NEW REGULATIONS FOR REPRESENTATIVE OFFICES

Many foreign companies have no legal status in China but still maintain representative offices (ROs).  An RO allows a company to have a presence in China, but an RO is not supposed to engage in any for-profit activities.  There has been some abuse of this system by some companies that did not want to go through the process of applying for permits to do business.  Instead of obtaining permits, those companies conducted business in violation of their limited authority as ROs.  To crack down on those violators, China issued new regulations governing ROs.  The regulations tighten the rules for the establishment and operation of an RO by stating the activities that an RO may engage in.  In addition, the regulations now have more teeth due to the increased fines for violations.  The regulations are effective March 1, 2011.

1.                  Establishment of an RO.  In order to establish an RO, a company must file these documents:  (a) its certificate of domicile and certificate of legal operation for more than two years; and (b) its articles of association or other organizational agreement.  The requirement of a certificate of legal operation is directed at companies that form a new Hong Kong holding company and then immediately set up an RO in China.

The company must also announce the establishment or change of the RO to the public via media designated by the state authorities.  The manner of the announcement and the definition of “designated media” have not been promulgated by the state authorities.

2.                  Permitted Activities.  An RO may engage in:

(a)        market investigations, displays, and publicity activities related to the company’s products or services; and

(b)        liaison activities related to the company’s sales, services, domestic procurement, or domestic investments.

An RO may not engage in any for-profit activities, unless permitted by treaties or agreements with China.

If an RO violates the regulations, the authorities may seize the illegal gains as well as any property used to engage in the for-profit activities.  In addition, the authorities can levy fines of approximately $7,500 to $75,000.  The authorities can also revoke the RO’s Registration Certificate.

3.                  No Tax Exemption.  An RO will no longer be permitted to apply for a tax exemption.  In the past, an RO occasionally was granted a tax exemption.  An RO will now be taxed at 15% of its profit.

4.                  Representatives.  A company may appoint one chief representative and up to 3 other representatives.  A person may not be a representative if (a) there are national security concerns; (b) the person was a representative of an RO which had its permit revoked in the previous five years; or (c) there are other circumstances deemed relevant by the State Administration for Industry and Commerce (SAIC).

5.                  Annual Report.  An RO must file an annual report between March 1 and June 30.  The annual report must include the status of the company, the business activities of the RO, and financial statements prepared by an accounting firm.

WHAT IS THE VALUE OF RMB?

By Siva Yam, CPA, CFA, President, U.S.-China Chamber of Commerce with the assistance of Philip Wong, Esq., Editor, China Alert, U.S.-China Chamber of Commerce

A lot has changed since the day that King George III sent an envoy to congratulate Emperor Qianlong on his eightieth birthday.  That marked the beginning of formal East-West diplomatic relations, although King George's real agenda was for trade and permission for missionaries to preach Christianity in China. 

However, misunderstanding and disparity remain unchanged.

300 years ago, European vessels sailed to China with a light load but returned full with hundreds of thousands of pounds of tea, porcelain, silk, and other Chinese items.  Today, ocean tankers from the U.S. sail to China, sell a few odds and ends, and return full with toys, home appliances, consumer electronics, and furniture. 

The trade gap between China and the U.S. has skyrocketed to $145 billion in the first seven months of this year, and, along with its trade surplus, China has accumulated a huge foreign reserve of $2.65 trillion.  Such a disparity compounded with a high unemployment rate in the U.S., in particular, in the manufacturing sector, has plunged global economic co-operation in disarray, and a currency war is imminent.  In last week's IMF meeting, the U.S stepped up its warnings that manipulated exchange rates [by China] were standing in the way of global recovery, while Beijing said super-loose monetary policy in the advanced world [the U.S.] was creating destabilizing capital flows. 

Is RMB undervalued and the cause of trade imbalance?  Is China the scapegoat for unemployment in the U.S.?

From a historical and cultural perspective, U.S. companies have not focused on export.  The U.S. is the largest consumer market in the world, and U.S. companies have been too busy in serving their domestic customers.  Accordingly, the U.S. perennially had a trade deficit even before China emerged.  For the U.S. to close the trade gap with China, U.S. companies must find something that the Chinese want.  But what can the U.S. sell to China?  The answer is primarily technology.  The U.S.’s biggest advantages are technology and management--- things that the U.S. should export to China.  Unfortunately, the U.S. is not doing very well in this regard because of national security concern and fears that the technology will be stolen by the Chinese.  The U.S. also has a huge advantage in the cultural and entertainment sector.  If China fully opens its cultural, agricultural, and other industries, the U.S. would have fewer complaints. 

Although currency exchange rate might play a role in China's enormous trade surplus, the main factor is China's excess production capacity.  Its competitive position is further enhanced by aggressively investing in infrastructure.  The twin engines driving the Chinese economy are exports and investments, and the safest and quickest way for the Chinese to get rich is to invest in real estate.  Many factory owners are de facto real estate investors, and factories are simply veils for their real estate activities.  This leads to excessive, uncontrolled investments and capacities.  Along the way, Chinese manufacturers have become efficient because of extensive investments in capital goods.  Excess capacities, coupled with the urgency to keep 1.4 billion people employed, and aggressive government policies are the primary reasons for the low prices of Chinese products. 

China’s exports to the U.S. are usually low-value-added products.  U.S. manufacturers cannot and should not compete with these low-value-added importers.  Resources should be allocated to high-value-added sectors such as IT, healthcare, and R&D. 

Even if the U.S. did not import goods from China, it would still be importing from other countries.  Further, Chinese companies are not really doing most of the exporting.  Importing to the U.S. is mostly originated by U.S. companies.  Thus, the situation is not one of the Chinese selling products to the U.S. but one of the Americans doing so. 

The exchange rate may be a factor in the trade imbalance, but it is not the key factor.  Whether in the end RMB is undervalued, it is difficult to judge.  No one knows how much RMB should be worth.

China’s foreign reserves in U.S. dollars are really a big headache for China.  In order to keep the dollar from falling too low, China must continue to buy U.S. bonds.  China is lending to America and selling cheap goods to American consumers.  This allows the U.S. to have no inflation and at the same time maintain low interest rates.  China’s consumer market is not mature, so it must rely on exports, while the U.S., which has the most mature consumer market in the world, is China’s largest export market.  One day, when China’s domestic consumption reaches a certain level, exports to the U.S. will no longer be so important.  At that time, China will not need to purchase dollar assets to keep the dollar stable and maintain the value of its reserves.

Sino-U.S. relations is the world's most important bilateral relationship.  Both countries must to strive to understand each other's needs and the restraints under which the other is operating.  U.S. companies needs to focus on the higher-value-added sectors, and the U.S. government needs to encourage more investments in R&D and capital goods.  China needs to be more transparent; more diligent in enforcing intellectual property rights; and more willing to further open up the sectors in culture, sports, entertainment, and financial services for U.S. export.

In the end, it is the consumers who will determine U.S.-China trade relations.  Meanwhile, misunderstanding and disparity will continue.