Foreign Investment in China’s Civil Aviation Industry: Holding up Half the Sky?

China's sky is set to open wider for foreign investors from the 1st August 2002. That date marks the arrival into effect of the new Regulations on Foreign Investment in Civil Aviation Industry which were jointly promulgated by the General Administration of Civil Aviation, the Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") and the State Planning and Development Commission of the People's Republic of China ("Regulations"). The Regulations are in line with the PRC government's policy of gradual liberalisation of this sector to foreign investment and they repeal a number of industry regulations issued in the mid-1990s.

Areas Open to Foreign Investment

The areas of civil aviation opened to foreign investment cover:

• civil airports (not including dual-use airports);

• public air transport enterprises;

• general aviation enterprises; and

• projects ancillary to air transportation, including aerial gasoline, aircraft maintenance, airfreight storehouse, ground services, air catering, parking and other projects that the governmental authority may approve.

Foreign investment and participation in management in air traffic control system is still not permitted.

Approval Authorities

Foreign investments in the civil aviation sector are subject to the approval of various authorities. Depending on the size and the nature of a project, the project proposal and feasibility study report must first be submitted to the State Planning and Development Commission (or State Economic and Trade Commission) or the General Administration of Civil Aviation for approval. MOFTEC has authority for approving joint venture contracts and the joint venture companies' articles of association.

Form of Foreign Investment

Foreign investment in the civil aviation industry may take one of the following avenues:

• establishing an equity joint venture (EJV) and a contractual joint venture (CJV) in China;

• acquiring shares in the existing civil aviation enterprises, including purchasing the shares listed overseas (e.g. H shares) or the shares listed domestically but offered to foreign investors (commonly known as "B" shares); or

• other investment modes that may be approved by the Chinese government.

Foreign Ownership

The Regulations stipulate controls on foreign investment as follows:

Foreign investment (Please cross reference with the list below)

• 1. civil aviation
• 2. public air transport enterprise
• 3. general aviation enterprises engaged in a)public affairs flying, aerial tours, providing services to industrial sectors; or b) providing services in relation to agricultural, forestry or aquaculture assignments
• 4. Ancillary services a)aircraft maintenance and aerial gasoline b)airfreight storehouse, ground services, air catering, parking etc.

Ownership

• 1. controlled by Chinese Party
• 2. majority stake held by Chinese party. Moreover, a foreign investor (together with its associated enterprises (if any)) should not hold more than 25% of the entire shareholdings.
• 3 a). majority stake held by Chinese party
• 3 b). subject to the negotiation of the parties
• 4 a). majority stake held by Chinese party
• 4 b). subject to the negotiation of the parties

The term of operation of joint ventures (either in the form of an EJV or a CJV) normally should not exceed 30 years. Foreign investors which invest in the construction of civil airports are to be given priority in investing in projects ancillary to air transportation.

Investors from Hong Kong, Macau and Taiwan are treated as "foreign investors", and therefore their investments in China’s civil aviation sector are also regulated by these Regulations.

With the issuance of the Regulations, foreign investors are now set to play a greater role in China's aviation industry. In particular, following the issuance of the Regulations, there is now greater opportunity for foreign companies to take direct equity stakes in operating companies providing services in this sector in China.

For further information on this, please contact Luke Filei in Beijing on 86 10 6590 0389 or luke.filei@cms-cmck.com. CMS Cameron McKenna 12 July 2002