China Stimulus PackageChina Stimulus Package

Geoffrey G. RevelleStoel Rives LLP

www.stoel.comwww.stoel.com

O r e g o n W a s h I n g t o n C a l I f o r n I a U t a h I d a h o

Summary

• $586 billion announced 11/2008 over the next 2 years

• Part of “proactive fiscal policy” to create jobs and maintain 8% GDP growth

• Main beneficiaries – government owned and private Chinese companies, provincial governments

• High-tech and other foreign products and services not available in China also will benefit

Chinese Business Entities

• State-owned enterprises (“SOE”)• Provincial Investment Vehicle (“PIV”)• Domestic Private Enterprise (“DPE”)• Foreign Invested Enterprises

Foreign Invested Enterprise (“FIE”)• Wholly Foreign-Owned Enterprises

(“WFOE”)−100% foreign-owned−Only engage in business in China when

foreign investment permitted or encouraged−Typically in manufacturing, consulting,

trading, wholesale and retail−Limited liability

FIE’s (cont.)

• Equity Joint Venture (“EJV”)−Chinese and foreign ownership−Commonly used to invest in restricted areas

of Chinese economy−Limited liability

FIE’s (cont.)

• Cooperative Joint Ventures (“CJV”)− Can be limited liability company or an

unincorporated entity− Engage in restricted activities

• Foreign invested companies limited by shares (“FICLS”)− Stock exchange company

• Representative office: conduct research, establish contacts, cannot engage in profit-making activities

Prohibited Foreign Investment • Arms and munitions• Construction and operation of power

grids• Motion picture distribution

Restricted Activity

• Requires participation of Chinese company• Categories

−Outdated technology−Harmful to environment−Protected economic sectors

• Examples−Gold, silver, and platinum mining−Mobile and data telecom services−Grain production

Encouraged Activities

• No participation by Chinese company required

• Examples:−Development of agricultural technologies−Production of engineering plastics and plastic

alloys−Software−Construction of large thermal power stations

Stimulus Package Goals

• Maintain GDP gross at or near 8% and create jobs (6.1% first quarter)

• Focus on 10 sectors of the economy• In line with latest Five-Year Plan• Boost domestic demand (spending) to

counter export losses

Focus AreasRural Infrastructure

• Roads• Power grid

−Drinking water safety and conservation

• $54 billion

Focus Areas Transportation

• Rail −extending lines, more passenger links, coal

routes−$147 billion in 2009, $147 billion in 2010

• Airports in central and western regions−$30 billion in 2009, $37 billion in 2010

Focus Areas Environment

• Water safety and conservation• Expand recycling• Energy and clean energy technologies• $31 billion 2009/10

Focus Areas Power Grid

• $175 billion on grid structure 2009/10• Goal to address grid bottlenecks and add

renewables to system• Wind and solar investment – energy

stimulus, plan coming later – $290 billion in alternative energy industry through 2020 – replace coal with clean energy

Focus Areas Finance

• Likely remove previously imposed loan quotas – lending has increased

• Increase bank credit for key stimulus projects

• State owned banks• Various tax incentives being put in

place

Focus Areas 5/2/08 Earthquake

Reconstruction• $146 billion

Focus Areas Housing, Health Care & Education, Industry• $58 billion for low rent housing and slum

clearance• $27 billion – health care and education

project• $53 billion in modernizing aging

industries and high tech

February National People’s Congress

Changed PrioritiesPrioritized Sectors Original Total

(billion)Revised Total (billion)

Change (billion)

Infrastructure: railway, highway, airport, grid construction

263 219 -44

Sichuan Earthquake Reconstruction

146 146 0

Housing 41 58 +17 Rural Livelihood and Infrastructure

54 54 0

Industry Innovation 23 53 +30 Environmental Projects 51 31 -20Healthcare and Education

8 27 +19

• No new money

Approval Process for Funding• Approval by central government for all

projects, National Development and Reform Commission (“NDRC”)

• Projects all implemented at the provincial level

• Provinces and municipalities apply to central government for funds (NDRC and other Ministries)

• Not much visibility on the process at this point

Factors

• Fit the Stimulus Package Criteria• Create jobs, bolster GDP• Applicant province’s ability to secure all of

the funds needed to complete the project• Vague standards but predicted 25-30%

from central government, the rest from provincial governments (PIV’s), banks, SOE’s and private companies (DPE’s mostly)

FIE Opportunities

• Subcontractors only• Focus on advanced IP and value added

services that DPE’s and SOE’s can’t provide

FIE Opportunity Examples

• Clean energy technologies, solar, wind• Technical systems like control and

automation processes for machinery used in railway and other infrastructure projects

• Logistics and project management services in rural infrastructure development and earthquake reconstruction efforts

• High-tech equipment in all areas• Medical equipment

Foreign Investment Process• Need to be approved or licensed by

government pursuant to Administrative Permissions Law

• Complex process to approve projects with foreign investment

• Both national and provincial approval required

Factors for Success

• Understand and keep track of changes in bureaucracy

• Understand national and provincial procedures and guidelines

• Understand the Foreign Investment Industrial Guidance Catalogue – prohibited, restricted, encouraged or permitted

Factors for Success (cont.)

• Policy changes and priorities as they change

• Understand needs of each province• As economy’s conditions change, so will

the package (GDP drops, more spending likely quickly)

Factors for Success (cont.)

• Understand what services and technologies Chinese companies can and cannot provide

• Hire good consultants