The ASIA Miner electronic news service continues this week to provide extracts from Goldletter International"s report on China"s gold industry. In the Third Quarter - July-September 2007 issue of The ASIA Miner magazine, we present Marino Pieterse"s overview that China will emerge as the world"s largest gold producer by 2010.

This week we present the topic of China"s Government encouraging foreign investment.

One of the specific aims of the 1990s" initiatives was to try and attract foreign investment into the Chinese gold mining industry.

However, the lengthy and complex approval process, the limited and poor quality of designed exploration projects, coupled with a legal system that was unclear about ownership and without guarantees of tenure, was enough to deter most candidates. In addition, the mining taxation code did not encourage investment.

The recent changes in regulation adopted by the Chinese government have encouraged provincial mining bureaus to source capital from mineral exploration companies.

In 1996 China passed the mineral resources law on mineral exploration and development by which the State shall safeguard the national development and utilisation of mineral resources under the responsibility and supervision of the Ministry of Land and Resources (MLR).

By this legislation MLR has promised to reform the approval process and the costs associated with securing exploration rights in China, and in doing so to encourage foreign investment in an industry yet to experience the transformation brought in other sectors of the nation's economy.

The laws and notices issued in 1998 and 2000 clarified the exploration process and the transfer and assignment of exploration rights. In February 2006, the MLR published the 'Selected laws and regulations of the People's Republic of China on Mineral Exploration and Development'.

The Chinese Central Government has granted provinces the autonomy to approve Sino - Foreign Joint Ventures for mineral exploration and mining. This provision of the law has attracted a number of mainly Canadian public companies that have been entering into Sino - Foreign Joint Ventures.

The Foreign Investment Industrial Guidance Catalogue lists various minerals as 'encouraged', 'restricted' or 'prohibited' and determines the investment vehicle permitted for exploration and exploitation. A mineral's categorisation and the proposed size of the investment will also set the level of approval required. For example, restricted minerals, such as precious metals, should be approved at the central government level, or if the project size is below US$ 30 million, may be approved by the provincial government and registered with the central government.

Various policies to encourage investment in Western China will also have impact on the proposed structure of an exploration vehicle. Projects based in Central or Western China (including Sichuan), although listed as 'restricted', may in fact be treated as 'encouraged'. This means that the project attracts preferential treatment such as a 15% income tax rate for three years after any other applicable tax holidays end, exemptions from duties and VAT on imported equipment, and potential exemptions from various exploration-rights use fees.

The exploration right granted will typically only be for a particular mineral in the exploration area, and not for all minerals found at the same site. Exploration licences can only be granted to qualified, geological exploration work-units registered in China.

Foreign investors will either need to obtain this qualification. Subject to any restrictions set out in the catalogue and the qualification requirements, a foreign investor registered in China as a representative office, equity or co-operative joint venture, including a non-legal person, co-operative joint venture, or a wholly foreign-owned enterprise, may apply for an exploration licence.

At present, the Geological Survey Department of MLR, which has 26 affiliated organizations and six regional centres, is responsible for reviewing and approving exploration applications. Provincial authorities are entitled to issue exploration rights, but they cannot issue them to foreign invested enterprises or representative offices.

In 2003, the MLR issued a circular titled 'Administrative Measures of Public Tendering and Auction for the Rights of Exploring and Exploiting Mines'. The bidding regulations promulgated by the MLR, effective from August 1, 2003, prescribe three approaches for Chinese and foreign mining companies to obtain exploration and mining rights.

In December 2003, the Chinese Government issued a white paper on China's Policy on Mineral Resources which stresses that China will depend on exploitation of domestic mineral resources to guarantee the needs of its modernisation drive.

In future, China will strengthen mineral surveying, prospecting, exploitation, planning, management and rational utilisation of mineral resources.

The policy also highlights the importance of sustainable development, and Sino-foreign co-operation in the exploration and exploitation of mineral resources will be increased.

- Marino Pieterse was a key presenter at The ASIA Miner Investing in Mining Conference held in Sydney in May. His topic explored the opportunities of investing in gold. For more information on Gold Letter International go to www.goldletterint.com or e-mail: info@goldletterint.com