Buying Hotels in China
1. Is it encouraged or restricted for foreign companies to construct and operate hotels in China?
Construction and operation of hotels is classed as a "restricted" industry under China’s Guideline for Foreign Investment, and therefore foreign companies seeking to construct and operate hotels in China need government approval. As hotel developments can generate many employment opportunities as well as steady, long-term tax revenue, the government approval process for hotel investing is sometimes easier than the process for other types of real estate.
2. How long will it take to establish a wholly foreign-funded real estate company in China?
Foreign investment in China’s real estate industry faces cumbersome restrictions which have slowed down the flow of foreign capital. Winding through China’s government approval procedures to establish a wholly foreign-funded real estate company can take from six to twelve months.
3. Is there any requirement on the registered capital for the establishment of a foreign invested real estate company?
The total registered capital deposited in a foreign invested real estate company must not be less than half of the total investment, when such investment is more than US$10 million. If these procedures are not followed, you will encounter foreign exchange difficulties in repatriating profits and also on exit.
4. What kind of places are the best choices to invest in this industry?
Many foreign investors have shown strong interest in first-tier cities like Beijing and Shanghai, which has led to heavy investment in hotel developments in such cities and very restricted access to new investment opportunities. In contrast, attracting foreign capital is still an important measure of "political achievement" for second-tier and even remote cities. You may find it easier to invest in those areas.
5. Is there any special rule for foreign investors in dealing hotels with State-owned enterprises in China?
An investor trying to purchase a State-owned hotel or sell a hotel to a State-owned enterprise must be very patient. Special government departments exist to administer such assets, and it is the government officials in these departments who make the ultimate decisions, not the chairman of the board. In addition, transactions involving State-owned enterprises will often be driven by political concerns, and it is advisable to consider these concerns at the negotiation stage.
6. What are the major issues concerning employment if a foreign investor has acquired the shares of a State-owned enterprise?
Social stability is of great concerns to the Chinese government as China attaches great importance to the building a "harmonious society". Consequently, there are special restrictions on the transfer of State-owned property rights, such as placing priority on a plan for employees. If you have acquired the shares of a State-owned enterprise, do not expect to make immediate, large-scale workforce changes, such as layoffs. If you intend to make any such changes, you will need to submit a post-acquisition plan to the relevant government departments. However, the local government is usually reluctant to accept large-scale layoffs when new foreign management takes over.
7. What is the status of contract enforcement in China?
China’s legal processes are still developing and there is an increasing emphasis on the rule of law and legal process. Although respect for contractual terms is sometimes relatively weak in China and Chinese companies do not uphold contracts in the same way that Western companies might, a well-prepared contract is still very important in doing any business in China.
8. What measures should be taken concerning accounting records for foreign investors who are planning to acquire shares of Chinese companies?
It is sometimes found that Chinese companies have two sets of accounting records. False financial statements may be used to artificially enhance the financial and operational status of a target property. Investors must take care to ensure that they conduct a full financial investigation to ensure that the acquisition or investment is viable.
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