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Changing Trends and Implementation of China’s Foreign Investment Laws and Policies By Jack Qiao, Roxy Wang, Sanya Yu 2019-03-25

 

Preface

 
 

It took only roughly three months for the Foreign Investment Law of the People’s Republic of China (the “FIL”), the basic law of foreign investment in China, to come after its draft was debated, demonstrating an almost unprecedented fast turnaround in the legislation history of China. In response to China’s domestic demands for change of its foreign investment laws and against the background of China-U.S. trade talks, the FIL introduces many fundamental changes to China’s foreign investment law system, which currently consists of, inter alia, three main laws that the FIL is to replace - the Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures, the Law of the People’s Republic of China on Sino-Foreign Contractual Joint Ventures and the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises (collectively, the “Three FIE Laws”). If compared with the Foreign Investment Law of the People’s Republic of China (Draft) that was published in 2015 but ultimately failed to pass into law (the “2015 Draft”), the FIL also varies significantly, whether in positioning, orientation or content.

 

This article is intended to give a full picture of changes in China’s foreign investment laws and regulations in terms of key issues involved in the China-U.S. trade talks by highlighting the major differences of the FIL with the Three FIE Laws and the 2015 Draft in these regards. On that basis, this article further draws a brief comparison between the FIL and the 2015 Draft with a view to study the regulatory inclination of the FIL’s prospective implementing rules, combs through supporting laws and regulations in the field of foreign investment to exhibit the changing trends of foreign investment legislation, and then gives a look to the future implementation of the FIL based on our preliminary research on pilot program policies.  

 
 

 

1.Background

On March 23, 2018 (Beijing Time), the U.S. President Donald Trump signed a memorandum officially based on a Section 301 investigation conducted by the U.S. under its Trade Act of 1974, directing the U.S. Trade Representative to impose 60 billion U.S. dollars in tariffs on Chinese exports into the U.S. and the Treasury Secretary to propose restrictions on investment in and acquisition of U.S. companies and assets by Chinese companies. In response, China took countermeasures within days by levying tariffs on the U.S. imports, signifying the kick-off of a trade war between the U.S. and China. After several twists and turns, at a meeting in Argentina between the presidents of the two countries in early December 2018, both sides agreed to pursue a China-U.S. relationship based on coordination, cooperation and stability and refrain from increasing tariffs or imposing new tariffs. Shortly after the meeting, the Foreign Investment Law of the People’s Republic of China (Draft) (the “FIL Draft”) was submitted at the end of December to the 7th Session of the 13th Standing Committee of the National People’s Congress for deliberation, which is the first time since the 2015 Draft had been put on the back burner for three years that “merging three laws into one” was placed on the legislation agenda again. To keep pace with the 90-day trade negotiations between China and the U.S., the FIL Draft was laid three times before the Standing Committee for review in just three months. The FIL was finally adopted by the 2nd Session of the 13th National People’s Congress on March 15, 2019 and will come into force on January 1, 2020. Almost all issues of concern as touched upon in the trade talks between the two countries are addressed or reflected in the FIL.

 

 

2.Significant Changes in the FIL

The trade negotiations between China and the U.S. concentrate on issues such as technology transfer, intellectual property rights, equal treatment, regulatory transparency, and consistency between central and local policies. Regarding these issues, the FIL brings in significant changes in comparison to the Three FIE Laws and lays down many provisions that are different from the 2015 Draft. Following are the details:

3.Prospects for the Implementation of the FIL

(1)Supporting regulations and policies are being rolled out or in the pipeline, and pilot programs are at their inception stage.

After the China-U.S. trade war was waged in March 2018, China has released a series of regulations and policies (as illustrated below) to accommodate the U.S. concerns over the focal issues. As a crucial part of China’s foreign investment legal system, these regulations and policies interact effectively with the FIL and help ensure the implementation of the FIL in specific sectors.

