Professional Interpretation

A draft of the proposed legislation, Foreign Investment Law (the “Draft”), was presented at a meeting of the Standing Committee of the National People's Congress (NPC) on 23 December 2018. China's legislature is considering a new law governing foreign investment that will streamline existing rules and prevent the forced transfer of technology. The new "unified law" will replace three existing laws on Chinese and foreign equity joint ventures, non-equity joint ventures and wholly foreign-owned enterprise. 

The draft aims to promote foreign investment, investment protection, and investment management. The draft clearly defines the main tone of opening up and actively utilizing foreign capital, strengthens the promotion and protection of foreign investment, and strives to release a new round of high-level opening to the outside world.

1. Guarantee equal treatment of domestic and foreign-funded enterprises

The issue of equal treatment has always been a long-term appeal of foreign-invested enterprises. Ensuring equal treatment of domestic and foreign-funded enterprises is reflected in the draft provisions.

Article 9 of the draft stipulates that, except as otherwise stipulated by laws and administrative regulations, the policies of the state to support enterprise development are equally applicable to foreign-invested enterprises.

According to the draft, foreign-invested enterprises participate in the standardization work equally, and the formulation of standards should strengthen information disclosure and social supervision. In addition, the state guarantees that foreign-invested enterprises participate in government procurement activities fairly. Government procurement is treated equally according to the products produced by foreign-invested enterprises in China.

The Notice of the State Council on Several Measures for Expanding the Use of Foreign Capital for Opening to the Outside World, which was promulgated in 2017, will focus on promoting fair competition between domestic and foreign-funded enterprises, and proposes equal treatment of domestic and foreign-funded enterprises in terms of industrial policies, science and technology policies, and government procurement. It is welcomed by foreign-invested enterprises.

The draft raised a series of foreign investment policies in China into law, providing legal protection for foreign-invested enterprises to enjoy fair treatment, and helping to create stable, transparent and predictable investing environment, which are aimed to enhance foreign confidence in Chinese investment.

2. Incorporate policy measures to actively attract foreign investment into the law

Since the reform and opening up, China has attracted foreign investment based on its national conditions and has become the world's second largest investor. In practice, China has accumulated a series of experience in attracting foreign investment, including investment services, attracting investment. The industry and regional policies that encourage foreign investment, the draft foreign investment law insists on actively attracting foreign investment and fully absorbs these experience results.

The draft stipulates that the state establishes a sound foreign investment service system and provides consultation and services for foreign investors and foreign-invested enterprises in laws and regulations, policy measures, and investment project information.

The draft stipulates that the people's governments at all levels and their relevant departments shall further improve the level of foreign investment services in accordance with the principle of convenience, efficiency and transparency. The relevant competent authorities shall prepare and publish foreign investment guidelines to provide services and facilities for foreign investors and foreign-invested enterprises.

The draft also stipulates that the state shall, in accordance with the needs of opening up to the outside world, implement foreign investment pilot policies and measures in specific regions to promote foreign investment. The State Council may set up special economic zones to promote foreign investment and expand opening up.

3. Further simplifying foreign investment management

According to the draft, the approval and filing of foreign investment projects shall be implemented in accordance with relevant state regulations. Where a foreign investor invests in an industry or field that requires permission in accordance with the law, it shall go through relevant licensing procedures in compliance with the law. Except as otherwise provided by laws and administrative regulations, the relevant competent department shall, in accordance with the conditions and procedures consistent with domestic investment, review the application for permission of foreign investors.

From the perspective of investment management, the important idea of the draft foreign investment law is to unify the management of domestic and foreign investment in addition to the special access management measures stipulated in the negative list.

After the implementation of the Foreign Investment Law, the “three foreign laws” will be abolished, the examination and approval procedures for the establishment of foreign-invested enterprises will be ceased, and only the project management and industry licenses consistent with domestic and foreign investment will be retained, which will further enhance the convenience of foreign investment.

For the collection of foreign investment information, the draft is clear, the state establishes a foreign investment information reporting system, and the content and scope of the information report are determined according to the principle of necessity and strict control. Foreign investors or foreign-invested enterprises shall submit investment information to the competent commercial authorities through the enterprise registration system and the enterprise credit information publicity system. Investment information that can be obtained through departmental information sharing shall not be required to be submitted.

It is believed that the foreign-invested information is submitted through the unified system of domestic and foreign investment, which avoids redundant construction of information systems and long-term submission.

4. Strengthening the connection with international investment rules

A major feature of the draft is the emphasis on the protection of the legitimate rights and interests of foreign investment, including expropriation and compensation, intellectual property protection, and the free transfer of capital, profits, capital gains, etc. These are important elements of international investment agreements.

The draft makes clear provisions on strengthening the protection of foreign intellectual property rights, the constraints on the formulation of foreign-invested normative documents, the promotion of local government compliance, and the improvement of foreign-invested enterprises' complaints and rights protection mechanisms. 

The inclusion of these contents in the draft Foreign Investment Law fully reflects the responsibility of China's foreign investment protection, which is conducive to China's better participation in the formulation of international investment rules, and further demonstrates its firm position in support of economic globalization.