Background

Before 1979 China's foreign trade was exclusively conducted through national foreign
trade corporations under import and export plans assigned by the former Ministry of
Foreign Trade. With the adoption of the "open door" policy in 1979 China began to
reform its foreign trade sector, very gradually decentralising and deregulating control
over its foreign trade. With China's WTO accession, China is revising many of the laws
governing foreign trade to honour commitments made under the WTO protocol.

At present, the authorities in charge of imports and exports in China include the Ministry
of Commerce (MOFCOM), the General Administration of Customs, the State
Administration of Foreign Exchange (SAFE), the State Exit and Entrance Inspection and
Quarantine Bureau (SEEIQB) and the Administration of Quality Supervision and
Inspection and Quarantine (AQSIC).

Foreign trade dealers

The business activities of all enterprises and individuals involved in import and export
trade are supervised by MOFCOM. Prior to July 2004, only enterprises approved by
MOFCOM were allowed to engage in import and export trade; with the promulgation of
the revised PRC Foreign Trade Law on 1 July 2004, such approval is no longer required.
Enterprises or individuals wishing to import and export goods or technologies only need
to register with MOFCOM (or its local delegates). Where foreign trade dealers fail to
register as required, the customs authority may not carry out procedures such as
declaration, examination and release of the imported or exported goods.

While foreign-invested manufacturing enterprises may conduct import and export

transactions related to their production business (provided that the required registration
is carried out with the relevant authority), China does not allow a wholly foreign-owned
company specially engaged in import and export business to be set up in China - at
least, not yet.

Sino-foreign equity joint venture companies specially engaged in import and export
business can, however, be set up, provided that the stringent criteria prescribed by law
are met: A foreign party to a proposed EJV specially engaged in foreign trading business
must have an average annual volume of trade with China of over US$30 million in each
of the preceding three years (or US$20 million if the EJV is to be set up in central or
western China). The actual paid-up registered capital of the EJV must be no less than
Yn50 million (or Yn30 million if the EJV is to be set up in central or western China). The
establishment of an EJV specially engaged in import and export business also requires
approval of MOFCOM.

Commodity imports administration

MOFCOM determines lists of goods and technologies subject to import prohibition.
Goods with import restrictions are subject to import quotas and/or licence systems
implemented by MOFCOM. Goods whose import is restricted on quantity are subject to a
quota system. MOFCOM releases from time to time (normally on an annual basis) a list
of goods that are subject to quota and/or licence control. Goods subject to quota and/or
licence administration can only be imported after a quota and/or licence is obtained from
the relevant authorities.

At present, several goods may only be imported by the state or by designated parties.
Goods which may only be imported by state-owned trading companies include: grain,
vegetable oil, sugar, tobacco, crude oil, processed oil, chemical fertiliser and cotton; and
goods which are restricted to designated traders include: natural rubber, plywood, wool,
acrylic and steel.
Commodity exports administration
MOFCOM also determines lists of goods and technologies subject to export prohibition.
Goods whose export is restricted on quantity are subject to a quota system and some
others can only be exported if a licence to do so is obtained. MOFCOM releases from
time to time (normally on an annual basis) a list of goods that are subject to export quota
and/or licence control.

China prohibits and restricts the export of certain goods and technologies on grounds of
public policy or in order to comply with international treaties or agreements. Goods
reserved for state trading include, for example, crude oil, processed oil, corn, rice, coal,
cotton, silver and silk. Goods reserved for trading only by specially designated traders
include tea (green tea, oolong tea) and certain cut steel sheets.

Where export of Chinese goods is subject to quota restrictions in other countries, a

passive quota administration applies. The annual export amount of the commodities
subject to passive quota management will be decided by the two countries each year in
accordance with any bilateral agreements in force. The goods that are currently subject
to passive quota management include textiles.

Customs
As a result of WTO accession, China now charges four import tariffs: general tariffs,
Most-Favoured-Nation tariffs, preferential tariffs and a special preferential tariff.

China has in recent years made substantial tariff reductions in many sectors. Effective
from 1st January 2004, the average import tariff is 10.4 per cent. China has committed to
reduce its import tariff to an average of 10 per cent in the year of 2005.

There are special concessions covering tariffs on goods exported from Hong Kong and
Macau to China.

