Important regulatory movements affecting foreign investment in China

On December 26, 2018, the Standing Committee of the National People’s Congress of China released a new draft of the Foreign Investment Law (the Law) for public comments. This is a major law-making development of the Foreign Investment Law, following the previous draft which was issued by the Ministry of Commerce almost four years ago. 

The 2018 draft of the Foreign Investment Law is far shorter than the 2015 draft, with some interesting and notable changes, on which we set out our comments in the following paragraphs. 

Ban on Forced Technology Transfer and Wider Access to Government Procurement and Industry Standard Formation

One of the most prominent changes demonstrated in the 2018 draft Law is that it substantially expands the protections offered to international investors and their investment in China. This is apparently intended to address the concerns voiced by US and European companies in the past years. 

The 2018 draft Law proposes a ban on forced technology transfer by providing that technology transfer shall be a matter of free will for parties to decide based on business practices. Neither governmental authorities nor their officials will be able to use administrative measures to force transfers of technology. 

The 2018 draft Law also provides that foreign-invested enterprises will have equal rights to bid for government procurement projects and will also be given equal access to the discussion and formulation of industry standards. 

It is also provided in the 2018 draft Law that, in case of expropriation of foreign investment (which only happens in exceptional circumstances), fair and reasonable compensation is to be given to foreign investors. More comfort is given to foreign investors in the 2018 draft, as opposed to the 2015 draft which merely states that the compensation will be given to foreign investors without indicating what standard should be adopted in determining the level of compensation. 

Confirmation of the Negative List Regime for Foreign Investment

Since 2015, the negative list regime for market entry by foreign investors has been gradually established, initially in the Free Trade Zones and later nationwide throughout the rest of China. The most recent version of the negative list for foreign investment was jointly issued by the National Development and Reform Commission and the Ministry of Commerce in June 2018. 

Under the negative list scheme, foreign investment in industries outside the scope of the negative list is generally regulated in the same way as investment by Chinese domestic investors and does not require project-by-project prior approval from the Ministry of Commerce or its local counterparts. Compared with the previous versions, the 2018 version of the negative list has greatly reduced the scope of the negative list, with a view to further removing market access restrictions for foreign investment. 

Consistent with the 2015 draft, the new draft of the Foreign Investment Law re-confirms the negative list regime for regulating foreign investment and national treatment will apply to foreign investment in China. 

In case any industrial operating permit is required for foreign investment, the 2018 draft Law contains stipulations that the relevant approval authorities are required to streamline the governmental process and cut red tape, in order to develop a favourable business environment. 

National Security Review

The 2015 draft of the Foreign Investment Law has an entire chapter devoted to requirements and procedures for national security review. The provisions in the 2015 draft appear to be modelled on the US CFIUS structure. 

Interestingly, the 2018 draft only keeps one generic clause saying that China will adopt the national security review for foreign investment which has or may have bearings on China’s national security and that decisions of the national security review are to be final. Apart from this generic requirement, the 2018 draft of the Foreign Investment Law does not contain any further details on the national security review process. It is anticipated that Chinese authorities may pass separate implementing regulations to provide for details for national security review. 

Next Step

China remains one of the most attractive destinations for foreign direct investment. At present, foreign investment in China is governed by three existing laws which regulate Sino-foreign equity joint ventures, Sino-foreign contractual joint ventures and wholly foreign-owned enterprises. The Foreign Investment Law, after adoption, will become the unified national law to replace those three existing ones and will no doubt have significant implications for foreign investors and their businesses in China, from the market-entry and the daily operations perspectives. Companies which are already incorporated under the three existing laws are required to restructure themselves under the new regime of the Foreign Investment Law within the given grace period after its implementation. 

The 2018 draft of the Foreign Investment Law is open to public consultation until February 24, 2019. Chinese senior governmental officials have called for swift adoption of this Law to further open the Chinese market and create a more friendly and transparent investment environment. We will keep close watch on the regulatory movement in this regard and provide an update from time to time.