China is slowly, but steadily, introducing legal changes which will reshape its economic landscape. It is going from being an export-oriented country, which makes money from export of goods and services, to be more and more oriented towards its internal consumption and foreign investment. This kind of change requires a lot of time and effort. Indeed, China is only in the middle of this long term process of further economic opening and to build a moderately prosperous society in all its aspects. (1)
The Foreign Investment Law passed on March 15 which will become effective on January 1, 2020 will replace three existing laws on foreign investment, namely the laws on Chinese-Foreign Equity Joint Ventures, Chinese-Foreign Contractual Joint Ventures and Wholly Foreign-Owned Enterprises.
The first article of the new Foreign Investment Law says: “This Law is formulated on the basis of the Constitution to further expand the scope of opening-up, to actively promote foreign investment, to protect the lawful rights and interests of foreign investment, to standardize the regulation of foreign investment, to make new grounds in opening up on all fronts, and to promote the healthy development of the socialist market economy.”
The Law was discussed and written quicker than any other previous law. This can be considered as a sign of inaccuracy, but on the contrary, it only highlights China’s will to send specific signals to the World and especially to the United States of America. In fact, the passing of this kind of law would be very unlikely, if were not for heightened tensions of the current trade talks between USA and China.
Regardless, experts raised some issues about this topic. The first one is the lack of details within this law which controls all foreign investments in China. In fact, it has only five pages written in Chinese, not so much for such big economic power. Moreover, this law will not completely regulate and govern everything related to the foreign investment, such as China has Company Laws, Participations Company Law and others. Another problem is that this law shows what China wants to achieve without explaining how it will do it.
The key aspect can be seen in the second paragraph of the article 4 which says: “Pre-establishment national treatment” as used in the previous paragraph refers to affording foreign investors and their investments treatment, during the investment access stage, no less favorable than that afforded to Chinese domestic investors and their investments. The State affords national treatment to foreign investment outside the negative list” [emp. added].
This means a potential opening by the Chinese capital market to foreign investment entities. Basically, this paragraph shows that Chinese government is doing the exact opposite of the US government. In this sense, foreign investors in China will operate under a simplified process based on the same legal regulations used for foreign investors who apply to domestic business owners, even if the problem of implementing this law must be always taken into account.
Finally, the new law also emphasizes that the PRC government will protect the intellectual properties of foreign investors and foreign-funded enterprises by law, and no administrative means shall be used to make transfer of technology mandatory. Another interesting aspect is the possibility of implementing new types of trade disputes resolutions in order to ensure a more effective resolution process and to guarantee the intellectual property rights of both Chinese and foreign investors In this way they will be both protected in a fully transparent and uniform framework.
The main issue of the Law will be the one concerning the body, the establishment and the organization style that the foreign-funded enterprises will need to implement in order to operate in the Chinese market. This basically represents just one step towards the further opening of the country. Nevertheless, many steps and need to be done in the future by the Chinese government. The first one will obviously be regarding the fundamental implementing rules of the law, which will undoubtedly bring new challenges to optimizing the legal system for foreign investments.
- “In the new era, we must strive to realize the great cause of modernization. In the new era, we should not only fulfill the task of building a prosperous society in all respects, but also initiate a new journey of socialist modernization, and create conditions and lay a foundation for the accomplishment of the second centenary goal of realizing the great rejuvenation of the Chinese nation”, Xi Jinping during the 19th CPC National Congress, October 2017, Speech available from: http://www.chinadaily.com.cn/china/19thcpcnationalcongress/2017-11/04/content_34115212.htm
- Chen, Chunlai. “The Liberalisation of FDI Policies and the Impacts of FDI on China’s Economic Development.” China’s 40 Years of Reform and Development: 1978–2018, edited by Ross Garnaut et al., ANU Press, Acton ACT, Australia, 2018, pp. 595–618.
- Drysdale, Peter, and Samuel Hardwick. “China and the Global Trading System: Then and Now.” China’s 40 Years of Reform and Development: 1978–2018, edited by Ross Garnaut et al., ANU Press, Acton ACT, Australia, 2018, pp. 545–574.
- Foreign Investment Law of the People’s Republic of China. Available from: https://npcobserver.com/lawlist/foreign-investment-law.