The 2013 Chinese Entry-Exit Law - How it will impact you

The new PRC Entry-Exit Administration Law will go into effect on July 1, 2013. This is the first time the authorities have meaningfully amended this area of law to reflect China's modern day immigration issues.

Listed below are some key questions raised by expatriates and their employers concerning the anticipated rule changes:

1.  Are there any new requirements/restrictions on entries or exits into China?

As with other nations, China follows suit by constricting and retracting its immigration policies based on its current political and economic environment. Until now many expatriates have managed to find refuge and employment in China by entering on business or tourist visas. The new law attempts to crack down on this issue in Article 25 which allows the visa issuing authorities a wide margin of discretion in granting visas - that means if a person, by whatever metrics being used at the time, is considered to fall into a category of persons who "might violate" visa policies, they could be denied entry visas into China. It is said that this law is particularly targeted at those in the Education and Entertainment sectors. On the other hand Article 28 has been drafted to tackle the issue of expatriates who pose a flight risk. This article stipulates that if an employer has unfulfilled payment obligations to PRC employees, they may be subject to a no-departure restraining order until such matters are resolved. Article 42 also provides that the authorities will periodically issue and update an "occupations list" which categorizes the industries and occupations that are encouraged, prohibited, or restricted to foreign participation. Therefore it seems the authorities will be herding expatriates into the direction it believes will promote to China's growth - much like the Foreign Investment Guidance Catalogue. Does this signal bye bye to the English teachers that don't possess the proper qualifications? Maybe..

2.  How is the issue of documenting expatriates addressed?

China will soon start collecting biometric data. Fingerprints are explicitly mentioned in the new law, and the authorities may also collect "other biometric data" which presumably could extend to retinal scans or behavioral biometric data such as handwriting samples. For now I think it is reasonable to presume that if you are applying for any type of long term residence, your fingerprints will be taken. 

3.  Are there any new obligations on employers under the new law?

Yes. Article 19 says you better issue authentic invitation letters and application documents or you will be fined. There are several new articles dedicated to the increase in penalties and fines therefore it is important to continuously be mindful of the legal requirements for employing an expatriate. 

4. How harsh are the authorities going to be when it comes to enforcement/penalization? 

The base fines have increased for violations. If you have only a few employees this may not make a significant difference, but for large scale employers noncompliance may greatly increase the cost of operations. Article 45 for example requires international schools to report foreign student enrollment to the public security bureau. The public security bureau is also authorized to detain persons suspected of violating the entry-exit laws up to 30 days and in serious cases up to 60 days. These increased policing efforts are aimed to deter any violations..and with such unbridled discretion, I am guessing this may in fact work. 

5.  What to do next?

Keep following the updates in this area of law, plan for the upcoming year and following years and look out for interpretive guidance which could help clarify some of the vague sections of the law. 

China's Impending Health Issues - How Can Smartphones Help?

What are Chinese citizens most concerned about?

Medical issues generally fall under the number one category of concern among Chinese citizens according to government surveys - trailing much higher than concerns over social morals, security, education and unemployment. Much of this anxiety comes from the fact that routine healthcare is still extremely expensive even for the average Chinese middle class - not to mention that hospitals revenues and pharmaceutical sales are in a market oriented system which further increases medical expenses.

[See my previous post on drug pricing http://chinainhousemonster.blogspot.com/search/label/drug%20pricing]

How have eating habits changed in China?

Historically, Chinese diets have had a symbolic relationship between the food eaten and aspects of health. "He that takes medicine and neglects diet, wastes the skills of the physician."(Chinese proverb)" It is important to point out cultural values here. One one side Chinese people are very concerned about balance and harmony, the "yin and the yang", or the "five elements theory" that was traditionally applied to almost every aspect of day to day life, including food. However, today with rising disposable incomes and most of the nuclear family in the workforce, regular eating out has become mainstream culture in China. This is why fast food chains such as McDonald's and KFC have been some of the fastest growing franchieses in this region.

Beacause of this change in eating habits and lessened physical activity, Chinese people are increasingly starting to witness diet and obesity related health disorders. According to a Chinese health ministry statement in China there are more than 60 million obese people and another 200 million who are overweight. The New England Journal of Medicine calls diabetes and pre-diabetes a silent epedemic in China - with 1 in 10 people already suffering from the disease and millions who are undiagnosed.

