*Introduction
Recently, the Pudong New Area government officially issued the "Trial Implementation Measures for Domestic Natural Persons Investing in the Establishment of Sino-Foreign Joint Ventures and Sino-Foreign Cooperative Enterprises in Pudong New Area" (hereinafter referred to as the "Trial Measures"), which took effect on May 1, 2010, launching the pilot work in the foreign investment sector allowing domestic natural persons to serve as shareholders in establishing sino-foreign joint ventures and cooperative enterprises in the Shanghai region, further innovating the methods of attracting foreign investment and taking the lead in creating an "equal treatment for Chinese and foreign" investment and cooperation environment.

*Analysis of Policy Background
For a long time, relevant foreign investment enterprise laws including the "Law of the People's Republic of China on Sino-Foreign Equity Joint Ventures" and the "Law of the People's Republic of China on Sino-Foreign Cooperative Joint Ventures" stipulated that foreign legal entities and natural persons could serve as shareholders to establish sino-foreign joint ventures and cooperative enterprises, but domestic natural persons were never included in the scope of investors of foreign investment enterprises. At the same time, the introduction and revision of relevant laws created obvious room for circumventing the restriction that domestic natural persons do not belong to Chinese joint venture parties:
1. According to the revision of the "Company Law" in 2005, "one-person limited liability company" was recognized for the first time. Therefore, by first establishing a sole proprietorship, partnership, or one-person limited liability company, and then using that shell company to establish a joint venture with the foreign party, domestic natural persons could achieve the goal of establishing a foreign investment enterprise through indirect means.
2. Article 54 of the "Provisions on Foreign Investors' Merger and Acquisition of Domestic Enterprises" promulgated in 2006 stipulates: "Chinese natural person shareholders of the domestic company being merged through equity may, upon approval, continue to serve as Chinese investors of the foreign investment enterprise established after the change." This means that domestic natural persons are allowed to become shareholders when foreign investment merger methods cause domestic enterprises to change into sino-foreign joint ventures or cooperative enterprises.
3. Domestic natural persons participate as anonymous shareholders in establishing foreign investment enterprises.
In summary, the prohibition on domestic natural persons as shareholders in foreign investment enterprises was merely a formal threshold. The issuance of the "Trial Measures" has clarified and legalized domestic natural persons' investment in foreign investment enterprises, providing greater protection for the rights and interests of domestic natural persons in terms of legal rights and tax policies, and greatly facilitating the organic combination of domestic natural persons with foreign capital, advanced technology, and management experience.

*Key Policy Points for Domestic Natural Persons' Participation in Establishing Joint Ventures
I. Industry Restrictions
The fields in which domestic natural persons can invest in establishing foreign investment enterprises are currently limited to projects encouraged or permitted under the "Foreign Investment Industry Guidance Catalog."
II. Qualification Requirements for Domestic Natural Person Shareholders
Must be domestic residents holding Chinese resident identity cards and having full civil capacity. At the same time, such domestic natural persons shall also comply with other provisions of national laws and regulations regarding natural persons serving as shareholders.
III. Forms of Investment
The Trial Measures stipulate that the investment or provision of cooperative conditions by domestic natural persons may be in the form of currency, or in the form of non-monetary property such as tangible assets or intellectual property that can be valued in monetary terms and transferred according to law.
IV. Approval Authorities
The Trial Measures stipulate that the approval and registration of domestic natural persons investing in the establishment of sino-foreign joint ventures and sino-foreign cooperative enterprises in Pudong New Area shall be handled respectively by the Pudong New Area Commerce Committee and the Pudong New Area Branch of the Shanghai Administration for Industry and Commerce within their respective approval and registration authority.
V. Applicable Scope and Duration of the Pilot
For newly established foreign investment enterprises, or for changes that result in domestic natural persons becoming shareholders of sino-foreign joint ventures or cooperative enterprises, the procedures shall be handled in accordance with these Trial Measures.
Pilot area: Pudong New Area.
Pilot period: Effective from May 1, 2010, for a trial period of 2 years.

*Similarities and Differences with Ordinary Joint Venture Establishment Procedures and Required Materials
I. Examination of Domestic Natural Person Shareholders' Qualifications and Creditworthiness
Qualifications refer to the identity cards of domestic natural person shareholders, and the original identity cards of domestic natural person shareholders must be presented at the time of registration application, or a notarized certificate (copy of identity card consistent with the original) may be used as a substitute.
Credit certificates refer to the credit information of the bank deposit accounts of domestic natural person shareholders. The approval authorities and the administration of industry and commerce mainly examine whether the natural person's deposit account is operating well and stable. It should be noted that: when domestic natural persons contribute as shareholders, they should contribute in RMB, and correspondingly, the bank credit certificate filed should be issued by the bank where the natural person opened the RMB account.
II. Need to Submit an Official Standard Commitment Letter Signed by All Investing Parties.
This commitment letter requires all investing parties to clearly acknowledge the legal facts of domestic natural persons' participation in establishing the joint venture and bear the corresponding risks.

*Issues to Note in Drafting Legal Documents
In the drafting process of joint venture articles of association and joint venture agreements, risks associated with establishing enterprises with domestic natural persons should be fully assessed, and more clauses protecting the rights and interests of company shareholders should be included, with clear breach of contract responsibilities. At the same time, the advantages and disadvantages of methods for generating board members should also be fully considered. In particular, for important positions such as the chairman of the board, a method of joint appointment by all parties to the joint venture can be adopted to avoid situations where a dominant shareholder unilaterally changes key company personnel, thereby more properly protecting the rights and interests of natural person shareholders. In short, clauses should be properly drafted according to the requirements of all parties to the joint venture, and corporate governance methods and profit distribution methods that fully realize the interests of all parties to the joint venture should be selected.

*Issues Requiring Further Elaboration
The Trial Measures are limited to Pudong New Area only. Due to the principle requiring consistency between the registered location and the actual business location, many investors face restrictions in selecting company locations, and further opening of the policy in other regions is awaited.
The Trial Measures emphasize the examination of qualifications and creditworthiness of domestic natural person shareholders. The corresponding series of information such as domestic natural person credit management and tax declarations should also be联网可查 (connected and accessible) to ensure the authenticity of examination results.

*Conclusion
As pointed out by Tang Chao, Deputy Director of the Foreign Investment Management Division of the Shanghai Commerce Committee: "This method only represents a breakthrough at the local operational level and has not yet risen to the level of law." Investors should seize the opportunity and make prudent choices on the basis of fully considering the feasibility of investment projects, the business costs in Pudong New Area, and their company development strategies.