ESTABLISHING A JOINT VENTURE WITH THE

PEOPLE'S REPUBLIC OF CHINA:

A GUIDE FOR AMERICAN BUSINESSES

I. Introduction

When attempting to establish joint ventures (JV) with the People's Republic of China (PRC), a United States company (U.S. company) is confronted with myriad unique obstacles which, if dealt with properly, can be overcome and possibly avoided. The most important issues a U.S. company needs to address prior to entering into a JV with the PRC include the following: Is there a majority interest requirement? In what currency should dividends be dispersed? What is the exposure to liability under the corruption and anti-trust laws and how can it be minimized? Will the PRC have immunity and therefore, lack of deterrence from unfair practices? Who should control the JV? What type of special training is needed? How should the expatriate employees of U.S. companies be paid? Will the PRC be able to disperse high-risk loans? What forum should be used for dispute resolution? What rate of exchange should apply? What is the value of a letter of credit or guarantee from the PRC or one of its entities? What intellectual property laws should apply? Should the JV lease or buy equipment? What happens when a land-use right expires or when granted land is expropriated? How can the U.S. company retain control over major decisions of the JV when the PRC requires that it have majority ownership interest? And how can a U.S. company obtain acceptance of its preferred provisions of the JV contract when dealing with the PRC? This guide is designed to assist the reader in understanding the aforementioned issues. Having a working knowledge of these issues is vital to assure a successful JV with the PRC. In addition, simple awareness of certain issues can greatly reduce the frustration and the potential for misunderstandings which are inherent in JV agreement negotiations between a U.S. company and the PRC.

This note will take the reader from the evolution and the status quo of Chinese business law, all the way to the actual negotiation of an agreement. Section I, "Chinese Business Law: The Evolution and Status Quo," provides a brief introduction to the history of Chinese law. The reader is introduced to various business forms recognized by the PRC, followed by Chinese contract and registration of capital law. Next, several issues pertaining to property are examined, including leasing, allocated land-use rights, and expropriation. The State guarantee is analyzed, and then an introduction to the different avenues available for dispute resolution is provided. Section II takes the reader through currency issues including taxes and foreign exchange. Section III examines corrupt practices and anti-trust issues, including suggestions for minimizing exposure to violations of these laws. Ultimately, Section IV provides essential information and recommendations to be implemented at the time the agreement is negotiated, including seventeen clauses which are vital to the U.S. company-PRC JV agreement.

II. Chinese Business Law: The Evolution and Status Quo

A. Basic Law of the Land

Confucianism and Legalist philosophies create the foundation of Chinese legal tradition.⁽¹⁾ As early as the third century B.C., there had been tensions between and influences from both philosophies.⁽²⁾ Legalist theory promotes deterrence through force and State power rather than focusing on morality.⁽³⁾ To the contrary, Confucianism is based on the theory that social harmony may be attained by influencing the masses through the persuasion of a morally good role model. According to the Confucian philosophy, attempts to deter undesirable behavior through force and punishment are futile. In the Confucian society, the group is more important than the individual; "conflicts destroy the harmony within the group and disagreements are settled through yielding and compromise."⁽⁴⁾ The Confucian philosophy does not recognize the court system as an acceptable means of resolving disputes. According to Confucian thought, court actions reflect the failure of a group to work harmoniously together and should be avoided at all costs.

The PRC has had five constitutions which theoretically have been the supreme law of the land.⁽⁵⁾ "It is considered the 'mother-law' (mufa), from which all other laws are derived as if they were its children (zifa)."⁽⁶⁾ The most recent constitution was adopted on December 4, 1984, and is known as the 1982 Constitution.⁽⁷⁾ According to the 1982 Constitution, the power in China is held by the people's democratic dictatorship.⁽⁸⁾ Workers, peasants, intellectuals, and other patriots supporting socialism and the unity of the motherland make up the "people" referred to in the 1982 Constitution.⁽⁹⁾

