Status quo of the hotel industry in China
Big sports and cultural events, such as the 2008 Beijing Olympic Games, 2010 Shanghai World Expo, and the fast growing tourism industry, bring huge opportunities for China’s hotel business. In 2007, the number of tourists coming into China was 131 million. It is reported that the demand for hotel rooms in Hong Kong, Shanghai and Beijing will continue to grow in 2008. 14000, 11400 and 9240 new hotel rooms will be built in Beijing, Shanghai and Hong Kong respectively, which will result in a respective 11.3%, 16.8% and 19.6% increase. Second tier cities, such as Tianjin, Chengdu, Chongqing, Wuhan, are also attracting increasing numbers of foreign hotel investors, as more market opportunities and profitability are expected. In addition to high-end hotel business, budget chain hotels are another booming sector in recent years. Major international budget chain hotel brands are expanding their business in China very quickly.
Although the Chinese government has promulgated strict regulations to prevent “hot money” entering China’s real estate market, increasing numbers of foreign investors are prepared to invest in China’s booming hotel business. We will examine the basic aspects for foreign companies to invest in China’s hotel business in this article.
Permitted or restricted for foreign investor?
Foreign investment in China is categorised into encouraged, permitted, restricted and prohibited areas periodically adjusted by the PRC National Development and Reform Commission (NDRC) and the PRC Ministry of Commerce (MOFCOM). Foreign investment in the hotel sector is categorised as “permitted” in accordance with the latest version of Foreign Investment Guidance Catalogue, which came into force 1st December 2007. However, the luxury hotel industry is classed as “restricted” for foreign investment. Hotels superior to 4-star are regarded as “luxury”. Falling into the “restricted” category, an application to establish a foreign-invested hotel company will be subject to stricter scrutiny by the authorities at provincial or even national level. This can result in a longer process.
Wholly-owned or joint venture?
Foreign investors can set up wholly-owned subsidiaries to own hotels in China. Companies that are 100% owned by one or more foreign investors are known as wholly foreign-owned enterprises (WFOE). If a foreign investor intends to set up a company with a Chinese partner, a joint venture (JV) arrangement is also possible. Where an existing hotel project in China is to be acquired, foreign investors can either purchase 100% of the issued share capital in the project company, and convert it into a WFOE, or purchase part of the share capital and form a Sino-foreign JV.
Licence required?
To own a hotel in China, there is no special licence that is required other than a business licence, which every Chinese company must have. However, some operational activities in hotels, such as the sale of alcohol and cigarette, karaoke facilities and satellite TV, require separate permits or licences from various authorities.
More restrictions recently?
A hotel is regarded as a real estate investment. As such, the relevant regulations implemented by the Chinese government in respect of foreign investment in China’s real estate industry shall apply to the hotel industry. In 2006, a new regulation restricting foreign investment in the real estate sector was promulgated by NDRC, MOFCOM, the PRC Ministry of Construction, the State Administration of Foreign Exchange (SAFE) and other relevant authorities. The resulting restrictions include:
- For a project with total investment of USD 10 million or above, at least 50% should be put in as registered capital. The ratio is 40% or even lower (1/3 of total investment should be registered capital for projects with a total investment over USD 30 million) for companies in other industries.
- Certificates of approval and business licences issued to hotel companies will be valid for only one year. Upon the issue of a land use right certificate, granted after full payment of a land premium, the long-term certificate of approval and business licence will be re-issued.
- Foreign investors must have a corporate presence in China in order to own a hotel.
- Where existing hotel projects are being acquired, the consideration shall be fully paid within 3 months of the issue of the certificate of approval.
In May 2007, MOFCOM and SAFE issued a document imposing additional requirements for real estate investment. These include:
- MOFCOM, in Beijing, shall supervise the approval of an establishment or acquisition of real estate companies more strictly, in particular where luxury real estate projects are concerned.
- Real estate development companies must be set up on a project-by-project basis.
- All projects approved by a local authority must be reported to MOFCOM in Beijing for filing within 1 working day following the issue of a certificate of approval. If this filing requirement is not satisfied, SAFE will not approve the opening of a foreign currency bank account and conversion of foreign currency into to Renminbi.
- Foreign-invested real estate projects (including hotel projects) must be funded by way of capital or from local sources in Renmibi. Shareholder loans in foreign currency will not be allowed. Previously, foreign-invested companies were able to borrow foreign debt within their debt quota. The foreign debt quota is the difference between approved total investment and registered capital.
Way out
Despite the fact that the recent regulations make investment in hotel businesses in China more difficult, there are still ways to proceed with such projects. The filing process with MOFCOM may be time-consuming, but more than 1000 real estate companies have been approved by local authorities and successfully filed with MOFCOM, since the regulations came into effect. One of the key issues with funding is that it must be by way of capital or debt provided by local banks. This needs to be expressly stated in the articles of association of the company. It should be noted that hotel projects in smaller second or third tier cities are welcomed by local governments, making the approval process somewhat easier for foreign investors.