How smartphone apps work toward promotion of health in other countries?

There currently exist about 700 healthcare and fitness smartphone apps ranging from the useful to the gimmicky. These include custom diaries, calorie counters (tracking what you eat, including those from popular foods or restaurants), pedometers (tracking your every footstep) etc. Users pay about 99 cents for these applications or sometimes even get them for free. Although you can't click yourself to a healthier body, many users have claimed that by using things such as a calory counter, they think twice before consuming certain foods. Also since the price of these apps are so low, there is more of a "why not try" attitude and very little required commitment of the consumer with respect to expense and time.

Smartphone applications for food in China

China with 800+ million cellphone subscribers is easily the worlds largest growing market for smartphones and smartphone apps. The major service providers such as China Mobile, China Unicom, and China Telecom have already outfitted third generation devices. Given the discussion above, there are really endless ways smartphone apps in Chinese can be used for improving/maintaining the health of Chinese citizens, by educating the consumers and providing instant information on food choices. There are hundreds if not thousands of franchisee food stores in China - wouldn't it be great if when you walked in you could see the calorie and nutrition count of everything on the menu. What about all the snack foods and drinks in the convenient stores which are on every corner and every block... With the relatively low cost of the application, consumers can benefit with little expenditure by taking proactive rather than reactive measures on health. Because medical issues are most important to Chinese people, apps tailored to these concerns will surely fare well.

Interesting Reading

Food and Eating Anthropology: http://www.sirc.org/publik/food_and_eating_9.html

New England Journal of Medicine: http://content.nejm.org/cgi/content/short/362/12/1090

Five Elements Theory of Chinese Cooking: http://chinesefood.about.com/library/weekly/aa041900a.htm

China Suffering Diabetes Epedemic: http://health.yahoo.com/news/afp/chinahealthdiabetes_20100325104234.html

Smart Solution: Researchers Use Smartphones to Improve Health of Elderly Diabetics in China:

http://www.sciencedaily.com/releases/2009/10/091029162022.htm

Google to Pull out of China?

If you've already read the news this morning, you would have heard that 'Google citing a cyber attack' is threatening to pull out of China.

Read the article on NY Times here:
http://www.nytimes.com/2010/01/13/world/asia/13beijing.html

Read the official Google Blog statement here:http://googleblog.blogspot.com/2010/01/new-approach-to-china.html

Complying with the FCPA in China

What is the FCPA and why should you be concerned?

The US Foreign Corrupt Practices Act – governs the offering of bribes to foreign government officials to further business interests. China, which shouldn't come as a surprise, falls under the catagory of high risk jurisdictions. Even though the act of gift giving is customary in Chinese culture and business transactions, the giving of certain gifts will run afoul of the FCPA. The US Department of Justice and the Securities Exchange Commission have been stepping up their investigation and punishment of FCPA violations. "If we call them before they call us, it's not where they want to be." (DOJ spokesperson).

Who does it apply to?

(a) Issuers of public securities or those required to regularly report to the SEC, even PRC companies listed in the US.

(b) US citizens, US permanent residents (i.e., green card holders)

(c) Business entitites established in the US or those with a principal place of business in the US (and their senior officers, directors, shareholders or employees)

(d) Foreign businesses or nationals (that cause an indirect or direct corrupt payment in a US territory)

(e)Foreign Subsidiaries of US companies (US companies will be held liable if they authorize, direct or approve of noncompliant activity by their subsidiaries, this also includes situations where they were not actually aware but should have known)

Elements

(1) Giving or Offering
• includes an offer, a promise to pay or payment of anything of value

(2) Anything of Value
• the giving of anything of value includes particularly creative means beyond the obvious exchange of money such as: low interest loans, assistance to get jobs or into educational institutions, credit cards, gym memberships, payment for weddings, holidays etc., and even nonmonetary gifts such as sexual favors, etc. Just use your imagination.

(3) To a “Foreign Official”
• in China this includes: a member/candidate/official of a political party, any officer or employee of the PRC government, a public international organization, or any department, agency thereof, or any person that acts in an official capacity, and also includes employees of State-owned enterprises.

(4) Directly or Indirectly

Means also giving something of value to any person - while knowing that such thing of value will be Given or Offered to a Foreign Official. Knowing includes not only actual awareness or a firm belief, but also a high probabilty that such circumstance will occur or that it exists. Concious disregard is not a defence.

