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18 Mar 2019

China Passes Unified Foreign Investment Law

On 15 March 2019, the Foreign Investment Law of the People’s Republic of China (“FDI Law”) was passed by the 2nd Session of the 13th National People’s Congress. Taking effect on 1 January 2020, it will be the first unified and fundamental law governing foreign investment in the People’s Republic of China (“PRC”), replacing three current foreign investment laws[1] that have long served that purpose separately for Sino-foreign equity joint ventures, Sino-foreign cooperative joint venture enterprises and wholly foreign-owned enterprises. The FDI Law, the basis of foreign investment going forward, provides general rules for the promotion, protection and management of foreign investments.

Equal-Treatment System

The FDI Law will regulate foreign investment according to the principle of pre-establishment national treatment plus a “Negative List”.[2] In short, a foreign investor may invest in the PRC just like a domestic investor unless the investment falls within one of the specified areas enumerated in the Negative List. The FDI Law also aims to further simplify the current filing requirements for foreign investments outside the Negative List by adopting an FDI information reporting system that only requires necessary information which cannot be obtained from other governmental authorities.

In addition to the equal treatment listed in the newsletter on the Law of the People’s Republic of China on Foreign Investment (Draft) which we published on 28 December 2018, the FDI Law further specifies the following equal treatment for foreign investors and foreign invested entities (“FIE”):

  • The laws governing the form, framework and conduct of foreign enterprises are those governing domestic enterprises, e.g., the Company Law of the PRC and the Partnership Enterprises Law of the PRC. For example, the long-standing forms “Sino-foreign equity joint venture” and “Sino-foreign cooperative joint venture” will be eliminated as the FDI Law takes effect.
  • Mergers, acquisitions and other business concentrations involving foreign parties and other types of foreign investment are not to be subject to special treatment or treated less favorably than domestic enterprises, unless such investments fall under the Negative List.
  • In addition to products, the services provided by FIEs should also be fairly treated in Government procurement.
  • In addition to capital contributions, profits, capital gains, royalties on intellectual property, and lawfully obtained compensation or indemnification proceeds, the income from disposal of assets and liquidation is to be freely transferrable into and out of mainland China in RMB or in foreign currency.
  • Foreign investors and FIEs are to have access to the mechanisms for formal complaints, administrative reconsideration and administrative action if the foreign investors or FIEs are unfairly treated or their interests are infringed.

Remaining Restrictions and Requirements

Although the FDI Law may increase foreign investors’ access to and competitiveness in the mainland China market, some former impediments remain. Among the restrictions and requirements investors from abroad should be aware of are:

  • Foreign investors will still be barred from investing in certain industries and must satisfy special requirements in certain others. These industries comprise the long-standing but regularly-updated Negative List, including for example certain telecommunication services, although the list may be shortened (as Premier Li Keqiang stated during an interview with a journalist after the passing of the FDI Law).
  • Foreign investors will be subject to a “National Security Review” when making certain investments that could impact China’s national security.
  • Foreign investors may trigger anti-monopoly review when acquiring PRC businesses or entering into other types of mergers which constitute business concentrations under PRC anti-monopoly law, if certain thresholds of business concentrations reporting are triggered.
  • As for domestic investors and PRC entities, certain regulatory requirements (e.g., licenses, approvals and filings) will apply to FIEs in order to operate in the PRC.
  • Where separate provisions governing foreign investment in China’s financial industries (e.g., banking, securities, insurance) and in China’s financial markets (e.g., the securities market and foreign exchange market) exist, those provisions will apply and thus continue to impose their restrictions and requirements.

Additional Benefits for Foreign Investors

The FDI Law, which is passed amid particular trade tensions with the U.S., has been heralded as a major contribution to the PRC’s promotion and protection of foreign investment. Within this context, foreign parties may stand to also benefit from the following general provisions in the law:

  • In response to the issue of forced technology transfer, the FDI Law provides that the intellectual property of foreign investors and FIEs will be protected and the parties to the investment will negotiate such matters while administrative organs and their employees must not force such transfers through administrative measures.
  • PRC administrative organs and their employees are strictly obliged to keep confidential any business secrets of foreign investors and FIEs that the organs and their employees become privy to during the performance of their duties.
  • PRC regulators at all levels may not impair the legitimate rights and interests of or impose any additional obligations on an FIE, set any condition for market access and withdrawal or intervene in any normal production or operation activity of an FIE.
  • In addition, the FDI Law specifically provides that local governments must strictly follow their commitments and covenants made to foreign investors and FIEs.

Transition Period

The FDI Law will not take effect until 1 January 2020 and from that date further provides for a five-year transition period for Sino-foreign joint ventures, Sino-foreign cooperative enterprises and wholly foreign-owned enterprises to adjust their organizational forms to the unified form under the FDI Law. It is currently unclear whether foreign investors should continue handling foreign investment matters, e.g., drafting transaction documents and handling registrations, under the currently effective foreign investment laws or the new FDI Law before 1 January 2020.

Outlook

The coming years can expect additional promulgations, in the forms for example of national and local regulations, to fully implement the major changes in the framework governing all foreign investment in the PRC. On the local side, the FDI Law grants local governments certain authority to formulate policies and procedures regarding promotion and facilities of foreign investment, within the boundaries set by relevant laws. On the national side, several major issues remain to be resolved or clarified, including but not limited to whether the current management systems remain for the foreign investment which falls under the Negative List, what measures existing FIEs need to take to adjust to the FDI Law during the transition period and what will be the legal consequence if they fail to do so after the transition period, the status of Variable Interest Entities (i.e.,“VIEs”) and the details of the investment information reporting and service system. If the FDI Law itself can be taken as an example, the supplements and refinements in the near future should be welcomed as further opening up China to foreign investment.



[1] The Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures (promulgated on 1 July 1979 and last amended on 3 September 2016), the Law of the People’s Republic of China on Foreign-invested Enterprises (promulgated on 12 April 1986 and last amended on 3 September 2016), and the Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures (promulgated on 13 April 1988 and last amended on 4 November 2017).

[2] The Negative List system currently in force is composed of 2 lists jointly issued by MOFCOM and the National Development and Reform Commission, namely: (1) the Special Administrative Measures for Access of Foreign Investment (Negative List) (2018 Edition), which wasissued on 28 June 2018 and applies to the PRC except for pilot free trade zones (“FTZs”), and (2) the Special Administrative Measures for Access of Foreign Investment in Pilot Free Trade Zones (Negative List) (2018 Edition), which wasissued on 30 June 2018 and applies to FTZs.

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