CAI is short for EU-China Comprehensive Agreement on Investment. December 30, 2020, just two (2) days before the enforcement of the Civil Code of the People of Republic of China (effective on January 1, 2021), the EU and China concluded the negotiations for a Comprehensive Agreement on Investment ("CAI").
Even under the impact of COVID-19, this is another great event in 2020 for China after the passage and adoption of the Civil Code in May, 2020. To investors from both the EU and China, this is no doubt a great event for them, because this will open a new era of improving market access conditions for EU companies in China and vice versa, and it will help investors make profitable investments in each other's market.
We feel that a better environment for business in both the EU and China will come from this great event. A better environment for investment will attract more investors from China to invest in the EU and also attract more investors from EU countries to China. Obviously, the conclusion of CAI is accelerating the pace of building such an environment for business that will benefit investors from both sides.
It is a good time for investors to seize the opportunity to invest and profit from the markets. However, this opportunity also brings a lot of challenges. If investors do not handle these challenges in the right way, their ambitious investment efforts may be in vain.
According to statistics, over the few years, more and more Chinese foreign direct investment (FDI) went into the EU, and most of the investment went directly to the categories of infrastructure and high technology. However, investment from EU into China was even higher, and about 50% of the investment went toward manufacturing.
For better process of investment, CAI was intended to cover both market access and investment protection. This makes it very important to understand the thresholds or standards of the market access to each market. Previously, each EU member (except Ireland) had bilateral agreements with China in business, but such bilateral agreements only focus on post-entry protection of investment. Obviously, CAI extended protection to cover the market access as well.
In practice, market access is really a first line of protection for making investment in a market. Before making a decision about a market, the first thing an investor must do is learn and understand the details of market access. Even though investors may have done this previously, there may not be similar or united laws or regulations for market access as those offered in principle by CAI.
We believe that after the conclusion of CAI the momentum of investment will increase drastically as the two sides are eager to work with each other. Both the market in China and the market in the EU are big markets, so it is never too late for investors to step up to get a share of them.
How to utilize this opportunity is this great epoch may be a big problem of investors who may not know the ins and outs of the markets. Before making any decision, they need to have a thorough understanding of the many factors related to the investment. Such factors may include the following:
- Target consumers;
- Habit of consumers;
- Target markets;
- Sales channels;
- Sources of raw materials;
- Investment partners;
- Laws and regulations governing investment etc.
In my opinion, investigation of the factors in item #1 to 6# may be easier and more convenient than studying and knowing applicable laws and regulations in Item 7# that can be very complicated and need professional assistance.
Thus, before the investment, the most important factor for investors to study, learn and understand is applicable laws and regulations in each other's market. The reason is that these laws and regulations will govern their activities in the investment, and legal issues in investment may bring risks to them and ruin their dream of success from the investment in the market.
For example, if an investor wishes to set up a wholly foreign-owned enterprise ("WFOE") in China, the investor may at least need to learn and know about relevant stipulations in the following laws in PRC, namely:
- Foreign Investment Law;
- Company Law;
- Labor Law;
- Labor Contract Law;
- Tax Law;
- Other applicable laws.
In fact, besides such laws that are applied to the whole jurisdiction of PRC, there are local regulations or enforcements related to such laws. This may make things even more complicated. It is much more difficult than knowing that people in Guangdong area like to eat everything, while people in Sichuan like to have hotpot.
Simply speaking, these are too complicated for investors to handle by themselves. They need to rely on attorneys in each other's market for help. In order to value and assess the risks of the investment, attorneys normally suggest clients conduct a due diligence on the investment either by attorneys or associates in other regions (including the EU) before the investment.
We may need to address topics depending on the purpose of due diligence. If they are helpful for valuation and assessment of such risks, such topics may be general or specific. In our experience we have gained from different scenarios for investment, a normal due diligence for investment may cover the due diligence on the aspects related to laws and regulations, commerce, financial affairs and tax. Besides these aspects, due diligence on technology, environment, management, etc. may also be needed.
The due diligence on laws and regulations may cover legal matters relevant to proper incorporation and ownership, compliance, contractual obligations, assets and ownership, litigations and the like. The purpose is to confirm that the rights to be acquired by the investor are valid and whether there are any legal risks that may hamper the value of the investment. As the aspect of commerce is the most critical component of the target's business plan, due diligence on this aspect may cover positioning, drivers, prospects and market shares in the target market.
Its purpose is to independently achieve a perspective on the forecast of sales. To verify the assumptions of the valuation of investment is one of the purposes of due diligence on financial aspects. Another purpose is to identify financial uncertainties and exposures and find out if these may destroy the business or cause additional costs. The target of tax due diligence is to identify tax liabilities in the investment and additional tax liabilities.
Before investors make their decision on investment, it may be very difficult for them to learn and understand such laws and regulations relating to investment on their own. As attorney at laws for global ventures, IPO PANG XING PU is in position to assist investors from abroad (including the EU) to invest in China and assist investors from China about investing in foreign markets (including the EU).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.