Although the 1982 Constitution theoretically preempts other laws, to have any legal effect its provisions require enactment of ordinary legislation.⁽¹⁰⁾ Therefore, instead of providing a practical source of law, the Constitutional provisions merely provide guidelines.⁽¹¹⁾ In addition, courts are limited to the application of ordinary legislation and are not allowed to rely on constitutional provisions directly in deciding cases.⁽¹²⁾ Moreover, judicial review of legislation, to ensure that newly enacted laws are consistent with the Constitution, does not exist.⁽¹³⁾ The National People's Congress (NPC) has the power to make the laws and its Standing Committee has the power of review, however, it has never exercised its power of review.⁽¹⁴⁾ "The [S]tate embodies the will of the proletariat, and courts are subordinate to the highest organs of [S]tate power."⁽¹⁵⁾

"Although there is no actual separation of powers, a certain degree of specialization does exist."⁽¹⁶⁾ According to Article 126 of the Constitution, the courts theoretically are granted independent judicial power and are not subject to interference by any administrative organ, public organization or individual.⁽¹⁷⁾ However, China's court system plays only a small role within the government hierarchy.⁽¹⁸⁾ "In reality, the courts are weak institutions under heavy influence from party and regional interests."⁽¹⁹⁾

Today, China is still a one-party state with little regard for democracy or human rights.⁽²⁰⁾ Officially, China is a communist country with a "socialist" market economy. In reality, communism is dead and China is quickly transforming itself into a society powered by brutal capitalism.⁽²¹⁾

B. Business Law Generally

The 1988 Amendment to the Constitution acknowledged the existence of private business and granted it constitutional protection.⁽²²⁾ In addition, foreign enterprises' "lawful rights and interests are protected by the law"⁽²³⁾ via the Constitution. However, these rights are limited in that they are only guaranteed as long as they are in the interest of the State.⁽²⁴⁾

The corporate form of business is not new to China.⁽²⁵⁾ Foreign companies established a stronghold in the country after the Opium War of 1840.⁽²⁶⁾ In addition, the late Qing dynasty promulgated its own company law in 1904 to "promote the creation of Chinese company to compete with the foreigners who were producing and marketing their goods on Chinese soil."⁽²⁷⁾ The succeeding Nationalist Government continued Qing's reforms by codifying a new company law in 1929.⁽²⁸⁾

Under Mao Zedong's leadership in 1949, the Chinese Communist Party (the Party) briefly allowed the 11,298 existing companies to remain in operation before it declared the corporate enterprise inimical to socialism.⁽²⁹⁾ By the early 1950s, the Party had nationalized or collectivized all privately held companies.⁽³⁰⁾ The Party directives and Maoist ideology, rather than market-oriented supply-and-demand forces, governed state owned companies (SOC).⁽³¹⁾ By 1958, all land and most means of production were nationalized and the commune system was established.⁽³²⁾

In 1978, after Deng Xiaoping seized power, economic reforms began⁽³³⁾ and the economy grew quickly.⁽³⁴⁾ This was followed by the dismantling of the commune system which resulted in the government contracting out farming to the peasants. Not long thereafter, a land-use right was created⁽³⁵⁾ and ownership of private business was permitted.

Another important development was the promulgation of the Civil Law of 1986 which re-established a legal basis for private business in its corporate form.⁽³⁶⁾ In addition, since 1986, the government has allowed thousands of formerly state run enterprises to convert to stock companies. Companies are now being listed on the newly-formed Shanghai and Shenzhen stock exchanges, as well as on a few foreign exchanges.⁽³⁷⁾ Today, venture capital can be raised through the stock markets.⁽³⁸⁾ However, China's stock exchange is bifurcated. "A" shares are available only to Chinese investors, while "B" shares can be purchased by foreign investors.⁽³⁹⁾ The bifurcated exchange, coupled with large-scale speculation, deterred some potential major investors who remain "wary of China's political and economic stability as well as its murky legal system."⁽⁴⁰⁾

The Civil Law also provides for the regulation of business and personal relationships among Chinese citizens, between "legal persons," and between citizens and "legal persons."⁽⁴¹⁾ "Legal persons," as referred to in the Civil Law, include JVs, SOCs, and new companies. In other words, the "legal persons" that the law creates can be fictional corporate persons.⁽⁴²⁾ They obtain this status when the enterprises are established in accordance with the appropriate law.⁽⁴³⁾ Accordingly, the Civil Law guarantees that once establishment and registration are complete, an enterprise is a "legal person" that has the capacity for civil rights in conducting lawful activities -- it may lawfully conduct business under the protection of law.⁽⁴⁴⁾ As a "legal person," the entity gains a judicial remedy in the event of a contractual or other breach of law by another company, a JV, a SOC or a Chinese citizen.⁽⁴⁵⁾