(5) With a Corrupt Intent
• i.e., for the purpose of influencing the Foreign Official in the furtherance of an act or decision in their official capacity or inducing a Foreign Official to use their influence over a foreign government or instrumentality in order to affect its acts or decisions.

(5) To Further Business Objectives

What is allowed under the FCPA?
The FCPA does allow payments to Foriegn Officials for the purpose of performance or expediting a routine government action, examples of which include: obtaining permits, licenses, police protection, utilities supply, etc. The focus here is ROUTINE - and means actions that are commonly or ordinarly performed by such Foreign Official. And small nominal gifts are ok too (ask your lawyer what is ok)

Penalties
The penalties for FCPA violations are very very high. And include criminal fines of ($2 million for corporations, and $100k for individuals with a possibility of 5 years prison sentences) and civil fines of $10k for corporations or individuals, not to mention companies run the risk of loosing important licenses, permits or qualifications for continuing their business operations.
See WSJ Article - http://tinyurl.com/r2urug


Final words - do your due dilligence - the DOJ, SEC or your coroporate board will never critisize you for doing tooo much DD.

Check out FCPA BLOG - for all the naughty news - http://fcpablog.blogspot.com/
**this is not legal advice

Moganshan Mountain

Temperatures in Shanghai can get extremely uncomfortable during the summer months. If you are tiered of feeling like a roast potato in the middle of the city, I highly recommend a long weekend stay at the Naked Retreats (http://www.nakedretreats.cn/) on Moganshan Mountain. During our stay we were blessed to have two wonderful Ayi's who cooked up some killer English breakfasts with freshly baked bread and all the trimmings each morning before we set out on 6 hour hikes. Moganshan is a sleepy little village dotted with abandoned mansions, where most people seem to know each other and the average age of residents is over 60. A special treat was the filtered well water which we could drink straight from the taps in our Naked Cabin - it was so delicious we filled up a couple of bottles for our trip back to Shanghai.

Sweet lady working away

View from the top of Moganshan Mountain

Ahhhh retire to the bedroom.

Deeeeep in the forest.


Drying fish? or bamboo?


Picking tea

The three hour tour...

Commerical Bribery in China - They're Comming to Get You.

- New Interpretations of Criminal Commercial Bribery Cases -

Commercial bribes under the guise of gifts, entertainment, and favors have long catered to the operational norms of foreign and domestic businesses in China, where it is often hard to distinguish local customs from bribes. Statistics show that alarmingly, foreign companies have been involved in the majority of corruption scandals investigated in the PRC. Millions of dollars and items of value have been exchanged in thousands of cases of commercial bribery. A State news agency reported that in 2007, 1000 cases of bribery were uncovered in the health sector estimated at $4.3 million, and 7450 cases in the industrial sector with over $3.3 million in illicit gains. The PRC government remains focused on cracking down on bribes involved in property and land transactions, pharmaceutical sales, government procurement contracts and major construction projects, which due to their high profiles still remain the primary areas of scrutiny.

Administrative Violations.

Over the past decade China has enacted several laws and regulations to battle this illegal activity both through administrative and criminal sanctions. Commercial bribery was first recognized under provisions of the PRC Anti-unfair Competition Law which came into effect in 1993. This law defines administrative violations with respect to commercial bribery and was further reinforced and clarified by (i) The Tentative Provisions for the Prohibition of Acts of Commercial Bribery (1996); (ii) Opinions on the Launch of a Special Task Force to Tackle Commercial Bribery (2006); and (iii) Implementation Opinions on the Investigation and Treatment of Commercial Bribery by Law (2006).

Criminal Violations

The focus here is on certain classes of bribes which were criminalized in 1996 under the PRC Criminal Code (amended 2006) (the “Code”). Most recently, to shed light on the application of the Code, on November 20th, 2008 the Supreme People’s Court and the Supreme People’s Procuratorate released the Opinions on Several Issues Regarding the Application of Laws in Commercial Bribe-Related Criminal Cases (the “Opinions”). The Opinions clarify and expand the Code on the following issues:

I. Scope of commercial bribes;
II. Definition of “other organizations”;
III. Scope of criminal liabilities in medical, educational and government procurement;
IV. Gifts vs. bribes; and
V. Settlement of joint crimes between state and non-state personnel.

