Following up with China’s Newly Adopted Foreign Investment Law

道可特法视界第1181篇原创文章

Abstract: 

On March 15, 2019, on the second session of the thirteenth National People’s Congress (“NPC”) the Foreign Investment Law in People’s Republic of China (hereinafter referred to as this Law) was adopted and will take effect as of January 1, 2020. With several rounds of comments solicitation and revisions, this newly adopted Law is one of the most spectacular highlights in this NPC session and taken as a milestone for China’s higher-level opening up.

While the current three separate laws on foreign investment, namely Law of People’s Republic of China on Sino-foreign Equity Joint Ventures, Law of People’s Republic of China on Sino-foreign Contractual Joint Ventures and Law of People’s Republic of China on Foreign Invested Enterprises (hereinafter referred to collectively as Three Separate Laws), have played an important role for foreign investment in China, they can no longer adapt to the new situation at home and globally, a uniform foreign investment law is a call so as to “expand opening up, promote foreign investment ”, as articulated in Article 1 of this Law and further “develop high-level investment policy of liberalization and facilitation, put in place and improve foreign investment promotion system, build a stable, transparent, predictable and level-playing business environment “according to Article 3 of this Law.

In this article I will explore some highlights under the legal framework of this Law, the roles of Chinese government, the challenges for the implementation and preparation called for

01Highlights under Main Framework

This Law generally provides for promotion, protection and administration of foreign investment. It has drawn all these years’ experience since China opened up, addressed the frequently raised concerns of foreign investors and foreign invested enterprises (hereinafter referred to as FIEs), and thus lays out a comprehensive legal framework for foreign investment in China.

Below are some highlights:

△Pre-access national treatment：The first and foremost key position is elaborated in Article 4 under General Provisions of Chapter I for a management system of pre-access national treatment with negative lists. Pre-access National Treatment means that during investment access period foreign investors and their investment are granted treatments no less preferential than to Chinese nationals and their investment. Negative lists refer to special administrative measures for market access of foreign investment in specific sectors as stipulated by the State. Beyond the negative lists foreign investment is entitled to national treatment. In case that international treaties and agreements to which China is a party provide for more preferential treatments regarding market access of foreign investors, those relevant provisions can be applicable. It is specified that the negative lists shall be issued or approved by the State Council of China. See also Article 28.

△Standardization process: FIEs’ equal participation in standards making process, with information disclosure and public oversight to be enhanced (See Article 15).

△ Government procurement: FIEs’ participation by fair competition in government procurement will be protected; FIEs’ products made and services provided within the territory of China will be entitled to equal treatment in government procurement (See Article 16).

△Capital free flow: Free flow across the border of capital contribution, profits, capital gains, income from assets disposal, IP license fees, compensations or damages, liquidation proceeds, in CNY or a foreign currency (See Article 21).

△IP protection: China will protect IP rights of foreign investors and FIEs, encourage technology cooperation in foreign investment based upon autonomy of will and business rules. The terms and conditions shall be agreed upon at arm’s length by the parties to the transactions. No government or its staff shall force technology transfer by way of administrative means (See Article 22).

There are also other equal treatment and protection of foreign investors’ concerns, like no expropriation in Article 20, access to financing by public offering of stocks, corporate bonds and other securities or by other means, as stipulated in Article 17 and in Article 41, etc. to be notable.

02Focus on Government’s Roles

The past practices and experience show that Chinese government’ role play is the very key for a stable, transparent, predictable and fair business environment. This law puts quite much emphasis on the government’s role play, particularly in the following areas:

△Preferential policies: Firstly according to Article 9, government policies to support the enterprises’ development will be equally applied to FIEs. Then Article 14 stipulates that FIEs and foreign investors are also entitled to preferential treatments in accordance with Chinese laws and rules made by the State Council to provide incentives and guidance for foreign investment in some industries, fields, and areas. And pursuant to laws, State Council’s administrative regulations and local regulations, local governments above the county level can within their respective statutory authorities formulate policies and measures to promote and facilitate foreign investment (See Article 18).

△ No derogation of legal rights and interests: Governments of each level and their related agencies shall comply with laws and regulations when developing rules with regards to foreign investment; in case of no such laws and regulations in place, they shall not derogate FIEs’ legal rights and interests, nor increase FIEs’ duties, or set conditions for market access and exit, nor interfere with FIEs’ normal production and business operations (See Article24).