One of the State's priorities is to continue its control over the business and economic activities within China. Therefore, through its various ministries, the State maintains a controlling share in new ventures.⁽⁴⁶⁾ As a result, China's so-called "privatization" is a form of limited privatization.⁽⁴⁷⁾ This limited privatization allows the Party to draw on the Marxist principle that, so long as the government retains a majority share in the enterprise, it remains in the "people's" hands.⁽⁴⁸⁾ It is important to know that through its controlling interest in JVs, the PRC has been in the practice of dispersing high risk loans from JVs to PRC entities. Many times these entities have gone insolvent, and thus, were unable to pay back the loans. A U.S. company in such a situation has little or no recourse unless this practice was not prohibited by the terms of the JV contract.

Like many nations, China often previews impending policy shifts via news leaks and "official" publications.⁽⁴⁹⁾ However, it is important to be aware that such communications may be trial balloons that can be plausibly denied if there is a vehement reaction.⁽⁵⁰⁾ China's aspirational declarations usually appear in official newspapers like The China Daily or The People's Daily.⁽⁵¹⁾

To know and understand China's unwritten laws, referred to as its Operational Code, is sometimes more important than knowing its written laws. Being ignorant of China's Operational Code can be expensive and risky. In fact, it cost an American businessman a $300 million dinner, including tip.⁽⁵²⁾ For important suggestions related to the Operational Code see Section IV of this note, "Negotiating the Agreement." With regard to business form selection, JVs with state-owned enterprises are the Chinese authorities' preferred mode of economic cooperation with foreign investors.⁽⁵³⁾ Fortunately for U.S. investors, China has abolished its prohibitions against foreign majority ownership in JVs.⁽⁵⁴⁾

C. Contract Law

"Contracts in China have more of a sense of moral obligation than absolute rights,"⁽⁵⁵⁾ and according to a Beijing-based American lawyer, "[t]here is no concept that [they are] binding."⁽⁵⁶⁾ In fact, contracts can always be renegotiated. In an effort to create a more consistent contract practice, seminars are being held where sample contracts and handbooks are being distributed. However, reciprocity remains a major issue to be resolved before critics will believe in China's sincerity in reforming its contract law.⁽⁵⁷⁾ Until Chinese courts enforce foreign legal decisions, the comfort level of foreign investors will remain low.⁽⁵⁸⁾

D. Capital Registration Laws

China has very specific "registered capital"⁽⁵⁹⁾ requirements for all Chinese-foreign equity JVs.⁽⁶⁰⁾ The Chinese have a vested interest in such specificity because, according to official figures, they have more than 170,000 foreign-funded ventures with a gross investment of approximately sixty billion dollars.⁽⁶¹⁾

Article II of the Capital Registration Law states that "[t]he parties to the joint venture shall share profits and bear risks and losses according to the proportion of registered capital."⁽⁶²⁾ This issue arose earlier when China introduced new regulations targeting foreign companies that allegedly inflate the value of their assets to cheat their Chinese partners.⁽⁶³⁾ An official Chinese report stated, "[b]y overvaluing their assets, some foreign investors have been claiming a disproportionately large share of profits, which are nailed down according to each side's stated investment."⁽⁶⁴⁾ The new "registered capital" regulations include an evaluation procedure which will aid officials in ascertaining the real value of a foreign investment.⁽⁶⁵⁾

E. Property Law and Leasing

The advancement of property law had been slow and ongoing because there was no real need for an advanced property law in the PRC⁽⁶⁶⁾ until after the 1978 economic reform movement began. A Constitutional amendment was adopted which protects the so-called "economic ownership" of land.⁽⁶⁷⁾ By 1992, a real estate market for urban land existed. In addition, the state protected the right of citizens to own lawfully earned [or inherited] income, savings, houses and other lawful property.⁽⁶⁸⁾

Leasing in China is similar to leasing in the United States, in that the lessor retains legal title even though the lessee has actual possession.⁽⁶⁹⁾ However, an important factor regarding leasing in China is that since there is no reliable legal framework. Actual possession often means a de facto ownership, regardless of who holds title to the property.

