CIRCULAR OF THE STATE COUNCIL CONCERNING THE REVISION OF THE THIRD PARAGRAPH OF ARTICLE 86 IN REGULATIONS FOR IMPLEMENTATION OF THE CHINESE-FOREIGN EQUITY JOINT VENTURES

    The Third Paragraph of Article 86 in “Regulations for Implementation of the
Law of the People’s Republic of China on Chinese-Foreign Equity Joint
Ventures”, promulgated by the State Council on September 20, 1983, provides:
“Losses or gains in remittances resulting from differences in exchange rates
shall be recorded as current gains or losses for the year in which they occur.
No adjustments shall be made to a balance in a foreign currency account as the
result of a recorded fluctuation in the exchange rate for such a currency.”
This paragraph has been revised and now it reads: “The differences, converted
into the standard accounting currency and resulting from the fluctuations in
foreign exchange rates, shall be recorded as current gains or losses in
remittances for the year in which they occur. The surplus appearing in foreign
currency accounts as the result of a recorded fluctuation in the exchange rates
shall be handled, while settling accounts at the end of the year, by
accountants in accordance with the provisions of pertinent Chinese laws and
financial and accounting system.”

    Article 1  These Regulations are formulated with a view to facilitating the
smooth implementation of the Law of the People’s Republic of China on
Chinese-Foreign Equity Joint Ventures (hereinafter referred to as the Law on
Chinese-Foreign Equity Joint Ventures).

    Article 2  Chinese-foreign equity joint ventures (hereinafter referred to
as joint ventures) established within China’s territory in accordance with the
Law on Chinese-foreign Equity Joint Ventures are legal persons in China and are
subject to the jurisdiction of Chinese laws and enjoy protection thereof.

    Article 3  Joint ventures established within China’s territory shall be
able to promote the development of China’s economy and the raising of
scientific and technological levels for the benefit of socialist modernization.
Joint ventures permitted to be established are mainly in the following
industries:

    (1) energy development, the building material, chemical and metallurgical
industries;

    (2) machine manufacturing, instrument and meter industries and offshore oil
exploitation equipment manufacturing;

    (3) electronics and computer industries, and communication equipment
manufacturing;

    (4) light, textile, foodstuffs, medicine, medical apparatus and packaging
industries;

    (5) agriculture, animal husbandry and aquiculture;

    (6) tourism and service trades.

    Article 4  Joint ventures to be applied for their establishment shall lay
stress on economic results and shall comply with one or several of the
following requirements:

    (1) they shall adopt advanced technical equipment and scientific managerial
methods which help increase the variety, improve the quality and raise the
output of products and save energy and materials;

    (2) they shall prove to be conducive to technical renovation of enterprises
and be able to bring about quicker returns and bigger profits with less
investment;

    (3) they shall help expand exports and thereby increase foreign currency
receipts;

    (4) they shall help train technical and managerial personnel.

    Article 5  Application for establishing joint ventures shall not be
approved if they involve any of the following circumstances:

    (1) detriment to China’s sovereignty;

    (2) violation of Chinese Law;

    (3) nonconformity with the requirements of the development of China’s
national economy;

    (4) environmental pollution;

    (5) obvious inequity in the agreements, contracts and articles of
association signed, impairing the rights and interests of one of the parties.

    Article 6  Unless otherwise stipulated, the government department in charge
of the Chinese joint venturer in a joint venture shall be the department in
charge of the joint venture (hereinafter referred to as the department in
charge). If a joint venture has two or more Chinese joint venturers which are
under different departments or from different regions, the departments and
regions concerned shall, through consultation, designate a department in
charge.

    Departments in charge are responsible for providing guidance and assistance
and exercising supervision over the joint ventures.

    Article 8  The establishment of a joint venture in China is subject to
examination and approval by the Ministry of Foreign Economic Relations and
Trade of the People’s Republic of China (hereinafter referred to as the
MOFERT). Upon approval, an Approval Certificate shall be issued by the MOFERT.

    The MOFERT may entrust the people’s governments in the related provinces,
autonomous regions, and municipalities directly under the Central Government or
relevant ministries or bureaus under the State Council (hereinafter referred
to as the entrusted office) with the power to examine and approve the
establishment of joint ventures that comply with the following conditions:

    (1) the total amount of investment is within the limit set by the State
Council and the source of capital of the Chinese venturers has been
ascertained;

    (2) no additional allocation of raw materials by the State is required and
the national balance as to fuel, power, transportation and foreign trade
export quotas is not affected.