To gain a rough idea about the progress of and potential problems in the implementation of the FIL, we conducted a preliminary research into the state of play of policies on the establishment of foreign-funded investment companies and on information transmission, software and information technology services that fall within the further opening-up scope of the Work Plan on Fully Promoting Comprehensive Pilot Programs for Expanding the Opening-up of the Service Industry of Beijing Municipality (《全面推进北京市服务业扩大开放综合试点工作方案》) issued by the State Council on January 31, 2019 (the “Pilot Work Plan”). Following is what we found in the research:

From the implementation progress of the Pilot Work Plan, we can see that it still takes time to achieve the blueprint vision drawn up in the plan. The same is true to the FIL, as much remains to be done for the basic law of foreign investment to be fully put into place. This may include working out further implementing rules and supporting regulations and cleaning up laws, regulations and policies that are incompatible with the FIL. Also, local regulators need time to understand and carry through the law. Having said that, we are optimistic about the expected time of the FIL’s implementation and work efficiency of the regulators, given the background and legislation process of the FIL.    

(2)The prospective implementing rules of the FIL are expected to address the matters contained in the 2015 Draft but left aside by the FIL.

To make a quick adoption of the FIL possible, the legislator changed the positioning of the law from an all-inclusive legislation like the 2015 Draft into the basic law of foreign investment, as was evident as early as when the FIL Draft was released, and at the same time shelfed matters that could give rise to disputes. If put side by side for comparison in terms of structure and content, (i) the 2015 Draft is organized into 11 chapters and 170 articles, whereas the FIL only encompasses 42 articles, short of one fifth of the 2015 Draft in length; and (ii) the 2015 Draft goes into details in various aspects, such as foreign investors and foreign investment, access administration, national security review, information reporting, investment promotion, investment protection, coordination of the handling of and resolution of complaints, supervision and inspection and legal liability, each of which is categorized into a separate chapter, and what’s more, VIE structure is explicitly put in the realm of regulation; while in contrast, the FIL gives prominence to guiding principles without going into specifics or dealing with disputable VIE structure.

 

Despite the fact that the 2015 Draft was put on hold for three years in the light of its over-detailed provisions and high-impact contentious issues such as VIE structure, the draft is a matter of great moment in the field of foreign investment, for it has a considerable reference value when the frame of the FIL needs to be fleshed out and filled in. One example is VIE structure, which is specifically identified as a form of foreign investment in the definition of the “Foreign Investment” in the 2015 Draft, and the Explanations of the Foreign Investment Law of the People’s Republic of China (Draft for Public Comments) (《关于<中华人民共和国外国投资法(草案征求意见稿)>的说明》) even proposes three regulatory solutions for VIE structure, namely, a declaration system, a declaration and certification system, and a licensing system. By contrast, the FIL does not give a clear description of VIE structure in the definition of “foreign Investment”, but adds in a catch-all clause which reads “Foreign investors make investment within the territory of China by any other means as prescribed by laws or administrative regulations or by the State Council”. Bearing this catch-call clause in mind, as well as the regulatory intention reflected in the 2015 Draft, there is still a possibility that VIE structure will fall within the “foreign investment” regulatory domain through special law, or administrative regulation made by the State Council, or normative document.

 

4.Conclusion

The change in the China-U.S. economic and trade relations presents China with both enormous challenges and extraordinary opportunities. It gives a boost to a far-reaching reform in China’s foreign investment system as China uses this opportunity to introduce a variety of reform measures such as lowering market access thresholds, better protecting intellectual property rights and leveling the playing field for foreign investors, all of which help China fit better into the world. In the meantime, we cannot ignore the lions in the path from the adoption to the refinement and implementation of the FIL. Examples include how to address potential conflicts that may exist in the current legal system between general and special laws, national and local laws, and new and old laws, how to strike a balance when shoring up local companies while honoring China’s commitments on opening-up policies for foreign investment, and how to achieve a win-win situation in fostering domestic economic development and promoting international economic cooperation. So, there is still a long way to go for the FIL to move from paper to practice.

注释:

 

【1】See the Provisions of the Ministry of Commerce on the Establishment of Investment Companies by Foreign Investors (Order [2004] No.22 of the Ministry of Commerce) (《商务部关于外商投资举办投资性公司的规定》(商务部令2004年第22号)).

 

【2】See the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (《外商投资电信企业管理规定》) and the Special Administrative Measures for Access of Foreign Investment (Negative List) (2018 Edition) (Order No.18 of the National Development and Reform Commission and the Ministry of Commerce) (《外商投资准入特别管理措施(负面清单)(2018年版)》(国家发展改革委、商务部令第18号))

 

 

 

 

 
 

特别声明:

以上所刊登的文章仅代表作者本人观点,不代表北京市中伦律师事务所或其律师出具的任何形式之法律意见或建议。

 

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