When financial leases are entered into, Chinese or JV leasing companies borrow money from banks and use the funds to buy equipment for the lessee.⁽⁷⁰⁾ JV companies can often get funds from foreign banks, whereas Chinese companies typically lack the credibility needed to borrow from such a source.⁽⁷¹⁾ Under the purchase agreement between the manufacturer and the lessor, the lessee is named as the user in the contract, but the ownership is retained by the lessor.⁽⁷²⁾ The point of this arrangement is that the end-user may then claim warranty under the contract with the manufacturer.⁽⁷³⁾ After the installation certificate has been signed, the leasing company assumes the economic but not the technical risk.⁽⁷⁴⁾

Financial leasing in China is different from financial leasing in the West. The pay-back time is very short, normally only three years.⁽⁷⁵⁾ Therefore, the payback time is too short to let the machines pay themselves off. However, because of the market risk, no leasing company is prepared to grant a ten year payment period, which in many cases would better reflect the depreciation.⁽⁷⁶⁾ In addition, because of the unreliable property system and the short payback time, a guarantee from a third party is always needed. Unlike leasing in the United States, the end-user, lessee, lists the equipment as an asset instead of a cost in its bookkeeping and thus, it is more like acquiring a bank loan than leasing.⁽⁷⁷⁾

F. Allocated Land-Use Rights

Allocated land-use rights are different from granted rights, in that the government provides land to the land user without consideration.⁽⁷⁸⁾ Although the land-use right normally has no time limit, ⁽⁷⁹⁾ the land user's rights can be revoked at any time by the State.⁽⁸⁰⁾ When the State exercises its right of revocation, it is obligated to compensate the land-user for the structures on the land.⁽⁸¹⁾ Also, allocated land may not be transferred without state consent whereas granted land can be freely transferred.⁽⁸²⁾ In addition, if a land-user needs to change the purpose of the land-use, as specified in the contract, he must obtain permission from the grantor and the city planning department.⁽⁸³⁾

A disadvantage to the land-use contract is that the contract fee must be paid before a transfer is permitted.⁽⁸⁴⁾ However, like other regulations in China, this regulation is not always adhered to. To transfer real estate, the land-use certificate and the certificate of title to the buildings must be presented to the State Land Administration Bureau (SLAB) of the municipal or county.⁽⁸⁵⁾ Another disadvantage to the land-use contract is that after the land-use right contract expires, the land and all the buildings thereon is returned to the State without compensation.⁽⁸⁶⁾ If the land user needs to continue using the land, he must apply for an extension no later than one year before the expiration date of the contract.⁽⁸⁷⁾ Unless the land needs to be recovered for "social and public" interests, such an application shall be approved.⁽⁸⁸⁾

When the parties enter into a transfer or grant contract, all rights to and liabilities from the property are transferred from the seller to the buyer with respect to the new owner's relationship with the SLAB.⁽⁸⁹⁾ The time limit of the land-use is therefore the remaining time of the period specified in the original grant contract.⁽⁹⁰⁾

In the 1990 Grant Regulations, the state reserved the right to intervene in the real estate market.⁽⁹¹⁾ For example, the local government has a pre-emptive purchase right if the transfer price is "substantially" lower than the market price.⁽⁹²⁾ In addition, if the market price rises irrationally, the local government may take "necessary measures."⁽⁹³⁾

G. Expropriation

The state will not recover the land-use right from the land-user before expiration of the term specified in the contract.⁽⁹⁴⁾ However, the right to expropriate the land is reserved by the state "under special circumstances and in the light of social and public interests."⁽⁹⁵⁾ When the state expropriates the land, the land-user should be compensated according to the number of years left on the contract and the extent to which the land has been developed.⁽⁹⁶⁾ As the compensation is decided by the government, it tends to be significantly lower than market value.⁽⁹⁷⁾

H. The Guarantee

In light of the foregoing, it is not surprising that getting compensation from guarantors is difficult in China.⁽⁹⁸⁾ Guarantees from a local government agency are not necessarily honored and the central government does not necessarily stand behind the commitments of its SOCs.⁽⁹⁹⁾ Local government agencies or companies and local banks often claim they were forced to sign the guarantee and they therefore are not liable, or claim that there is no money available to pay the guarantee.⁽¹⁰⁰⁾ Furthermore, the local courts are neither willing nor have the power to force the local governments to honor their promises.⁽¹⁰¹⁾ Since 1988, government agencies are not allowed to guarantee loans or leasing.⁽¹⁰²⁾ Today, the local government creates government-owned companies which in turn give the guarantees on loans and leases, thus making claims against the local government itself more difficult.⁽¹⁰³⁾