    The entrusted office, after approving the establishment of a joint venture,
shall report the same to the MOFERT for the record. An Approval Certificate
shall be issued by the MOFERT.

    (The MOFERT and the entrusted office will hereinafter be generally referred
to as the examining and approving authorities.)

    Article 9  The following procedures shall be followed in the establishment
of a joint venture:

    (1) it is the Chinese joint venturer in a joint venture that shall submit
to its department in charge a project proposal and a preliminary feasibility
study report of the joint venture to be established with foreign joint
venturer. The proposal and the preliminary feasibility study report. upon
examination and approval by the department in charge, shall be submitted to the
examining and approving authorities for final approval. The parties to the
venture shall then conduct work centering around the feasibility study, and
then proceed on this basis, to negotiate and sign joint venture agreement,
contract and articles of association;

    (2) when applying for the establishment of a joint venture, the Chinese
joint venturer is responsible for the submission of the following documents to
the examining and approving authorities:

    (a) a wtitten application for the establishment of the joint venture;

    (b) the feasibility study report jointly prepared by the parties to the
venture;

    (c) joint venture agreement, contract and articles of association signed by
representatives authorized by the parties to the venture;

    (d) list of candidates for chairman and vice-chairman of board of directors
and directors nominated by the parties to the venture;

    (e) written opinions concerning the establishment of the said venture of
the department in charge and the people’s government of the province,
autonomous region or municipality directly under the Central Government where
the joint venture is located.

    The aforesaid documents shall be written in Chinese. Documents (b), (c) and
(d) may be written simultaneously in a foreign language agreed upon by the
parties to the joint venture. Both versions are equally authentic.

    Article 10  Upon receipt of the documents stipulated in Article 9 (2). the
examining and approving authorities shall, within 3 months, decide whether to
approve or disapprove them. Should anything inappropriate be found in any of
the aforementioned documents, the examining and approving authorities shall
demand an amendment within a limited time. Otherwise, no approval shall be
granted.

    Article 11  The applicant shall, within one month as of the receipt of the
Approval Certificate, register with the administrative department for industry
and commerce of the province, autonomous region or municipality directly under
the Central Government in accordance with the provisions of the Measures of the
People’s Republic of China for the Administration of the Registration of
Chinese-Foreign Equity Joint Ventures (hereinafter referred to as registration
administration office). The date of the issuance of its business licence is the
date of the formal establishment of the joint venture.

    Article 12  Any foreign investor who intends to establish a joint venture
in China but is unable to find a specific co-operator in China may submit a
preliminary plan for the joint venture project and entrust the China
International Trust and Investment Corporation (CITIC) or a trust and
investment corporation of a province, autonomous region or municipality
directly under the Central Government, or a relevant government department or
a non-governmental organization, to recommend Chinese co-operators.

    Article 13  The “joint venture agreement” mentioned in this Chapter refers
to the document agreed upon by the parties to the joint venture on some major
points and principles governing the establishment of the joint venture.

    “Joint venture contract” refers to the document agreed upon and concluded
by the parties to the joint venture on their mutual rights and obligations.

    “Articles of association” refers to the document agreed upon by the parties
to the joint venture specifying the purpose, organizational principles and
method of management of the joint venture in compliance with the principles of
the joint venture contract.

    Where the joint venture agreement comes into conflict with the contract,
the latter shall prevail.

    The parties to the joint venture may agree to sign the contract and
articles of association only, without signing an agreement.

    Article 14  A joint venture contract shall include the following main
items:

    (1) the names, the countries of registration, the legal addresses of
parties to the joint venture, and the names, positions and nationalities of the
legal representatives thereof;

    (2) name of the joint venture, its legal address, purpose and the scope and
scale of business;

    (3) total amount of investment and registered capital of the joint venture,
amount, proportion and forms of investment to be contributed by each party to
the joint venture, the time limit for contributing investment, stipulations
concerning incomplete contributions, and assignments of investments;

    (4) the proportion of profit to be shared and losses to be borne by each
party;

    (5) the composition of the board of directors, the distribution of the
number of directors, and the responsibilities, powers and means of employment
of the general manager, deputy general manager and high-ranking managerial
personnel;

    (6) the main production equipment and technology to be adopted and their
source of supply;

    (7) the ways and means of purchasing raw materials and selling finished
products, and the ratio of products sold within Chinese territory to those sold
abroad;

    (8) arrangements for receipts and expenditures in foreign currency;

    (9) principles governing the handling of finance, accounting and auditing;

    (10) stipulations concerning labour management, wages, welfare, and labour
insurance;

    (11) the duration of the joint venture, its dissolution and the procedures
for liquidation;

    (12) the liabilities for breach of contract;

    (13) ways and procedures for settling disputes between the parties to the
joint venture;

    (14) the language(s) used for the contract and the conditions for putting
the contract into force.

