Publications

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1. Understanding China's industrial policies

Foreign companies seeking to construct and operate hotels in China need government approval to do so, because construction and operation of hotels is classed as a "restricted" industry under Chinese industrial policies. The Chinese government has recently launched policies which discourage foreign capital from entering the Chinese real estate market. However, hotel developments can generate many employment opportunities as well as steady, long-term tax revenue. This sometimes makes the government approval process for hotel investing easier than the process for other types of real estate.

2. Understanding local government policies and attitudes

Many foreign investors set their eyes on first-tier cities like Beijing and Shanghai, which has led to heavy investment in hotel developments in such cities and very restricted access to new investment opportunities. In contrast, attracting foreign capital is still an important measure of “political achievement” for second-tier and even remote cities, often making it easier to secure sites in such locations. Investors therefore need to be familiar not only with central government laws and regulations, policies and practices, but those of their target locales.

3. Consider employing a local agent

Commercial bribery remains a real possibility that foreign investors may face. For example, investors may find that a transaction has been held up for no apparent reason or that they cannot obtain certain necessary approvals from the local government. China is an emerging economy, and it is inevitable that corruption will play its part in its commercialisation and industrialisation. An investor would be well advised to enlist the services of an agent who can help complete such matters as filings with the local government and thereby avoid putting the investor in a position where a bribe could be requested.

4. Be sensitive to the political issues associated with State-owned enterprises

An investor trying to purchase a State-owned hotel or sell a hotel to a State-owned enterprise must be very patient. Special government departments exist to administer such assets, and it is the government officials in these departments who make the ultimate decisions, not the chairman of the board. In addition, transactions involving State-owned enterprises will often be driven by political concerns, and it is advisable to consider these concerns at the negotiation stage.

5. Be wary of entering into both "black" and "white" contracts

In China, one sometimes refers to a "black contract" as the term for a complete, accurate contract that is entered into by the parties. In contrast, a "white contract" refers to an edited version of the black contract that would be registered with the government. It is not uncommon that Chinese parties request the use of both black and white contracts. The purpose of such contracts may be to lower the rate of taxes or costs, although this is not the only the purpose (sometimes parties want to incorporate some illegal terms in violation of law into a black contract). If the party you are negotiating with proposes signing both a black and white contract, you should be aware that you may be violating Chinese laws.

6. Take the initiative and act quickly

The 2008 Beijing Olympics and the rapidly approaching Shanghai 2010 Expo mean hotels have been snapped up by numerous investors. This is a fast-moving seller's market. Do not let another investor snatch away your opportunity because of your internal delays.

7. Check accounting records carefully; build appropriate reps and warranties into the contract

It is not uncommon for Chinese companies to have two sets of accounting records. False financial statements may be used to artificially enhance the financial and operational status of a target property. Investors must take care to ensure that they conduct a full financial investigation to ensure that the acquisition or investment is viable. The vendor should be made responsible for false representations, and this responsibility should be reflected in the arrangements for security and payment.

8. Contract enforcement in China

China’s legal processes are still developing and there is an increasing emphasis on the rule of law and legal process. However, personal relationships still play a key role in Chinese society and business, and respect for contractual terms is sometimes relatively weak. There also tends to be a view that anything is negotiable. Do not expect Chinese companies to uphold contracts in the same way that Western companies might.

9. Government approval of foreign real estate companies

Foreign investment in China’s real estate industry faces cumbersome restrictions which have slowed down the flow of foreign capital. Winding through China’s government approval procedures to establish a wholly foreign-funded real estate company can take from six to twelve months. The total registered capital deposited in a foreign invested real estate company must not be less than half of the total investment, when such investment is more than US$10 million. If these procedures are not followed, you will encounter foreign exchange difficulties in repatriating profits and also on exit. Help to accelerate the process by using an experienced third party, such as your lawyer or other agent, to communicate with government departments on your behalf.

10. Dissolving employment contracts with former State employees

China is putting great emphasis on building a “harmonious society.” Social stability is extremely important to the Chinese government. Consequently, there are special restrictions on the transfer of State-owned property rights, such as placing priority on a plan for employees. If you have acquired the shares of a State-owned enterprise, do not expect to make immediate, large-scale workforce changes, such as layoffs. If you intend to make any such changes, you will need to submit a post-acquisition plan to the relevant government departments for their approval. Keep in mind that the local government is unlikely to be receptive to large-scale layoffs when new, foreign management takes over.