I. Dispute Resolution

In the past, the Chinese merchants relied on trust, guarantors and a web of interlocking obligations instead of laws.⁽¹⁰⁴⁾ Guilds and other nonofficial bodies were used by the merchants to enforce contracts.⁽¹⁰⁵⁾ As a result, informal solutions to resolve conflicts have a long tradition in China. This is explained by the interplay of Confucian values and the unattractiveness of the imperial court system.⁽¹⁰⁶⁾ Today, there are four types of dispute resolution in China: mediation (xieshang), conciliation (tiaojie), arbitration (zhongcai), and court verdict (panjue).⁽¹⁰⁷⁾

1. The Chinese Courts

In selecting a forum to resolve a dispute, it should be noted that the traditional view of the Chinese is that bringing a dispute to court reflects failure and disrupts the harmony that is so precious to the Confucian philosophy. In fact, litigation has been discouraged by government officials and in Imperial China penalties were imposed on those bringing a lawsuit.⁽¹⁰⁸⁾ Even today, the law is viewed as a means to control and punish criminals, but not a means to protect non-criminal legal rights. As discussed in Section II of this note, the lack of judicial power of the courts, relating to non-criminal actions, impedes the remedial process and creates a virtually deterrent free environment. For example, unlike in the United States where judgments in one state are recognized by another under the Full Faith and Credit Clause,⁽¹⁰⁹⁾ the courts of one Chinese province do not often recognize or order execution of extraterritorial judgments. This is especially true when the judgment has a negative impact on an entity within that court's district.⁽¹¹⁰⁾ This is not to say there is no chance of prevailing in a civil law suit at a court in China. In an attempt to address the Chinese court problems, the president of the Supreme People's Court has admonished lower courts to be more consistent and equitable.⁽¹¹¹⁾ In addition, multinational corporations, such as Walt Disney Company, have successfully litigated intellectual property suits in Chinese courts.⁽¹¹²⁾ In fact, intellectual property protection practices are becoming more westernized.⁽¹¹³⁾ However, the lack of enforcement and remedies regarding this type of vulnerable property makes it necessary to include explicit language, pertaining to the same, in any JV agreement with the PRC. It should also be noted that in 1987 China ratified the New York Convention, and thus, is more prone to recognize foreign arbitral awards.⁽¹¹⁴⁾

2. Alternative Dispute Resolution.

As with western mediation, a mutually satisfactory solution based on voluntary negotiations between the parties is attempted. Unless otherwise provided in the contract, the next non-binding attempt at settlement is conciliation which may be conducted by the People's Conciliation Committees. Should these non-binding attempts fail, arbitration is typically the next step towards resolution. Unlike western arbitration, the Chinese have two arbitration procedures, one of which is designated for disputes involving foreign entities and the other for disputes involving only domestic parties.⁽¹¹⁵⁾ Unless otherwise provided in the contract, arbitration involving foreigners can be conducted by the China International Economic and Trade Arbitration Commission (CIETAC) or the China Maritime Arbitration Commission (CMAC).

III. Currency

A. Generally

The Chinese currency was named renminbi (literally the "people's currency" in Mandarin Chinese) with its unit referred to as the yuan.⁽¹¹⁶⁾ The central government sets national policies,⁽¹¹⁷⁾ and large district governments carry out foreign exchange control using their own provisional measures.⁽¹¹⁸⁾ There have been two main foreign exchange policies: one forbidding circulation of foreign currencies within China, and the other providing for state supervision over all inflows and outflows of foreign exchange.⁽¹¹⁹⁾ Thus, the PRC has attempted to strictly control currency.