    The annex to the contract of a joint venture shall be equally authentic as
the contract itself.

    Article 15  Chinese laws shall apply to the conclusion, validity,
interpretation and execution of a joint venture contract, as well as to the
settlement of disputes.

    Article 16  The Articles of association of a joint venture shall include
the following main items:

    (1) the name of the joint venture and its legal address;

    (2) the purpose, business scope and duration of the joint venture;

    (3) the names, countries of registration and legal addresses of parties to
the joint venture, and the names, positions and nationalities of the legal
representatives thereof;

    (4) the total amount of investment, registered capital of the joint
venture, each party’s investment proportion, stipulations concerning the
assignment of investment, the proportions of profit distribution and losses to
be borne by parties to the joint venture;

    (5) the composition of the board of directors, its responsibilities, powers
and rules of procedure, the term of office of the directors, and the
responsibilities of its chairman and vice-chairman;

    (6) the setting up of management organizations, rules for handling routine
affairs, the responsibilities of the general manager, deputy general manager
and other high-ranking managerial personnel, and the method of their
appointment and dismissal;

    (7) principles governing financial, accounting and auditing systems;

    (8) dissolution and liquidation;

    (9) procedures for amendment of the articles of association.

    Article 17  The agreement, contract and articles of association shall come
into force upon approval by the examining and approving authorities. The same
applies to amendments thereof.

    Article 19  A joint venture is a limited liability company.

    Each party to the joint venture is liable to the joint venture within the
limit of the capital subscribed by it.

    Article 20  The total amount of investment (including loans) of a joint
venture refers to the sum of capital construction funds and the circulating
funds needed for the joint venture’s production scale as stipulated in the
contract and the articles of association of the joint venture.

    Article 21  The registered capital of a joint venture refers to the total
amount of investment registered at the registration administration office for
the establishment of the joint venture. It shall be the total amount of
investment subscribed by parties to the joint venture.

    The registered capital shall generally be represented in Renminbi, or may
be in a foreign currency agreed upon by the parties to the joint venture.

    Article 22  A joint venture shall not reduce its registered capital during
the term of the joint venture.

    Article 23  If one party to the joint venture intends to assign all or part
of its investment subscribed to a third party, consent shall be obtained from
the other party to the joint venture, and approval from the examining and
approving authorities is required.

    When one party assigns all or part of its investment to a third party, the
other party has pre-emptive right.

    When one party assigns its investment subscribed to a third party, the
terms of assignment shall not be more favourable than those to the other party
to the joint venture.

    No assignment shall be effective should there be any violation of the above
stipulations.

    Article 25  Each joint venturer may invest in cash or may contribute
buildings, factory premises, equipment or other materials, industrial property,
proprietary technology, or right to the use of a site, appraised at
appropriate prices, as investment. If the investment is in the form of
buildings, premises, equipment or other materials, industrial property or
proprietary technology, the prices shall be determined through consultation by
the parties to the joint venture on the basis of fairness and reasonableness,
or they shall be evaluated by a third party accepted and invited by the parties
to the joint venture.

    Article 26  The foreign currency contributed by the foreign joint venturer
shall be converted into Renminbi according to the exchange rate quoted by the
State Administration of Foreign Exchange Control of the People’s Republic of
China (hereinafter referred to as the State Administration of Foreign Exchange
Control) on the day of its submission or be cross exchanged into the foreign
currency as agreed upon.

    Should the cash Renminbi contributed by the Chinese joint venturer be
converted into foreign currency, it shall be converted according to the
exchange rate quoted by the State Administration of Foreign Exchange Control on
the day of its submission.

    Article 27  The machinery, equipment and other materials contributed as
investment by the foreign joint venturer shall meet the following conditions:

    (1) they are indispensable to the production of the joint venture;

    (2) China is unable to manufacture them, or can manufacture them only at
too high a price, or their technical performance and time of availability
cannot meet the requirement;

    (3) the price fixed shall not be higher than the current international
market price for similar equipment or materials.