For import tariffs, value-added tax (VAT) and consumption tax (but only for some
products) are charged. All importers of goods into China must pay value-added tax. The
normal VAT rate is 17 per cent, except for certain goods (e.g. cereal and edible
vegetable oils, books, newspapers and magazines, tap water, heaters, air-conditioning,
hot water, coal gas, liquefied petroleum gas, natural gas, biogas and coal products for
residential use) whose import is subject to a 13 per cent rate). All importers of certain
selected consumer goods (including tobacco, liquour, cosmetics, skin and hair-care
products, expensive jewellery, pearls, jewels and jade, motor cars, fireworks, petrol,
diesel oil and motor vehicle tyres) must pay consumption tax. The consumption tax rate
varies from 5 per cent to 40 per cent.

Free Trade Zones

In China there are currently 15 free trade zones (FTZs). FTZs are special zones which
were established with State Council approval and in which the Customs Office permits
special policies involving exceptions to the usual customs procedures. In the FTZs no
licences or quotas are required (except for passive quotas) and preferential treatment for
import duty and import-related taxes is usually offered.

All kinds of trade and commercial activities conducted between enterprises in FTZs and
enterprises outside the zones (but within China) are regarded as foreign trade. The
normal import and export rules apply.

Commodity inspection and quarantine

Certain imported or exported commodities are subject to compulsory inspection by state-
certified authorities. The State Exit and Entrance Inspection and Quarantine Bureau (or
authorised local delegates) carry out such compulsory inspections. Commodities which
need not be inspected may nevertheless be inspected upon application by the
consignee or the end user.

Export processing trade

Special import and export rules apply to goods imported and exported under export
processing trade arrangements involving manufacturing contracts where all of the
manufactured goods will be sold outside China. Processing trade involves certain limited
manufacturing activities carried out in China using materials supplied from abroad or
from elsewhere in China. Processing may be conducted with materials supplied from
elsewhere in China (ordinary commission processing) or processing with imported
materials (import processing). All processing and assembly contracts signed with foreign
companies must be approved by MOFCOM or its local offices.

Generally, no import quota and/or licence is required either for the import of raw
materials or for the import of equipment necessary for production under a processing
contract if all of the output will be exported. If the finished products are commodities
which require an export quota or an export licence, the raw materials or equipment will
be released by customs only if evidence of the requisite export quota and/or licence can
be produced.

Anti-dumping
Dumping happens when the price of the products exported to a foreign country is less
than the price charged for an identical or similar product in the country where the product
was manufactured. To determine if a product is being dumped on a foreign market at a
price below cost, its price to foreign customers (export price) is compared to its cost or to
prices of similar goods in its market of manufacture (domestic price). If the export price is
less than the domestic price, the product is being dumped.

Products made cheaply in China and sold cheaply in the UK may be liable for anti-
dumping duties. This is also true if a British company sets up a joint venture with a
Chinese partner to make a product in China for sale in Europe.

It is expected that there will be a sharp increase in the number of new anti-dumping
investigations initiated by the Chinese authorities because of China's accession to the
WTO. There are three reasons for the increase:

• as a condition for joining the WTO, China has promised to significantly reduce its levels
of tariff protection for imported products which means many Chinese industries will be
exposed, perhaps for the first time, to the forces of international competition;

• the urgent need for restructuring of many Chinese state-owned enterprises means that
some of these industries may try to seek protection from international competition in
order to enhance possibilities for their continued survival;

• Chinese exporters, including for this purpose foreign investors in Chinese industry,
have historically been the main targets for anti-dumping actions by the European Union,
the United States, Canada and other WTO Member countries.

VAT refund for exporters

Normally only exporters or suppliers for international purchase projects (tender projects
financed by international financial institutions such as world bank or foreign
government's aids) are eligible to reclaim VAT. However, the relevant regulations are not
as straightforward as they seem and not every eligible exporter or supplier can reclaim
the 17 per cent VAT. Whether and to what extent VAT can be reclaimed will depend on
the type of products they supply or export and only those who export or supply under
government-labelled categories of machinery and electronic products can reclaim the full
17 per cent from the tax authorities.

For most of exportable products, eligible exporters or suppliers can only reclaim 13 per
cent VAT. For petrol, a 11 per cent VAT can be reclaimed. For other commodities like
coal, only a 5 per cent VAT can be reclaimed.

The procedures for reclaiming VAT are very complicated. Most import and export
companies hire financial specialists to process the application which is made to
designated tax authorities.

Written by DLA. For further information, contact: Janine.Canham@dla.com or tel:

(852) 2103 0683 or Christopher.Clarke@dla.com or tel (852) 2103 0688.