRs. Indian Depository Receipts may also be used to purchase international stocks.
Popular China ADRs include:
- PetroChina Company Limited (NYSE: PTR)
- Baidu Inc. (NASDAQ: BIDU)
- New Oriental Education & Technology Group Inc. (NYSE: EDU)
- China Mobile Ltd. (NYSE: CHL)
Risks of investing in China
Investing in China carries the following risks:
Less predictable China’s government has proved to be less predictable than democratic regimes such as the United States or European Union members.
Instability of society
The richest 1% of Chinese citizens owned more than a third of the country’s total household income, while the poorest 25% owned less than 2%. This wealth imbalance has the potential to cause social unrest or capital outflows.
Demographics are shifting
China’s economic growth has been based on a cheap and young workforce, but with an aging population, those demographics could be shifting.
To sum it up it can be said that investing in China has its pros and cons, keeping in mind the present situation it is advisable not to invest in China as your activities may be under the supervision of the government. There are other direct ways also to invest in China, but in this article, we have considered the best possible ways of investing to reduce government intervention.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: