China’s New Foreign Investment Law: Opportunity or Cost?

April 24, 2019
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By Ilan Bass, PTL Group

On March 15, 2019, China’s new Foreign Investment Law was adopted into law during the 13th National People’s Congress, the country’s legislature. The effects of the new law on foreign businesses operating in China could be significant but are unknown at this stage. So what is known about this new piece of legislation currently?

The new law is slated to come into force on  January 1, 2020 and will replace three separate laws enacted in the earlier years of China’s economic reform that govern foreign investment in the country: The Chinese-Foreign Equity Joint Ventures Law, the Wholly Foreign-Owned Enterprises (WFOE) Law, and the Chinese-Foreign Contractual Joint Ventures Law. Foreign-invested enterprises (FIEs) that were established in accordance with these older laws may keep their original corporate organizational structures for five years after the implementation of this new law during a transitional period that runs until December 31, 2024. China’s State Council, the executive branch of the central government, now has the task of formulating and implementing the regulations that will put the law’s guiding principles into practice.

The text is comprised of six chapters containing a total of 42 articles and was streamlined from a longer version of the legislation that was first announced by the government in 2015, with the final draft being deliberated and approved in only three months. This sudden acceleration may demonstrate a political move to deflect long-standing complaints made by the US and EU about China’s unjust trade practices and to assuage rising tensions in the business community related to developments in the highly publicized US-China “Trade War”.

The law reaffirms China’s central state policy of opening up, encouragement of foreign investment in mainland China, and vows to build a market environment of stability, transparency, predictability and fair competition. It also states that China will treat foreign investment no less favorably than domestic investment, unless in a protected industry as defined by the ‘Negative List’ (those that foreign investors are barred from). Furthermore, it will apply these principles in relation to the formulation and application of compulsory standards, in handling government procurement tenders, and will also consult with FIEs when deciding on rules related to foreign investment.

The new law also prohibits forced technology transfer by administrative measures, such as by barring employees of the state from disclosing trade secrets of foreign investors that they learn in the course of performing their duties, and requiring them to fulfill their contracts with foreign investors. If the public interest requires those employees to change contractual terms with foreign investors or enterprises, they must be compensated for any loss sustained as a result, and also be allowed to file complaints against administrative agencies and their employees via a working mechanism. As such, the law may have been fast-tracked to address three main criticisms the US government has made about the business environment in China: Intellectual property theft and forced technology transfer; pressure exerted on foreign businesses to partner with Chinese companies in several sectors; and state subsidies provided to Chinese firms.

While the new law appears to directly address those concerns, many China watchers remain cautious given that the text contains no details on how the provisions of the law will be implemented. Furthermore, the law also allows for governmental expropriation of foreign assets under “special circumstances” and when “for the public interest.”

Zachi Lichtblau, China Legal Adviser and Partner at Bonnard Lawson International law firm in Shanghai, says that, “What seems most revolutionary is the cancellation of the old Wholly Foreign-Owned Enterprises and Joint Ventures laws. Like many pieces of legislation in China, a lot depends on the implementing regulation and as that is not out yet we will have to wait and see to what degree our lives have changed as a result of this new law, but the potential is definitely there.”

Therefore, while the new law signals the Chinese government’s intent to level the playing field for foreign investment in the country, companies and investors must await the implementing regulations before being able to know how their businesses will be affected. Even once the regulations are published, a major test for those policies relating to the protection of foreign investment will be the vigor with which they are enforced and it may be some time before that is known. Foreign companies and entrepreneurs in China may feel the new law provides some hope that the commercial environment will improve in the near future. Until those hopes are realized, however, patience, long-term planning and utilizing professional management solutions will remain the most effective ways for companies to overcome the challenges of operating in the Chinese market.

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