What Constitutes a Criminal Offence of Commercial Bribery?


Under the Code, ‘commercial bribery’ is defined as (i) the act of offering money or property to the personnel of a company or enterprise, a government official, or other organization; (ii) in return for a benefit or the assistance to obtain a benefit; (iii) involving a relatively large or very large amount.

Attempt and the Act of Asking are now part of the definition

Under judicial interpretation of the Code, the ‘act of offering bribes’ has commonly included cases involving persons (a) who in exchange for money or property of substantial value, take advantage of their standing to secure benefits for the briber; (b) who in the course of business, accept illegal kickbacks or commission; or (c) who offer bribes, kickbacks, or commission to government officials to illegally facilitate the course of business.

In one of the most significant changes, the Opinion has expanded the above definition of what actions constitute a bribe. Now amended, an actual bribe does not even have to be extended because violations also include (i) “seeking inappropriate benefits” - plainly said, the attempt of gaining unfair advantages through the violation of laws, regulations, rules or policies; or (ii) the act of asking the bribe recipient to make or help to make matters convenient through violation of laws, regulations, rules or policies.


“Other organizations” includes ad hoc organizations

The Opinions clarify that “other organizations” mentioned in the Code include not only private institutions, non-governmental organizations, civil organizations, village and neighbourhood committees, but also ad hoc organizations or certain business relationships such as those with contractors or event organizing committees and even ad hoc committees within an organization.



By What Definition is the Determination of ‘Money or Property’ Made?

Financial Benefits of Any Kind

Over the years bribery has taken various and sophisticated forms. Certain classes of bribes have clearly fallen under the Code’s definition of “offering of money or property” such as: tours/trips, resident permits, foreign passports, housing renovations, designer clothes and electronics, club memberships, etc. But the grey area of bribes which are difficult to categorize, although still remain illegal, fall under the not so obvious such as: zero to no interest loans, employment arrangements, admission into educational institutions, etc. The Opinion has tackled this issue by enlarging the statutory definition of bribes to distinctly include “inappropriate financial benefits” of any kind that bring illegitimate benefit to the recipient, with the specific amount subject to the actual gains or costs.

Bank Cards

For the first time in PRC bribery legislation, the Opinion specifically pointed, if bank cards are received under an act of bribery, that the actual account deposits will constitute the amount of the bribe, whether or not such amounts have actually been withdrawn or used. If the bank account is overdrawn, and the offering party is responsible for the balance of the account, the overdrawn sum shall also be deemed as a bribe.


Joint Settlement of Crimes between State and Non-state Personnel

Under the Code, state-personnel and non-state personnel are punished according to Articles 385 and 163 respectively. The thresholds and punishments for state vs. non-state personnel vary significantly. Under the Opinions, if non-state personnel together with state personnel jointly receive bribes they shall be prosecuted according to their respective crimes. If however, the principal and accessory cannot be distinguished then the crime shall be punished according to the more stringent bribery laws governing state-personnel.


What Criminal Liabilities are Specifically Expressed in the Opinions?

Although not explicitly stated, the Code was designed in such a way that the criminality of certain groups (such as those mentioned below) implicated in bribery was implied. The recent articulations in the Opinions with regard to medical and educational personnel and bid evaluation committees, demonstrates the Chinese government’s seriousness in its efforts to eradicate bribery.

Medical Purchases and Sales

By definition ‘medical personnel’ includes physicians, physician assistants, nurses, emergency medical technicians, dentists, etc. In China, by way of market design and medical expertise medical personnel retain a type of monopoly control over the choice of drugs and equipment available to their often uninformed patients. This often leads to rampant abuse of the system where bribes are exchanged to push the sale of drugs and equipment. The Opinions stress that state and non-state medical personnel, who abuse their position to obtain kickbacks or commissions from pharmaceutical companies and manufacturers of medical apparatus and supplies, will be subject their respective crimes under the Code.

Bid Evaluation Committees/ Government Procurement

The changes in this section are subtle though should not be ignored. The new rule states that:

A member of a legally established bid-evaluation committee, a negotiation panel of competitive negotiation procurement, or a consultation panel is prohibited from illegally receiving bribes to gain advantage for others in bids or government procurement processes.

