China is rich in an impressive range of minerals. It ranks first in terms of the world’s output of 12 types of minerals and third in terms of the potential value of its proven mineral reserves, representing 12% of the world’s total, according to an article in a March 2000 issue of Asia Pulse. China’s mineral potential, particularly its gold reserves, has attracted the interest of a wide range of Canadian, Australian, American and other international mining companies over the last several years. Foreign mining companies have, however, faced a variety of challenges in their attempts to participate in mineral exploration and mining projects in the PRC. A principal challenge has been the country’s legal and regulatory system.
As a general matter, China’s legal system is still in the early stages of development. Its system of commercial laws has evolved within the last two decades as China liberalized its economy; however, the country’s laws still do not have the element of predictability found in the Canadian and other legal systems. Comprehensive regulations governing the mining industry have only been issued within the last five years.
Allowing foreign participation in China’s mineral sector has also been subject to controversy among different government departments in the country. Gold exploration and mining, in particular, are regarded as sensitive areas. As discussed below, foreign investment in gold mining has been tightly restricted and subject to approvals at the central government level. It is in part for this reason that China has been slow to introduce a clear regulatory framework for foreign participation in the mineral sector, and for the most part foreign companies undertaking exploration programs or investing in mining operations in China have had to establish joint ventures under a corporate law framework that is more appropriate for manufacturing projects.
December of last year, however, witnessed a significant step forward in China’s regulation of foreign mining companies, as the State Council on behalf of five government ministries with a role in regulating foreign investment in the mining industry issued the “Certain Opinions Concerning Further Encouragement of Foreign Investment in Exploration of Mineral Resources other than Oil and Gas” (the Certain Opinions). The Certain Opinions provide for a more liberal and comprehensive regulatory regime to govern foreign participation in the country’s mineral sector (other than the oil and gas sector, which is subject to separate rules), and set out a variety of tax and other incentives for foreign mining companies. This article briefly discusses the experience of Canadian and other foreign mining companies in China during the last decade, and then describes the regulatory framework and incentives introduced by the Certain Opinions.
The 1990s Gold Rush
Foreign interest in China’s mining industry first developed in the early 1990s. China hosted a United Nations-sponsored Round Table Conference on Mining in Beijing in 1993, during which the former Ministry of Geology and Mineral Resources (MGMR) released a first draft of regulations to govern foreign investment in mining. The message conveyed by the MGMR at the time was that the Chinese mineral sector was open to foreign investment.
Mining companies from Australia, Canada and other countries responded enthusiastically. Unfortunately their main interest was gold, and China had asserted a highly restrictive policy towards foreign participation in gold exploration and mining. That policy led the State Council to issue a notice in 1994 stipulating that foreign investment was permissible only in designated marginal gold deposits (i.e., low grade and difficult to mine deposits), and setting out approval procedures involving a variety of central government departments. Many foreign mining companies applied for central government approval under the terms of that notice, but only one – Vancouver-based Asia Minerals – received all the necessary central government approvals. The company, in turn, terminated its joint venture in 1997, shortly after it commenced operations. Other foreign mining companies established joint ventures with local government approvals, often with a scope of business that included exploration for and mining of gold and other mineral deposits. The legality of some of these projects, however, is debatable, given the restrictions applicable to foreign investment in the gold sector. Moreover, the joint venture structure was ill-suited to exploration projects. The parties were required to establish and fund a separate entity, with a stipulated amount of capital, at a stage when the parties could not know with any certainty the extent of the mineral resources involved and therefore what the funding requirements of the project were.
In other cases, foreign mining companies worked with domestic companies on a more informal basis, contributing expertise and funds on the basis of short agreements and without holding exploration permits or otherwise obtaining government approvals.
Certain Progress With the Certain Opinions
The Certain Opinions represent considerable progress over the prior regulatory regime applicable to foreign mining companies.
Most significantly, the Certain Opinions eliminate the need to set up a joint venture with a Chinese party or other separate entity. A foreign company may now conduct mineral exploration on its own by obtaining an exploration permit in its own name, or under a co-operative arrangement with a Chinese party,
with the latter holding the permit. In the former case, the foreign company must first obtain approval from the Ministry of Foreign Trade and Economic Co-operation (MOFTEC) and then register with the local bureau of the State Administration of Industry and Commerce (SAIC), following which it may apply to the Ministry of Land and Natural Resources (MLNR) for an exploration permit. In the latter case, the foreign and Chinese parties to the co-operative arrangement must enter into a co-operation contract, which in turn must be verified by both the MLNR and MOFTEC.
Some of the other significant provisions of the Certain Opinions include the following:
Confirmation that a foreign company discovering a mineral deposit as a result of its exploration work holds a legal priority to mine that deposit, upon establishing a mining entity for that purpose.
Stipulations regarding the approval procedures applicable to establishing a foreign invested mining entity.
Providing for expedited approval procedures. Under the Certain Opinions, the MLNR must respond to applications for exploration and mining rights within 30 days. The Certain Opinions also require other relevant government departments, such as MOFTEC and SAIC, to implement streamlined procedures applicable to their areas of responsibility.
Confirmation that foreign companies may provide advanced technology or equipment as investments in exploration and mining projects, and may purchase exploration and mining rights legally held by large and medium-sized domestic companies (subject to any prohibitions on the sale of these rights).
Confirmation of the transferability by foreign companies of their exploration and mining rights.
The Certain Opinions introduce a number of tax incentives applicable to foreign companies involved in China’s mining sector.
Consistent with other recent policies to encourage economic development in China’s western regions, the Certain Opinions provide additional incentives to foreign mining companies investing in the west. The western regions include the following provinces and municipalities: Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Ningxia, Qinghai, Xinjiang, Inner Mongolia and Guangxi.
The Certain Opinions are definitely a step in the right direction in providing foreign mining companies with a more favourable – and predictable – regulatory framework for their investments in China. The Certain Opin
ions state a number of welcome principles. It will be important to monitor how quickly the various ministries involved in the issuance of the opinions will act to incorporate these principles into detailed regulations and procedures.
For foreign investors, it will also be important to keep in mind that the Certain Opinions do not do away with current policies and rules governing foreign investment in China’s mining sector. Most significant are the Regulations for Guiding Foreign Investment in Industry and the accompanying categorization of industry sectors in the Foreign Investment Catalogue, which enumerate a number of mineral exploration and mining activities that remain subject to restrictive approval policies. Proper legal advice should be obtained before undertaking a project in China.
Paul D. McKenzie is a partner at Perkins Coie LLP in Hong Kong, and May K. Leung is a LL.B. candidate at the University of Victoria, Victoria, B.C.
For more information, contact Paul McKenzie at telephone (852) 2160-9402 or e-mail [email protected]