China Open for Business

By He Bin & Xu Ming

By prioritising the protection and facilitation of foreign investment, China’s new Foreign Investment Law is sending a message that foreign investors can be assured of a better business climate as the country continues to open up.

In just three months since the end of 2018, the National People’s Congress (NPC), China’s top legislative body, reviewed and passed the Foreign Investment Law, the first standardised basic regulatory framework of the country, which ranks second in the world both in its economic size and the inflow of foreign direct investment.

Yet three years earlier, an attempt to make a similar law to replace the existing fragmented legal system governing foreign investment went nowhere.

The first article states that the purpose of the law, which will come into force on January 1, 2020, is to expand China’s opening-up, promote foreign investment and protect the legitimate rights and interests of
foreign investors.

As long as foreign-funded projects are not on a negative list of industries in which foreign investment is restricted, they will follow the same procedures as Chinese enterprises. The law also addresses long-standing issues of concern to foreign investors, such as intellectual property protection, government procurement bidding and expropriation and compensation.

At the first press conference of the Second Session of the 13th NPC on March 4, NPC spokesperson Zhang Yesui described the law as “a fundamental change to China’s foreign investment management system,” which will “improve the openness, transparency and predictability of [China’s] investment environment.”

In the draft law three years ago, however, management of foreign investment, ranging from reviews, security scrutiny and shareholding structure, are detailed at least as much as rules regarding investment facilitation.

The speedy legislation process and the prioritising of protection of foreign investment have attracted attention from domestic and international media.

By the end of 2018, more than 960,000 foreign-invested enterprises in China had invested cumulatively more than US$2.1 trillion, making foreign investment “an important driving force of China’s economic and social development,” said Li Zhanshu, chairman of the NPC Standing Committee, speaking after the second review of the law at the end of January.

He added that the legislation demonstrated China’s commitment to free trade against the backdrop of increasing protectionism and unilateralism in the world. Observers have noticed that China’s trade tension with its major business partners, notably the US, also underlies the legislative process.

Streamlining Procedure

Foreign investment in China is governed by three laws regarding Chinese-foreign equity joint ventures, wholly foreign-owned enterprises and non-equity joint ventures (or contractual joint ventures). Passed from 1979 to 1988, the three laws were made at a time when China had little in the way of business laws. They are often repetitious or in conflict with later laws in regulating the form of organisation of a company and its business activities, such as the Corporate Law, Contract Law and the Labour Contract Law.

More importantly, according to the three laws, besides registering with market administrators in the same way as domestic enterprises, a foreign investor needs to go through a case-by-case approval from different
government agencies before setting up a business in China. As this has already been stopped in practice, the law is already obsolete.

While this means that a new law was needed to be consistent with reality and the existing rules, changes to China’s national policy and the international situation added to the urgency of accelerating the legislation.

Domestically, as foreign investment plays a more important role in the Chinese economy, China has prioritised stabilising foreign direct investment (FDI) amid the pressure of slowing economic growth. Creating a better regulatory framework is more emphasised than favourable tax and land policies in attracting foreign investment.

Externally, China and the US have been mired in trade woes since US President Donald Trump began to impose tariffs on Chinese imports in March 2018. Difficult negotiations are still going on between the world’s two largest economies to ease the tension. Uncertainties surrounding the trade war have negatively impacted global economic growth and international capital markets.

In this context, China has repeatedly declared its commitment to further reform and opening-up, and announced a series of measures targeted at giving wider market access to foreign investment, particularly in
the financial sector.

Kong Qingjiang, dean of the School of International Law at the China University of Political Science and Law, told China Report it is urgent that China legalises the direction of reform and opening-up.

“In recent years, there have been big changes to the external environment for the Chinese economy. China faces trade disputes with Western countries in particular. It’s a problem showing China’s attitude to reform and opening-up to dispel foreign investors’ worries over the investment environment in China,” Zhao Xudong, professor of commercial and economic law at the China University of Political Science and Law, told China Report.

“There have been policies and promotions in this regard, but they are not as strong as a law. Foreign enterprises need legal guarantees besides policies.”

In recent years, major global economies have been enthusiastic in reaching regional and bilateral trade agreements, such as the EU-Japan Economic Partnership Agreement, the Trans-Pacific Partnership and Regional Comprehensive Economic Partnership.