With respect to government procurement, the Code focused specifically on the liabilities of ‘state personnel or related units’ as perpetrators. Now under the Opinions, any other ‘party’ which has some relation to the transaction may be deemed the offeree. In a practical move, the Opinion also considers these bribery actions in light of ‘industrial norms’ and indeterminate ‘rules’ and ‘policies’.

Bribes in Relation to Schools and Learning Institutions

Likely in reaction to the public outcry and scandals surrounding the collapsed school buildings in Sichuan Province earlier this year, the Opinions have especially mentioned punishment of bribes with respect to educational institutions from the procurement of books and supplies to the construction of buildings and sale of lands. Officials will be keeping a close eye on any profits made under these transactions.


Differentiating Gifts from Bribes

As in many neighbouring countries, in China gift giving is an important and socially beneficial function. When gifts are actually bribes is sometimes hard to distinguish because promotional gifts and customary holiday gifts are given year round. The Opinions have now elaborated the following factors which are taken into consideration when differentiating ordinary gifts from bribes.

(a) Relationship between the parties / background on the property or financial exchange

The courts will consider whether the parties are relatives or friends and other historical context relating to the transaction.

(b) Value of the property / financial exchange

Small Gifts: What may be considered ‘excessive’ is a matter of administrative or judicial discretion, but in most instances small gifts of insignificant value (pens, mugs, t-shirts, moon cakes) are generally acceptable. The caveat here is to be in line with prevailing commercial practices.
Travel and Meals: When guests are invited to events (such as medical symposiums), all meal and travel expenses should be duly recorded and directly related to the event. Particularly lavish meals and additional entertainment should be avoided.

(c) The reasons, timing and methods of the property/ financial exchange

Consideration is given to the circumstances that may have prompted the offeror, and whether the receiving party is in a position that may be manipulated to confer benefit on the offeror.
(d) Whether the receiving party takes advantage of his or her position to seek profits for the offering party


Minimizing Risk

Commercial bribery has become engrained into the way business is done in China because it is such a common social phenomenon. All links in a commercial chain are susceptible to corruption and keeping abreast of the most recent developments in PRC laws and regulations can aid companies in designing their internal compliance mechanisms and avoiding costly fines and/or imprisonment of those involved.

** this is not legal advice.

Don't Forget Employer's Duties When Drafting Non-Compete Clauses

A Beijing Court recently rejected an employer’s claim for RMB 300,000 for a former employee's breach of a non-compete agreement.


Employer and Employee signed a Confidentiality and Non-Compete Agreement, which basically stipulated that during the term of the labour employment and the effective period thereafter, Employee should not hold a part-time job or otherwise affiliate itself with a competitor or lure employees or customers away from employer (pretty general terms). The agreement did not however mention the Employees ‘rights’ or otherwise the Employer’s ‘duties’ with respect to the above obligation to not compete. Employee eventually left the position, and Employer paid Employee the non-compete compensation; but then appealed to the Beijing Arbitration Committee for the RMB 300,000 for the alleged breach. The appeal was rejected and the Employer brought the case to court.

The Court held....
In a Confidentiality and Non-Compete Agreement “both parties should be entitled to equal rights and responsibilities”. Since the agreement only stated the Employees responsibilities and failed to state the rights to which Employee is entitled to for compliance with its obligations, the contents of the agreement were deemed to be unfair and unbinding on the Employee. (Even though the Employer did infact remit the non-compete compensation)

Another example of how careful drafting can save the day.
* This is not legal advice

FDI China - Highlights of the 2009 Regulatory Framework

I. Laws and Regulations to Watch For in 2009

§ Foreign Investment Directory for the Middle and Western Regions (effective January 1, 2009)
- Incentives and preferential treatment with respect to taxes, interest on loans, and reduced rent on industrial use purpose land will be individually determined by each autonomous region, province and municipality.

- Foreign investment is encouraged in areas of environmental protection, agriculture, infrastructure and upgrades in industrial technology.

§ Greater Tax Rebates on Exports (effective January 1, 2009)
- Higher rebates on 533 high-tech products and machines.

§ Supplementary Provisions to the Measures for the Administration of Foreign Investment in the Commercial Sector (IV) (effective February 5, 2009)

- The purpose of these measures are to encourage “service providers” (as defined by CEPA) from Hong Kong and Macau to establish commercial enterprises in mainland China by way of allowing formation of WOFEs if such service provider (i) has established over 30 shops in mainland China, and (ii) deals in goods commodities such as medicine, fertilizers, pesticides, sugar, cotton, etc., - which are sold under different brands from different suppliers.

