REGULATIONS OF THE STATE COUNCIL CONCERNING THE BALANCE OF FOREIGN EXCHANGE INCOME AND EXPENDITURE OF CHINESE-FOREIGN EQUITY JOINT VENTURES

The State Council

Regulations of the State Council Concerning the Balance of Foreign Exchange Income and Expenditure of Chinese-foreign Equity Joint
Ventures

the State Council

January 15, 1986

Article 1

These Regulations are formulated for the purpose of encouraging foreign joint venturers to establish in China Chinese-foreign equity
joint ventures involving Chinese and foreign investment and of promoting the balancing of their foreign exchange income and expenditure,
to the advantage both of production management and the repatriation of legally earned profits by foreign joint venturers.

Article 2

Chinese-foreign joint equity ventures should maximise the export of their products and the generation of foreign exchange in order
to achieve a balance in foreign exchange income and expenditure.

Article 3

Where it is necessary to adjust the foreign exchange income and expenditure of Chinese-foreign equity joint ventures approved and
established in accordance with the law, this shall be administered and resolved at the separate levels of examination and approval
jurisdiction.

In the case of a Chinese-foreign joint equity venture established with the approval of central administering authorities, these authorities
shall be responsible for adjusting its foreign exchange balance within the foreign exchange income derived by Chinese-foreign equity
joint ventures throughout the country. These authorities may also undertake the adjustment, in conjunction with the local people’s
government, in proportions to be discussed and agreed between them. In the case of a Chinese-foreign joint equity venture established
with the approval of a local people’s government authorised by the State Council or entrusted by the competent central authorities
or with the approval of a relevant department of the State Council, the said local People’s Government or relevant department shall
be responsible for adjustment using the foreign exchange income derived from the Chinese-foreign equity joint ventures established
with their approval.

Article 4

In the case of sophisticated products produced with advanced or key technology provided by the foreign joint venture, or of internationally
competitive products, where such products are urgently needed on the domestic market, have been certified as up to standard by the
competent department and have been approved in accordance with the regulation of the State concerning jurisdiction and procedures
for approval, special consideration may be granted with regard to the proportion and period of sales into the domestic market. Such
domestic sales should be set forth clearly in a contract signed between the producer and the purchaser.

The foreign exchange balance plans for the enterprises referred to in the preceding Article shall be formulated, in accordance with
paragraph two, Article 3 of these Regulations, by the approving body. They shall be submitted separately, in accordance with administrative
procedures, to the Ministry of Foreign Economic Relations and Trade or the local foreign economic relations and trade department
for examination and comment, and following submission to and approval by the State Planning Commission or the local planning commission
shall be included in long-term or annual plans for foreign exchange expenditure.

Article 5

Products of Chinese-foreign joint equity ventures which China needs to import on a long-term or urgent basis may, depending on requirements
as to quality and specifications and the import situation, be approved as import substitutes by the competent department of the State
Council or local government. Such substitutions must be clearly specified either in the Chinese-foreign joint equity venture contract
or in a producer-purchaser contract.

The departments of foreign economic relations and trade shall actively support domestic end-users in concluding purchase and sales
contracts at international prices, with the Chinese-foreign joint equity ventures referred to in the preceding Article. Their foreign
exchange expenditure plans shall be formulated in accordance with paragraph two, Article 3 of these Regulations and submitted separately,
in accordance with administrative procedures, to the Ministry of Foreign Economic Relations and Trade or the local foreign economic
relations and trade department for examination and comment, and following submission to and approval by the State Planning Commission
or the local planning commission shall be included in long-term or annual plans for foreign exchange expenditure.

Article 6

In order to achieve a balance of foreign exchange income and expenditure, Chinese-foreign equity joint ventures may, with the approval
of the Ministry of Foreign Economic Relations and Trade, utilise the sales connections of the foreign joint venturer to promote the
sale of domestic Chinese goods on the export market, by way of comprehensive compensation. But in the case of products which come
under unified State control, those which are restricted by export quota, and those which require application for an export licence,
it is necessary to apply to the Ministry of Foreign Economic Relations and Trade for special approval. Without such approval, Chinese-foreign
equity joint ventures may not engage in the export of goods in these categories.

Article 7

Where a Chinese-foreign joint equity venture does not fulfil stipulated contractual obligations for exports and generation of foreign
exchange, thereby creating a foreign exchange imbalance, the authorities concerned shall not be responsible for resolving the situation
through adjustment.

Article 8

In selling products to enterprises which are outside the special economic zones and the economic and technological development zones
of the open port cities and which have the capacity to pay in foreign exchange, Chinese-foreign equity joint ventures are permitted,
with the approval of the foreign exchange control department, to set prices and settle accounts in foreign exchange.

Article 9

Where one foreign joint venturer establishes two or more joint ventures in China (including where these are in different locations
and with different sectors) and where the legitimate foreign exchange income of one is in surplus and another is in deficit, that
joint venturer may, with the approval of the foreign exchange control department, solve the problem through adjustment between the
various enterprises in which the joint venturer is involved.

Such adjustment must be agreed to by all parties to the joint venture.

Article 10

With the approval of the foreign economic relations and trade departments and the foreign exchange control departments, a Chinese-foreign
joint equity venture which is unable to achieve a balance of foreign exchange income and expenditure may, in accordance with the
stipulations of Article 7 of the Law of the People’s Republic of China on Chinese-foreign Equity Joint Ventures, reinvest its share
of renminbi profits in other ventures in China which have the capacity to generate new or additional foreign exchange earnings. In
addition to enjoying, according to law, the preferential tax treatment of a rebate on tax already paid, the foreign joint venturer
may obtain foreign exchange from the newly generated foreign exchange income of that investment enterprise and remit it abroad as
legitimate profit.

Article 11

These Regulations shall apply to Chinese-foreign equity joint ventures established in China and to the Chinese-foreign contractual
joint ventures established in China by companies, enterprises or other economic organisations from the Hong Kong, Macao or Taiwan
regions. They shall also apply to equity joint ventures or contractual joint ventures involving overseas Chinese investment.

The Regulations shall not apply to financial or insurance enterprises established in China by foreign joint venturers or joint venturers
from Hong Kong, Macao or Taiwan.

Article 12

In the case of any conflict with any other regulations relating to the foreign exchange balance of Chinese-foreign equity joint ventures
promulgated prior to the promulgation of these Regulations, these Regulations shall prevail.

Article 13

The Ministry of Foreign Economic Relations and Trade shall be responsible for the interpretation of these Regulations.

Article 14

These Regulations shall come into force on February 1, 1986.