Joint ventures (JVs) were the first business entity opened to foreigners and for a long time have been an unpopular vehicle for international investors looking to China for lower production costs or for market access. Yet recently, we noticed more than ever before, there are an increasing number of foreign investors wanting to set up JVs in China. JVs are coming back.

What is a JV?

A JV is a limited liability company formed by a foreign investor or investors, or a foreign individual, and a Chinese company, in which the foreign party or parties own more than 25 percent of the shares. Note that a Chinese individual cannot normally be a shareholder in a JV (although they can under some special circumstances--for example, in a JV incorporated in Beijing's Zhongguancun Hi-Tech Park, or as a result of merger or acquisition if the Chinese individual serves as the shareholder of the target company more than one year).

We should emphasize--as this point is sometimes misunderstood--that the JV is not a merger between a foreign and Chinese company or companies. The JV is a new entity, partly owned by both sides, in which liability of the shareholders is limited to the assets they brought to the business. Liability does not, for example, extend to the parent companies.

There are two types of JVs in China, the Equity JV (EJV) and the Cooperative JV (CJV) (sometimes known as the Contractual JV). They appear similar on the surface but have different implications for the structuring of your entity.

Why should you choose it?

"Why do I need a partner?" They should have something tangible to offer. The main reason is usually that they can be an entry vehicle into an industrial sector otherwise restricted to 100 percent foreign investment--China still requires Chinese company participation or control in some sectors. Alternatively, they are used because they have assets such as a distribution network, brand reputation, a special manufacturing process or other tangible assets such as land or special licenses.

Structuring your JV

There are several major, interrelated issues to address if you intend to set up a JV in China. Some of the issues you need to consider apply to all types of foreign entities in China, while others relate specifically to JVs.

. Business scope: What should yours be?

. Registered capital requirements: These may vary depending on the industry and the location. It is also absolutely critical that you do not simply put in the minimum because the regulations say you can--you may find the business is under-capitalized if you do so. This is an operational judgment for you, not the bureaucrats.

. Are you manufacturing 100 percent for export, or part for export and part for domestic sales? Where are your clients located? Do they require an official local invoice? Would they require you to sell your goods to Hong Kong or other offshore jurisdictions? All this has a fundamental impact on how you structure the business.

. Agreement, contract and articles of association: These need detailed work by you to ensure you cover all the bases. You are setting up a company with a 10-15-year life span and you need to be sure you know what you are getting into. n

In Issue No. 37, we will explore, in more detail, the major interrelated issues to address if you intend to set up a JV in China.

The author is with Dezan Shira & Associates Business Consultants