    Article 28  The industrial property or proprietary technology contributed
by the foreign joint venturer as investment shall meet one of the following
conditions:

    (1) capable of manufacturing new products urgently needed in China or
products suitable for export;

    (2) capable of markedly improving the performance, quality of existing
products and raising productivity;

    (3) capable of notably saving raw materials, fuel or power.

    Article 29  Foreign joint ventures who contribute industrial property or
proprietary technology as investment shall present relevant documentation on
the industrial property or proprietary technology, including protocopies of the
patent certificates or trademark registration certificates, statements of
validity, their technical characteristics, practical value, the basis for
calculating the price and the price agreement signed with the Chinese joint
ventures. All these shall serve as an annex to the contract.

    Article 30  The machinery, equipment or other materials, industrial
property or proprietary technology contributed by foreign joint venturer as
investment shall be examined and approved by the department in charge of the
Chinese joint venturer and then submitted to the examining and approving
authorities for further approval.

    Article 31  The parties to the joint venture shall pay in all the
investment subscribed according to the time limit stipulated in the contract.
Delay in payment or partial delay in payment shall be subject to a payment of
investment on arrears or a compensation for the loss as defined in the contract.

    Article 33  The highest authority of the joint venture shall be its board
of directors, which shall decide all major issues concerning the joint venture.

    Article 34 (Note 1)  The board of directors shall consist of no less than
three members. The distribution of the number of directors shall be determined
through consultation by the parties to the joint venture with reference to the
proportions of investment contributed.

    The directors shall be appointed by the parties to the joint venture. The
chairman of the board shall be appointed by the Chinese joint venturer and its
vice-chairman by the foreign joint venturer.

    The term of office for the directors is four years. Their term of office
may be renewed with the re-appointment by the parties to the joint venture.

    Article 35  The board of directors shall convene at least one meeting every
year. The meeting shall be called and presided over by the chairman of the
board. Should the chairman be unable to call the meeting, he shall authorize
the vice-chairman or a director to call and preside over the meeting. The
chairman may convene an interim meeting on the suggestion of more than
one-third of the directors.

    A board meeting requires a quorum of over two-thirds of the directors.
Should a director be unable to attend, he may make a proxy authorizing someone
else to represent him and vote in his stead.

    A board meeting shall usually be held at the location of the joint
venture’s legal address.

    Article 36  Decisions on the following items shall be made only after being
unanimously agreed upon by the directors present at the board meeting:

    (1) amendment to the articles of association of the joint venture;

    (2) suspension or dissolution of the joint venture;

    (3) increase in or assignment of the registered capital of the joint
venture;

    (4) merger of the joint venture with other economic organization.

    Decision on other matters may be made according to the rules of procedure
stipulated in the articles of association.

    Article 37  The chairman of the board is the legal representative of the
joint venture. Should the chairman be unable to perform his duties, he shall
authorize the vice-chairman of the board or a director to represent the joint
venture.

    Article 38  A joint venture shall establish a management office which shall
be responsible for the day-to-day management and operations. The management
office shall have a general manager and several deputy general managers who
assist the general manager in his work.

    Article 39  The general manager shall carry out the decisions of the board
meeting and organize and conduct the day-to-day management and operations of
the joint venture. Within the scope of authorization by the board, the general
manager shall, externally, represent the joint venture, and internally, have
the right to appoint and dismiss his subordinates and exercise other powers as
authorized by the board.

    Article 40  The general manager and deputy general managers shall be
engaged by the board of directors of the joint venture. These positions may be
held either by Chinese or foreign citizens.

    At the instance of the board of directors, the chairman, vice-chairman or
other directors of the board may concurrently be the general manager, deputy
general managers or other high-ranking managerial personnel of the joint
venture.

    In handling major issues, the general manager shall consult with the deputy
general managers.

    The general manager or deputy general managers shall not hold posts
concurrently as general manager or deputy general managers of other economic
organizations. They shall not get involved in other economic organizations’
commercial competition against their own joint venture.

    Article 41  In case of graft or serious dereliction of duty on the part of
the general manager, deputy general managers or other high-ranking managerial
personnel, they may be dismissed at any time by a decision of the board of
directors.

    Article 42  Establishment of branch offices (including sales offices)
outside China or