§ Measures for the Administration of Overseas Investment (effective May 1, 2009)

- Applying to both greenfield and M&A investments, these measures support outbound Chinese investments and include an overall simplification of approval procedures. The greatest impact will be in cases of small investments (i.e., under US$ 10 million) where approval power will vest in provincial level MOFCOM offices, and approvals can be expected within three (3) business days of filing.

§ Food Safety Law and its Implementation Rules (effective June 1, 2009)

- The highlights of this new law which will supersede the existing China Food Sanitation Law include (i) an improved monitoring and supervision system which will include the departments of Heath, Quality Supervision and Industry and Commerce and Agriculture, (ii) introduction of provincial level safety commissions, (iii) national level food safety standards, (iv) cancellation of exemptions from inspections, (v) articulation of food recall procedures (vi) harsh penalties for offenders with the possibility of criminal sanctions for severe cases.

§ Patent Law Amendment (effective October 1, 2009)

Some Highlights of the law include:

- Required Identification of Genetic Information – The amendments in the Patent Law along with the amendments in the Genetic Resource Law aim to protect the source of genetic material (namely China’s resources) by requiring patent applications to identify the heredity or source of genetic resources (i.e., animal, microbial, or plant). Protection of genetic information will only be granted provided the inventor reveals the source of genetic information to the Intellectual Property Bureau, and an explanation will have to be given in cases where the source or heredity cannot be identified.

- Compulsory Licenses for Patented Pharmaceuticals – Such licenses will be granted by the State Council, to manufacturers of medicines for export, which are already protected by Chinese patents, in cases where there is a strong public interest such as (i) where countries have entered into relevant treaties with China, or (ii) where the designated country of export is unable to produce such pharmaceuticals. This rule may undermine innovation and inventiveness.

- Increased Penalties – A patent holder may now claim for reasonable expenses incurred for stopping an infringement, and the maximum statutory damages for infringements have been increased to RMB 1 million.

- Implementation of an Absolute Novelty/Inventiveness Standard – Prior disclosure of any kind anywhere in the world (e.g. public use) may be cited as prior art against the (a) inventiveness or novelty of a utility patent application, or (b) novelty of a design patent. Design patents are also required to be substantially different from prior designs and from designs which are combinations of existing patents.

- Use of Patented Pharmaceuticals/Medical Equipment in Clinical Trials – Importation, production, and use of patented pharmaceuticals and medical equipment will be exempted from patent infringement if such uses are for administrative approval purposes.

- First Filing Requirement Replaced with National Security Review – The often circumvented first filing requirement is now replaced with the requirement that if one ever desires to secure a patent in China, before filing a patent in any country, a national security review must first be conducted by the State Intellectual Property Office of China (which may take 2 to 4 months), the details of which will be set forth in the expected Implementing Regulations of the Patent Law.




Highlights from 2008

I. Favoring Real Estate Investors

§ Since 2006, the Chinese government took regulatory action to cool down foreign investment in the overheated property market in China. However, its approach to foreign investment in the real estate sector shifted radically by the end of 2008 in response to the financial crisis. Some highlights include:

- Uniform Real Estate Tax - Starting January 1, 2009 uniform real estate tax is applicable to foreign and domestic real estate investors under the Provisional Regulations on Real Estate Tax of the PRC.

- Beijing Relaxes Rules for Foreign Purchasers for One Year – In the 2009 calendar year, foreigners may purchase property in Beijing without having to meet the one year residency requirement and the use purpose of the property will not be limited to self-use.

- Shanghai Allows for Foreign Currency Deposit Accounts for Land Payments - Foreign investors without any existing PRC establishments may open foreign currency deposit accounts for the purpose of paying land security deposits, allowing them to actively participate in land bidding.

- Filings Reviewed by Provincial Authorities – Under MOFCOM’s Notice 23, from June 18, 2008, review of filings on foreign investment projects have been delegated to its provincial level authorities, which indicates that the approval process should speed up.

II. Favouring Domestic Growth

§ Policy has shifted from favouring export oriented businesses to focusing on quality investments geared toward domestic led growth. This shift can be attributed to directives of the 11th 5 year plan on the Utilization of Foreign Investment.