China is also trying to sign free trade agreements with more economies. Ma Yu, a research fellow from the
Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, told China Report that investment issues are often part of these bilateral or multilateral trade negotiations that China has engaged with.

For example, intellectual property rights protection and national treatment (equal treatment of foreign and local businesses) are also about fair competition in trade.

WTO reform will involve the rule of competition, public procurement, specific information products and trade in services, which are also linked with investment. “Even if China did not revise the law now, there would have needed to be changes to the law in the future so China could join higher level multilateral or bilateral trade agreements,” Ma said.

Protection Priority

The main intent to protect and facilitate investments is demonstrated both in the declared purpose of the legislation and in the specific articles of the law.

“The new law is much more concise about the management of foreign investment than in the 2015 version… it shows the Chinese government’s ongoing efforts to streamline red tape, promote fair competition and provide efficient services [to enterprises],” Kong said.

Chinese officials and analysts have repeatedly stressed major protection and facilitation rules that the law embodies and foreign investors have long asked for. The most important is that the case-by-case review for foreign investment is legally replaced by the combination of a negative list and pre-establishment national treatment, which promises foreign businesses equal treatment with domestic businesses in the phase of entering the Chinese market.

Under the old review system, government decisions on whether and how a foreign business could operate in China was based on a list of industries which fell into four categories – encouraging, permitting, restricting or excluding foreign investment.

By contrast, a negative list specifies only the sectors that are fully or partly closed to foreign investment. Any foreign project not on the list can be launched on the same terms as domestic ones. This practice, which makes it easier for foreign investors to establish, acquire and expand their business in host countries, has been adopted by many economies in the world in recent years.

After China and the US agreed in 2013 to use the policy as the foundation of their negotiations on a bilateral investment protocol, it was first tried in China in the Shanghai Free Trade Zone the same year. It was then promoted to China’s other free trade zones, and a national negative list was finally implemented in June 2017 and updated a year later. The number of subsectors on the list was 190 in 2013 in Shanghai, but this was reduced to 48 on the national negative list in 2018.

Ning Jizhe, vice chairman of the National Development and Reform Commission, China’s top economic planning agency, disclosed during the NPC session in March that even fewer subsectors would be on the list in 2019.

He added that government agencies are working on eliminating barriers imposed on foreign investment in areas not on the negative list.

Emphasising equality and fairness, the law stipulates that foreign companies have equal access to the same favourable policies as domestic enterprises and public procurement deals. Foreign companies have the same
right to set standards for Chinese industries as Chinese enterprises.

New local officials have to honour the promises made by their predecessors. If the State expropriates foreign
investments for public and social interests under special circumstances, it must follow legal procedures and make fair and reasonable compensation.

Forced technology transfer by administrative power is banned. A mechanism will be set up to deal with foreign investors’ complaints against policies and abuse of administrative power.

As Kong observed, the recent acceleration in legislation shows strong expectations and wide consensus on these main issues among lawmakers and other stakeholders.

Sharp contrast

China’s highlighting of protection and facilitation of foreign investment contrasts with the tightened scrutiny over foreign investment in the EU and the US.

In August 2018, US President Donald Trump signed the Foreign Investment Risk Review Modernisation Act (FIRRMA) to expand the power of CFIUS, the Committee on Foreign Investment in the US, and tasked it with screening any acquisition of US businesses by foreign enterprises that might impact US national security.

In February, EU member states also agreed on a deal to tighten supervision of FDI in the eurozone, which is also regarded as responding to China’s rising mergers and acquisitions in the region.

Though China was not explicitly mentioned, analysts generally believe that they are targeting the increased level of Chinese investments.

According to the United Nations Conference on Trade and Development, global FDI declined by 19 percent in 2018, but FDI inflow into China was up by 1.3 percent.

It is widely expected by Chinese officials and analysts that the new law will attract more FDI into China.

The law brings a more stable long-term environment for stakeholders. As the law is regarded as a basic framework and a commitment on China’s pro-investment policy, detailed rules are yet to be made to specify how the protection and facilitation principles can be realised on the ground.

This is not an easy job, as controversies still abound in this regard.

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