I. Compensation trade is a form of transaction in which a Chinese enterprise conducts production by using the technology, equipment, and certain raw materials, if necessary, provided by an overseas supplier or the technology and equipment introduced into China by means of foreign export credit. The Chinese enterprise will pay off the cost of the technology, equipment and raw materials or the loans and their interests thus incurred by selling the manufactured goods back or by amortization with its income from processing.

II. Compensation trade should be conducted with the focus on accelerating the city’s industrial technological innovation and expanding its production of commodities for export so as to increase the country’s foreign exchange income. Enterprises that meet the relevant requirements are all entitled to conduct compensation trade.

III. In principle, direct compensation that features the introduction of technology and equipment and the sale of the products back is preferred. Where direct compensation is difficult to realize or compensation in the form of other products proves more beneficial to the expansion of the export, enterprises concerned can use other products of their own for indirect compensation on the prerequisite that such compensation does not affect its previously stipulated assignment for export.
Commodities that are used for indirect compensation and that are under the administration of the central government (including commodities uniformly purchased and sold by the state, materials earmarked for unified distribution by the state, and commodities within the direct operation and unified transaction by the head offices of professional foreign trade companies) shall be reported to the Ministry of Commerce for approval. Commodities under the administration of the local government shall be approved by the Municipal Import & Export Office and the Municipal Planning Commission of Shanghai. Exports that are within the range of coordinated transactions nationwide shall be implemented in accordance with the regulations of the relevant coordination departments concerned.

IV. In conducting compensation trade the industrial and trading parties should cooperate closely to conduct research, hold negotiations together with the foreign partner, jointly sign contracts, and ensure the successful implementation. The industrial sector can also entrust the Municipal Investment Trust Company to act as its agent based on the principal of unified approaches in dealing with overseas transactions. Small projects of the 8 industrial bureaus of light industry, handicrafts, textiles, chemical industry, medicament, instrument, machine tool and metallurgy, whose total amount of compensation is below US$200 thousand, can be undertaken by the industrial sector on their own.

V. The examination and approval procedure for projects of compensation trade is as follows:

A. Project proposals for every project must be made and submitted to the specified departments and only after their examination and approval can the project be set up. The project proposal should be jointly submitted by the competent industrial company and foreign trade company and should, after the examination and approval of the competent municipal bureau and the municipal bureau of foreign trade, be jointly reported to the Municipal Import & Export Office (As for the projects entrusted by the industrial sector to the Municipal Investment Trust Company to act as agent, the project proposals should be jointly submitted by the competent bureau and the Municipal Investment Trust Company and reported to the Municipal Import & Export Office), the Municipal Planning Commission, and the Municipal Economic Commission (Projects that involve the introduction of technology should also be reported to the Municipal Commission of Science and Technology).

B. The industrial and trading parties (or the industrial sector and the Municipal Investment Trust Company) shall conduct the feasibility-oriented operations upon the approval of the project proposal, which includes a comprehensive study of the selection and invitation of customers, a draft of plans for negotiation, negotiations with foreign businesses, price enquiry, and a study of the domestic coordinating conditions. If the project is entrusted by the industrial sector to the Municipal Investment Trust Company for acting, the clients and prices are required to be coordinated by the foreign trade administration, which should work in full cooperation. During this period of time, no agreements or other documents with binding force should be signed with foreign businesses.

C. After the completion of the feasibility study, the feasibility study report should be submitted following the same procedure for approval as the project proposal. Projects with a total compensation value of below US$5 million will be jointly examined and approved by the Municipal Import & Export Office and some relevant departments. Projects with a total compensation value of over US$5 million, or below that amount but requiring the state to increase allocation of raw materials, fuels and power and to handle such conditions as transportation should be reported to the Municipal Import & Export Office and some relevant departments for examination and advice and then to the State Development Planning Commission and the Ministry of Commerce for examination and approval.

D. Only when the feasibility report has been examined and approved by the specified agencies can the factory and the foreign trade company (or the factory and the Municipal Investment Trust Company) jointly sign formal contracts (agreements) with overseas businesses. Such a clause that the contract (agreement) should be in effective only when ratified by the relevant leading agencies should be involved. The competent bureau should send a copy of the contract (agreement) to the Municipal Import & Export Office for examination and approval ten days from the date of signature. A notice of the Office’s decision should be sent to the parties in question within 30 days upon receipt of the contract. Exceeding of the time limit on the part of the Office shall be considered ratification. Revision of the contract (agreement) should also be sent to the original agencies for examination and approval.

E. The procedure for examining and approving small projects conducted by the 8 industrial bureaus on their own should be appropriately simplified. 1. The project proposal can be examined and approved by the competent bureau, reported to the Municipal Import and Export Office, the Municipal Planning Commission, and the Municipal Economic Commission for the record; 2. after the approval of the project proposal, the industrial sector shall conduct the feasibility-oriented operations, but the clients and prices are required to be coordinated by the foreign trade administration, which should work in full cooperation;3. the feasibility report, after being examined by the competent bureau, should be reported to the Municipal Import & Export Office for examination and approval; and 4. the contract (agreement) should be examined and approved by the competent bureau and be reported to the Municipal Import & Export Office for the record.

F. After the ratification of the project proposal and the feasibility report, a project plan for infrastructure should be drafted for all the projects of compensation trade that fall into the category of infrastructure; a project plan for technological innovation should be compiled for projects that fall into the category of technological innovation. These two types should be handled following the examination and approval procedure for infrastructure or technological innovation respectively.
G. Compensation trade projects that are entrusted by the factory to the Municipal Investment Trust Company for acting and small projects of compensation trade that are conducted by the industrial sector on its own should apply to the Municipal Bureau of Foreign Trade for import licenses for equipment and certain raw materials to be provided by foreign partners. Export licenses from the Municipal Bureau of Foreign Trade shall be applied for when the products are to be sold back. The Municipal Bureau of Foreign Trade should issue the licenses in the shortest possible time in accordance with the relevant rules and regulations. If the licenses are to be issued by the Ministry of Commerce, the Municipal Bureau of Foreign Trade should forward the reports in time. As for the small compensation trade projects conducted by the industrial sector itself, the industrial sector can entrust city’s relevant foreign trade companies to handle the procedure concerning the document processing and the consignment for shipment (service charge considered).

H. Compensation trade with the businesses from Hong Kong and Macao should be handled in close cooperation with China Resources National Corporation and Nam Kwong (Group) Company Limited. Sale of products back to the territory of Hong Kong and Macao should acquire the consent of the two companies. In terms of the contracted compensation trade projects with the businesses from Hong Kong and Macao, a copy of the agreement or the contract signed should be sent to China Resources National Corporation and Nam Kwong (Group) Company Limited in time to seek their support and cooperation.