§ Incentives under the 11th 5 year plan: as provided for in the 2007 Catalogue of Foreign Investment and the 2008 Catalogue of Foreign Investment in the Central and Western Regions

- Greatly expanded list of encouraged industries.
- Tax incentives for investment in Central and Western regions.

§ Prohibitions under the 11th 5 year plan:
- Solely export oriented projects.

- Projects listed in the 2005 Catalogue of Industrial Restructuring: such as those which waste electricity or raw materials; or those which pollute excessively or depend on outdated technology.

- Projects which focus on low value added consumer goods (toys, clothing, etc.), with low investment, use of low technology, and high employment of unskilled labour.

III. Favoring Establishment of Multinational Regional Headquarters in Shanghai

The Provisions of Shanghai Municipality on Encouraging the Establishment of Regional Headquarters by Multinational Corporations (effective on July 7, 2008)

Circular on the Implementation of Regulations on the Establishment of Multinational Headquarters in Shanghai, No. 28, Hufufa (effective November 15, 2008)

§ Major incentives include:
- Rental incentives of between RMB 500,000 – RMB 1,000,000 on leases with an area of more than 1,000 square meters and a minimum of a 3 year term.

- One time grant of (i) RMB 5 million for Management Companies whose annual turnover exceeds RMB 50 million; or (ii) RMB 10 million for Holding Companies whose annual turnover exceeds RMB 100 million.

- Other incentives include, (a) lower threshold of accumulated paid in capital, (b) broader permitted scope of business services, (c) relaxed rules on visas, work permits, and foreign employment certificates, and (d) simplified foreign currency conversions, and customs clearance and quarantines procedures for qualified bonded logistics and distribution centers.

Drug Price Reform in China: How Exactly Will Consumer Prices Go Down?

In China, on average, approximately 50% of healthcare expenditures by individuals are made on pharmaceuticals. The pharmaceutical industry is one of the principal industries in China with an average annual growth rate of 16.72% per year. China has steadily gained international market share afforded by its low cost manufacturing and is already the world’s leading producer of active ingredients used in brand name and generic drugs. Cost savings with respect to medical and clinical trials, human capital, and use of existing research facilities have long been attracting foreign investments in Chinese R&D centres, distribution channels and manufactories. However, such savings have not been readily passed on to Chinese consumers. In China, insufficient funding has caused hospitals to aggressively seek revenue through pharmaceutical sales which has led to the present state of over prescribing and over priced pharmaceuticals along with the undermining of public health.

On October 14th 2008, the State Food and Drug Administration (“SFDA”) released the anticipated proposal on the health care reform plan for public review[1] (“Proposal”). One of the most ambitious propositions in the Proposal centres on drug pricing reform.
[1] Draft Proposal available at: shs.ndrc.gov.cn/yg (public review forum will close on November 14th 2008).

I. How are Drugs Priced in China?
In China pharmaceutical prices are either determined by market forces, or otherwise by statutory guidelines which are included in the following laws:

§ Drug Administration Law and its Implementation Rules (2004) (Chapter VII);

If drug prices are fixed or guided by the government, the price should reflect, among others, the principals in the Pricing Law of the PRC, and the average social cost, affordability, supply and demand, to ensure that prices are commensurate with quality, so as to protect the legitimate interests of consumers.

§ National Development and Reform Commission (“NDRC”), “Measures on Government Pricing of Pharmaceuticals” (2000), and SDRC “Implementing Rules on the Law of Pharmaceutical Administration (August, 2002);

For Class A drugs, the SDRC will set the maximum retail prices; while wholesale prices may be determined by the market. For Class B drugs, the SDRC will set maximum price guidelines for provincial level governments. In-house drug prices are based on manufacturing costs plus 5% in profits. See pricing mechanisms for non-listed drugs below.

§ Pricing Law of the PRC (May 1, 1998 ); and

§ PRC Law on the Administration of Drugs (December 1, 2001).

Consumers Suffer Due to Mark-ups Along the Distribution Chain.
The Chinese drug distribution sector is at best highly fragmented. The three tiered distribution chain starts with the manufacturer, then: (i) national distributors (e.g. located in Beijing, Shanghai, Guangzhou, Tianjin, Shenyang), (ii) provincial distributors, and (iii) county and city wholesalers (and occasionally at the bottom of the chain hard to reach retail stores). The end users are either hospitals or franchised retail drug stores, with hospitals being the main market accounting for 80% of drug sales.