B. Taxes

Joint Ventures of PRC-U.S. companies are given sizeable tax breaks.⁽¹²⁰⁾ In 1984, President Reagan and Premier Zhao Ziyang signed the first income tax treaty between China and America known as the Agreement for the Avoidance of Double Taxation and the Prevention of Tax Evasion (Sino-U.S. Agreement).⁽¹²¹⁾ The Sino-U.S. Agreement aimed "to reduce double taxation of income earned by residents of either country from sources within the other country. Another goal of the Sino-U.S. Agreement was to prevent avoidance of the income taxes imposed by the taxing authority of either country."⁽¹²²⁾ Under the Sino-U.S. Agreement, unless the business activities in China are "substantial enough to constitute a permanent establishment or fixed base," China cannot tax foreign business income and the same applies to the United States.⁽¹²³⁾ While dividends, interest, and royalties received by a foreign investor may be taxed by both countries, they will be taxed by the source country⁽¹²⁴⁾ on a restricted basis.⁽¹²⁵⁾ The treaty provides for a maximum withholding rate of 10 percent and thereby provides tax relief when compared with the customary 20 percent Chinese rate and 30 percent American rate.⁽¹²⁶⁾

Additionally, the PRC has established areas of preferential treatment for foreign direct investments, known as Special Economic Zones and Economic and Technological Development Zones, which offer both foreign and domestic investors measurable preference in taxation, employment, utilities, and other business considerations.⁽¹²⁷⁾ These areas have served as testing grounds for reforms of business law and trading practices, including foreign exchange provisions.⁽¹²⁸⁾ However, China's apparent intent to assist foreign investors does not negate "[t]he complexity of China's foreign exchange [which] has become one of the greatest challenges for outsiders wishing to do business in the country."⁽¹²⁹⁾

C. Foreign Exchange

Foreign exchange has always been a problem in China. The American Motors Corporation (AMC) JV in Beijing is one well-known example.⁽¹³⁰⁾ Unfortunately, early pioneers, such as AMC, learned the danger of doing business in a country lacking legal protection for foreign investors when they were unable to repatriate their profits.⁽¹³¹⁾ Because of a shortage of foreign exchange to pay for parts, production of the "Beijing Jeep" was completely halted in early 1986.⁽¹³²⁾ Ultimately, AMC solved the problem and the enterprise, now controlled by Chrysler, remains an investor in China today.⁽¹³³⁾ However, AMC's experience was not an anomaly and others like it dampened the attractive foreign investment climate. Under the strict enforcement of PRC law, generating foreign exchange was a major problem for managers of foreign funded enterprises, especially in the production sector.⁽¹³⁴⁾ In response, the PRC reconsidered the goals of the "open door" policy,⁽¹³⁵⁾ and began to welcome investment that brought in other kinds of benefits, like the transfer of new and more efficient technology.⁽¹³⁶⁾ To codify China's new view, regulations were promulgated in 1986 and 1987 to provide several methods, other than export, of obtaining foreign exchange.⁽¹³⁷⁾

D. Alternative Means of Obtaining Foreign Currency

Methods set forth by the new 1986 and 1987 regulations include swap markets and import substitution. In addition, the means of obtaining foreign currency which is not officially regulated is known as the Black Market.

Probably the most successful of the PRC's efforts,⁽¹³⁸⁾ the swap markets, allow firms to balance their foreign exchange by trading renminbi for foreign exchange with other firms that have a surplus.⁽¹³⁹⁾ Retention quotas are given in the form of certificates to domestic enterprises that generate a foreign exchange surplus which allow for a later purchase of foreign exchange.⁽¹⁴⁰⁾ Eventually, all foreign invested enterprises were granted entry into the former retention quota market, which became known as the swap markets.⁽¹⁴¹⁾

The swap markets are governed by the State General Administration of Exchange Control and its various sub-bureaus, and transactions take place in Foreign Exchange Transaction Centers (also referred to as "swap markets").⁽¹⁴²⁾ FETCs are located in major cities and accommodate the multitude of enterprises with foreign exchange needs. In 1992, a national swap market was established in Beijing to better unify prices at swap centers across the country.⁽¹⁴³⁾ However, regional protectionist policies prevented cross-border swapping⁽¹⁴⁴⁾ and thus kept exchange rates higher in certain outlying exchange centers away from China's economic zones when demand out-paced supply.⁽¹⁴⁵⁾

At one time, import substitution was used as a means of foreign exchange in China. However, the Chinese government has promised to eliminate import substitution policies in its market access memorandum of understanding with the United States.⁽¹⁴⁶⁾

E. Foreign Exchange Rates

There are three rates of exchange in the PRC: the "official rate," the "swap rate," and the "black market rate." The official rate is fairly stable and is available on a daily basis at the Bank of China. The swap rate varies "as swap markets in different geographical areas operate under varying local rules and market conditions (supply and demand)."⁽¹⁴⁷⁾ The "black market rate" is more volatile than the swap market, as there is less official control over it.

