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China’s New Foreign Investment Law

On March 15, 2019, members of the National People’s Congress voted to pass a new law on foreign investment in China, the Foreign Investment Law of the People’s Republic of China (“中华人民共和国外商投资法 “). China’s initial period of reform and opening up, beginning in 1979, led to the implementation of three separate laws governing Chinese-foreign joint ventures, wholly foreign-owned enterprises operating in China, and Chinese-foreign contractual joint ventures. The new Law will replace these existing laws when it takes effect on January 1, 2020. According to Xinhua, China’s state-run news organization, it aims to “improve the transparency of foreign investment policies and ensure that foreign-invested enterprises participate in market competition on an equal basis.” 

The Law is comprised of six chapters and 42 articles. 

  • Chapter 1 provides the act’s general definitions, guiding principles, and administrative provisions.  
  • Chapter 2 outlines measures aimed at promoting foreign investment, principally calling for the equal treatment of foreign investors conducting business operations in China.
  • Chapter 3 provides a list of relevant investment protection measures. This section noteably prohibits the State-level expropriation of foreign investments and forced technology transfers, advocates for the protection of foreign intellectual property rights, and endeavours to create a complaint mechanism for foreign investors to identify, address, and resolve administrative issues. 
  • Chapter 4 outlines the array of investment restrictions placed on foreign investors, who must abide by all relevant local rules and regulations.They are required to abide by the “negative list” for investment, which defines industries where foreign investment is either barred or restricted. According to Article 4 (in Chapter 1), the list will be “issued by or upon approval by the State Council.” Further, Article 35 calls for the establishment of a “safety review system” for foreign investments deemed potentially injurious to national security. 
  • Chapter 5 broadly outlines the legal mechanisms, liability, and remedies available to foreign investors under the Law. 
  • Chapter 6 summarizes a number of supplementary provisions. Article 40, for example, states that in a case where “any country or region takes any discriminatory prohibitive or restrictive measures, or other similar measures against the People’s Republic of China in terms of investment”, China may take retaliatory action. 

The United States, currently working to resolve an almost year-long trade war with China, has long been critical of Beijing’s approach to trade and foreign investment. President Trump has called for China to reform its economic practises and investment framework to better serve American firms with Chinese interests. Some view the Law as a “possible olive branch” to the U.S. and, by extension, other western nations who share similar concerns. It directly “covers many of the items on Trump’s reform wish list, including forced technology transfer, intellectual property protections and the safeguarding of foreign companies’ capital.”

Foreign experts are, however, unsure whether or not the Law will actually improve the investment environment in China. In comparison to a 2015 draft foreign investment law (which contained 11 chapters and 170 articles), the newly passed Law is more “high level” and contains fewer specific provisions. It was also was fast-tracked through China’s legislative process, leading to criticism from the European Union that Beijing was “moving faster on the legislation than China’s own rules for public comment normally allow.” American business groups, including the U.S.- China Business Council and American Chamber of Commerce in China, have stated that while the law is a step in the right direction, it lacks certain crucial details and mechanisms for enforcement. 

It remains unclear what practical effect the Foreign Investment Law will have on foreign firms operating in the Chinese business environment. China’s decision to fast-track the legislation was almost certainly aimed at fostering American goodwill as the countries continue to negotiate a potential trade deal. Although legitimate concerns over the Law still exist, Beijing is clearly taking steps to quell negative perceptions of its business environment. It is only after the law is implemented that an accurate assessment of the measures can be made.

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