Drug prices which according to law may be determined by the market are based on manufacturing and operating costs which are self-reported by manufacturers. Drug manufacturers have incentive to mark-up their operating costs to increase their margins - also directly affecting the margins of the entire distribution chain. The government capped mark-up is set at 15%. However in practice, retail prices illegally extend well over the statutory margin. The NDRC has reported that hospitals collect the largest percentage of the final price for a bottle of pharmaceuticals (as sold to patients) at 45-50% (with 30% representing their mark-up), further up the chain the distributors collect an additional 20-25% and manufacturers on average collect 30% of the final sale price. About 20% is lost to illegal mechanisms that encourage doctors and hospitals to prescribe drugs. What remains are unaffordable prices and pushed sales on unwitting consumers.

What is the Real Root of the Pricing Problems?
Authorities have attempted to cure the issue of overpriced drugs by exercise of 24 nationwide price cuts from 2001 to 2007. The centralized tendering drug procurement policy of 1999 was another attempt to overcome corruption and excessive drug prices. Although these measures reduce the wholesale prices of drugs they still do not address the core of the retail pricing problems which are connected to several factors including lack of fiscal subsidies for hospitals which rely on pharmaceutical sales as their major source of revenue, and underpaid doctors who by way of medical expertise retain a monopoly over the choice of drugs available to patients. Adding to the over-pricing problem are mark-ups from companies with unachievable economies of scale due to outdated technology and the chaos in the distribution system.

II. The Future of Drug Pricing in China
The Proposal pledges to set up a healthcare system by 2020 that provides all urban and rural residents “safe, effective, convenient, and affordable” healthcare.

Management of Medical Institutions
The drafters recognize that high retail drug prices are connected to the funding issues faced by doctors and hospitals and recommends improvement of wages and to separate the management function of hospitals from treatment and expenditure of drugs. In a further attempt to alleviate hospitals’ reliance on drug sales for revenues, the Proposal mentions amending service fees, which translates to a price hike for hospital visits and in-patient services. The authorities wish to reintroduce similar subsidies for medical institutions as were used pre 1980 when the government paid for everyone’s healthcare - how exactly this will be implemented is not specified. For the public, the Proposal speaks of an establishment of a personnel system to improve the quality of medical services, and a system that strictly defines the appropriate use of technology, workforce, and pharmaceuticals. The Proposal further outlines standardized drug and medical checks, but again still vague on the points. The issues that remain here are the regression of medical diagnostics and the simple fact of unenforceability. Hospital visits will generate more revenue and doctors will be paid more, but will this be enough to curb the retail prices of pharmaceuticals?

Essential Medicines
Essential drugs are those that “satisfy the priority healthcare needs of the population; they are intended to be available within the context of functioning health systems at all times in adequate amounts, in appropriate dosage forms, with assured quality….and at an affordable price.”[1]

Under the Proposal China would like to create a national system of essential drugs and aspires to, by 2010, provide access to affordable and safe drugs to 80% of the population. This system will establish a catalogue of necessary drugs to be produced and distributed under government supervision with the aim to make the most basic and indispensable medicines such as penicillin safe and available in the market. For essential drugs, the government wishes to take macro-control of the existing distribution system and use a centralized purchasing system.

Furthermore in an effort to increase price transparency; the Proposal makes a bold proposition to subject essential drugs to new labelling requirements of printing drug prices conspicuously on the outer packaging. This labelling requirement aims to curtail industry wide margins and will most certainly transform the distribution systems and may possibly cut out the smaller middlemen.

Conclusion
The Proposal closed for comment on November 14th. Several white papers on this topic will be released by experts early next year. At present the wording of the Proposal is too general to leave a particularly impressive forecast although it appears the focus is on essential drugs. Authorities have responded that the Proposal is merely a guideline and will be followed by a formal legislation and at least eight implementing rules. Overall the public is most concerned whether the limited funding will actually be used where it is needed the most.
[1] as defined by the World Health Organization.

** this article can be contributed to http://www.knowledgeatwharton.com.cn/ "Will Drug Price Reform Improve China's Health Care System, or Only Mask Symptoms"