Until recently, black market currency exchanges remained small in nature, relegated to curbside transactions with foreign nationals working or traveling in China.⁽¹⁴⁸⁾ Similar to the swap market, the rates in these transactions were set by supply and demand, on a more localized scale.⁽¹⁴⁹⁾ However, increases in foreign exchange demand led to an increase in the size of black market trades, as some firms began by passing the swap markets altogether.⁽¹⁵⁰⁾ The black market has since developed its own "market makers."

IV. Corrupt Practices and Anti-Trust

A. The Status Quo in The PRC

U.S. companies which are active in China should be aware of their potential exposure under the Foreign Corrupt Practices Act (FCPA).⁽¹⁵¹⁾ Since most U.S. direct investment in China is in equity JVs with state enterprises,⁽¹⁵²⁾ the lack of control of the business operations lends itself to problems with FCPA compliance. In the JV, FCPA liability through a third party's conduct attaches easily as a result of the Act's broad intent of regulating U.S. corporate behavior abroad. Exposure to the anti-bribery provision of the Act in the joint venture setting is magnified when the U.S. company is the minority partner. The U.S. company's own employees, who are U.S. citizens or residents, are individually subject to the FCPA and are thereby less likely to violate the Act.⁽¹⁵³⁾ However, the foreign sales agent is not subject to the Act. Nevertheless, the agent's conduct or practices may create FCPA exposure to the U.S. company. The major problem regarding this issue is that many agents are unaware of the Act, and bribery in some places is a customary way of doing business. Notwithstanding the fact that minority partners in U.S. company-PRC JVs are afforded the good faith/due diligence safe harbor in the accounting provision,⁽¹⁵⁴⁾ they may nonetheless be subject to the anti-bribery provision, which is ambiguous with regard to the question of liability.⁽¹⁵⁵⁾

The rampant corrupt practices in China compound the problem of FCPA exposure for a U.S. company. Ever since Deng Xiao Ping made his famous remark that "it is glorious to get rich," government and party officials alike "have taken the statement to heart."⁽¹⁵⁶⁾ As a growing number of Chinese officials exchange their connections and influence for financial gain, the tide of corruption seems to be uncontrollable.⁽¹⁵⁷⁾ Some China watchers opine that corruption is almost "institutionalized" in the PRC,⁽¹⁵⁸⁾ and "payoffs, kickbacks, graft and bribery…have become a daily feature of doing business with China."⁽¹⁵⁹⁾

Officials are reportedly often soliciting bribes from foreign businessmen negotiating for contracts in China.⁽¹⁶⁰⁾ The request for bribes has progressed from the taking of gifts to requesting kickbacks based on a percentage of the sales commission or an outright demand for money.⁽¹⁶¹⁾ However, U.S. companies involved in a PRC JV are in a so-called "catch 22" situation. That is, if they submit or acquiesce to the bribery, they are subject to liability under the FCPA, and if they are firm and do not submit, they invite frustration, the risk of deals falling through and threats to keep silent about the bribery requests. In fact, if a U.S. company abruptly turns down corrupt demands, "it could lead to an army of inspectors arriving at [their] workplace . . . to search for and find every violation they can imagine."⁽¹⁶²⁾

United States' companies should also be aware that Chinese parties frequently bluff and are just "trying it on."⁽¹⁶³⁾ For example, an American corporate investigator reported that a $100,000 bribery demand was dropped after a Chinese manager "laughed in disgust" for a few minutes.⁽¹⁶⁴⁾

B. Applicable United States Anti-Corruption Law

The FCPA is applicable to U.S. nationals while they are within the territory of the United States and while they are doing business on foreign soil. Therefore, if a national of the United States violates the FCPA, the U.S. courts will have nationality jurisdiction to prosecute the person and/or entity. Both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have authority to enforce the Act, although the DOJ has sole authority over related criminal prosecutions.⁽¹⁶⁵⁾