Ministry of Communications

June 26, 2007

Shipping is the predominant mode of transport for international trade. Over 90 percent of China's foreign trade is carried by sea. Since the reform and opening-up, China's shipping industry has experienced fast growth with the continued expansion of its shipping fleet, which greatly ensures the development of its foreign trade and national economy.

As China's shipping fleet continues to grow, the number has also increased for the Chinese-owned vessels registering overseas and flying foreign flags, which accounts for 50 percent of the total international shipping tonnage of China. The problems arising from the great number of Chinese-owned vessels registering overseas and operating under foreign flags have caught the attention of the relevant ministries of the State Council. The Ad hoc Tax-free Registration Policy, as approved the State Council, is adopted to encourage the foreign-flagged but Chinese-owned vessels to register back in China acquiring Chinese nationality and to operate under the Chinese flag.

The implementation of the Ad hoc Tax-free Registration Policy will be conducive to further expand national fleet and to safeguard the economic security of the country.

I Overview of the overseas registration of the Chinese-owned vessels engaged in international voyage

The attribution of nationality to a ship shall be done through registration. The Maritime Law of China prescribes that vessels cannot operate under the Chinese flag unless such vessels register in accordance with law and acquire the Chinese nationality.

The United Nations Convention on the Law of the Sea, 1982 stipulates that there must exist a genuine link between the ship and the flag state. The flag state shall effectively exercise its jurisdiction and control in administrative, technical and social matters over ships flying its flag. Albeit these provisions, given the international nature of shipping industry, vessels can choose to register in other open register countries, which allow the registration of the vessels not owned by a national or legal person domiciled in that country. The registries in such countries are popularly known as "Open Registries", some of them also known as the "flags of convenience" registries. Some of the countries which have practiced flags of convenience registration, often do not have sound ship safety supervision system in place but charge a small sum of ship registration fees. Vessels flying such flags could hence obtain a number of commercial expediencies.

The flags of convenience are unique to international shipping. Around 65 percent of the world's merchant shipping fleet now operates under the flags of convenience. Some major maritime nations have already worked on this to adopt policies attracting the nationally owned vessels to register back and operate under the national flag.

II The reasons for and negative impacts of the Chinese-owned vessels flying the flags of convenience

There are multiple reasons for the Chinese-owned vessels to register overseas and fly foreign flags, such as the financing arrangement for shipbuilding overseas and the need for running certain special service. It also has the historic roots. The engagement of China's shipping businesses in international competition combined with the need to lower the operating cost results in the overseas registration of some vessels purchased or built overseas.

The flagging out of the Chinese-owned vessels has negative impacts on the healthy development of the country' shipping industry and national economic security. It affects the control of the country over the safety of the vessels, induces sub-standard shipping and poses potential risks, and is also detrimental to the protection of the legitimate rights and interests of Chinese seafarers.

III Salient elements of the Ad hoc Tax-free Registration Policy for the Chinese-owned Vessels Engaged in International Voyage

In order to address the problems arising from the overseas registration of a considerable number of the Chinese-owned vessels, the Ministry of Communications, in collaboration with the relevant ministries of the State Council, in view of the underlying reasons for the flagging out of the Chinese-owned vessels and the development of the other industries and domestic shipping industry, has carried out in-depth investigation to propose for approval by the State Council the Ad hoc Tax-free Registration Policy to encourage the overseas-registered but Chinese-owned vessels to register back in China acquiring Chinese nationality and operate under the Chinese flag.

The salient elements of the Ad hoc Tax-free policy are as follows: the Chinese-owned vessels having registered overseas by the end of 2005, which comply with certain age criteria and technical requirements and, submit import declarations within two years starting from 1 July 2007, will be exempted from customs duty and import VAT and are allowed to register back in China in accordance with the current ship registration regulations.

IV Desired effects of the Ad hoc Tax-free Registration Policy for the Chinese-owned Vessels Engaged in International Voyage

• It will expand the Chinese-flagged ocean-going shipping fleet. The implementation of the Ad hoc Tax-free Registration Policy will greatly increase the size of our national ocean-going fleet with an expected increase of 4 million dwt in the coming two years. This will in turn improve national fleet capacity so as to ensure the economic security of the country.

• It will help strengthen ship safety control. When the Chinese-owned vessels register back in China, China is the flag state of such vessels. In so doing, we can better implement the international conventions, exercise the flag state safety control so as to improve the safe operation of the vessels, reduce marine casualties, protect safety of life at sea and prevent marine environmental pollution.

• It will ensure employment of the Chinese seafarers and safeguard their legitimate rights and interests. The flagging back of the Chinese-owned vessels will, in accordance with the relevant international conventions and domestic laws and regulations, ensure employment for the Chinese seafarers and safeguard their legitimate rights and interests.

V Measures by the developed maritime nations to encourage the national registration for national shipping fleet

As the international community places increasing importance on maritime security, the problems posed by the flags of convenience registry have also caught worldwide attention. The major maritime nations have, in response to the operation of national fleet under the flags of convenience, taken such measures as the setting up of the second registry, deregulation of ship manning policy, the grant of tax relief and operational subsidy to attract the vessels engaged in international voyage and owned by the national business to fly the national flag.

(China Development Gateway June 26, 2007)