△Fulfillment of commitments: Local governments and their related agencies shall fulfill their commitments as to policies lawfully made and various types of contracts lawfully made with foreign investors and FIEs. In case required by national interest and public interest, they shall change their policies and contract commitments in their statutory authority and in due process, and compensate the foreign investors and FIEs for the loss incurred therefrom (See Article 25).

△Information reporting: A reporting system of foreign investment information will be established. Foreign investors and FIEs shall do the reporting through enterprises’ registration system and enterprises’ credit information disclosure system to the governing authority. The reporting content and scope shall be defined as truly necessarily needed, while those shall not be required repeatedly if accessible through information share with other government functions (See Article 34).

△Confidentiality as to trade secrets: The government agencies and their staff shall keep confidential foreign investors and FIEs’ information they learn when performing their functions, not disclose or illicitly provide to any others (See Article 23).

△Complaints on government acts: In case that foreign investors and FIEs find their rights and interests are violated by any government agency or it staff in their official acts, they can file for resolution through FIEs’ complaint working mechanism, apart from resort to administrative review and administrative lawsuits. The working mechanism is used to timely handle the issues reported, and coordinate in improving the policies and measures concerned (See Article 26).

Chinese Premier Li Keqiang responded on the press conference of this year’s NPC session, that this Law is also to regulate government’s acts, requiring the government to perform its functions in accordance with the law, and that the government will observe the principles of this Law and promulgate a series of matching regulations and directives to protect the rights and interests of foreign investors and FIEs.

03Challenges for Implementation

With more open market, more level-playing fields, more constrains on government acts, and more secured protection, we have reason for more confidence, however, we will also have in mind the challenges lying ahead for implementation of this Law.

△ The legal framework is established and some provisions are general under this Law. Therefore, much room is left for clarification with more detailed supporting rules. For example, Article 35 stipulates that China put in place security review system for foreign investment and exercise security review on foreign investment which has or will probably have some bearing on China’s state security. With the scope, the process, forms, timelines, etc. not specified, how the national security review will be conducted is not clear.

△ In some provisions of this Law, some related rules are to be referred to, however not specified, resulting in some ambiguity. For example, Article 17 provides that according to law FIEs can conduct financing by public offering of stocks, corporate bonds and other securities or by other means, while according to Article 41 under Supplementary Provisions of Chapter 6, in case otherwise provided with regard to management of foreign investors’ investment within the territory of China in banking, securities, insurance and other financial industries, or in securities market, foreign exchange market and other financial markets, such rules shall be observed. The question is: What could be “otherwise provided” Article 41 refers to? Will they prevail over or trump Article17, or this Law in terms of financing?

△ Some provisions may add to uncertainty and unpredictability for foreign investment, given current global business context. According to Article 40, in case that any country or region exercise discriminatory prohibition, restriction, or other similar practices to China in relation to investment, China is entitled to take corresponding measures to the same country or region as the situation requires.

△ There is also doubt that China’s newly adopted Law is just a passive response to the pressure from U.S. Government who has been accusing China of IP theft and various unfair trade practices. Thus much leverage is left in the current framework for the Chinese government to have leeway in the future political and trade dynamism.

Implementation thus is a big challenge, which calls for the government’s further commitments and hard work to sort out, amend, repeal the current related rules and formulate more detailed supporting rules, following the general principles under this Law.

04Prepared for Transition

This Law will be effective as of January 1, 2020, more than a half year away, and the Three Separate Law will expire at the same time. There will be a five year period for the FIEs incorporated according to the Three Separate Laws before the effective date of this Law to keep their current organization forms. The question is: how will this Law and the relevant rules be applied during this transition period? How about the other current rules on foreign investment?

Given the pre-access national treatment, on the whole, the foreign investment’s promotion, administration and protection rely on heavily on the overall Chinese business environment to be improved, in terms of its political, legal, economic and social development, whether for its nationals, or for foreign investors. Foreign investors will advisably seek some guidance and navigation through this new legal framework, the potential changes to be brought and preparation needed to see that their business is conducted in compliant and effective ways. 

 陈凤霞 律师 

Cathy Chen is a partner of Beijing DOCVIT Law Firm. She is admitted to practice law in China and New York State in the United States, with over 10 years of working experience in legal and compliance arena. Cathy focuses on corporate legal & compliance, inbound and outbound investment. Cathy’s working languages are Mandarin and English.

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