From Promulgation to Implementation

In 2018, China celebrated 40 years of opening up and reform, a policy that played a central part in the Chinese economy growing to become the world’s second largest. The Chinese Government has vowed that opening up will continue. As part of this drive, a draft Foreign Investment Law (FIL) was released in late 2018, with a revised version being eventually submitted to the National People’s Congress during the 2019 ‘Two Sessions’. In this second instalment of a two-part series, Richard van Ostende, Chief Representative of the Netherlands Business Support Office, looks at how the new law has been adopted, which steps shall be required for its implementation and the highlights of the legislation.

The National People’s Congress (NPC) took place from 5^th to 15^th March. During the closing ceremony, China’s legislative body adopted the new FIL, a decision 2,929 parliamentarians voted for, with eight against and three abstaining. The law will come into effect on 1^st January 2020. It will then replace China’s current Chinese-Foreign Equity Joint Ventures Law, Wholly Foreign-Owned Enterprises Law and Chinese-Foreign Contractual Joint Ventures Law, all of which were enacted in the early years of the country’s economic reform.

Next steps: detailed implementation rules

The FIL has been widely promoted as a framework emphasising equal treatment for foreign investment. The aim is to provide equal access to the Chinese market and legal protection as domestic companies.

From a high-level perspective, the FIL embodies China’s continuing efforts to modernise its laws to reflect the changing global economy. The law as currently passed includes only six chapters and 42 articles. It is less detailed and substantial than the draft Foreign Investment Law proposed in 2015. Before the implementation of the law on 1^st January 2020, the State Council is to promulgate specific implementation rules laying out the practical day-to-day implications for foreign-invested companies doing business in China.

Highlights of the Foreign Investment Law

H/M/T investments

The NPC Constitution and Law Committee confirmed that the FIL will not apply to Hong Kong, Macau, or Taiwanese investments (H/M/T investments).[1] These are characterised as special domestic investments. China has always applied special policies and management to H/M/T investments, and deems it appropriate to not make specific provisions for applying the FIL in these cases.

Grace period

As mentioned earlier, the FIL will replace three laws governing joint ventures and wholly-owned FIEs. China’s State Council is considering measures to allow foreign-invested enterprises established in accordance with those laws to keep their original corporate organisational forms for five years after the FIL comes into effect. 

Equal opportunity

In order to create a more level playing field, the FIL states that foreign investors will receive equal treatment when applying for licences (Article 30) and participating in government procurement (Article 16). According to Article 15, foreign investors will also be given equal opportunities to participate in the formulation of standards.

Article 4 of the FIL states that the State should use the Negative List – which provides an overview of restrictions on foreign investment, determined by the State Council – to ensure pre-establishment national treatment. It effectively means that foreign investors will be treated the same as domestic investors during the initial stages of setting up a business. Market access by foreign-invested companies has been categorised as either ‘encouraged’, ‘permitted’, ‘restricted’ or ‘prohibited’.

Foreign investment protection

The FIL includes multiple protective measures for foreign-invested enterprises.

Government employees are not allowed to disclose or unlawfully provide trade secrets they learn at work to others, and can face criminal charges if they do so.

Local governments are prohibited from interfering with national foreign investment laws and policies. Local governments are required to fulfill their policy commitments to and contracts with foreign investors and FIEs. In the case of national or public interest requiring changes to the commitments or contractual terms, they must compensate foreign investors and FIEs for any loss sustained as a result.

FIEs and their investors are allowed to file complaints against administrative agencies and their employees through an “FIE complaint working mechanism”. This new mechanism shall not replace other remedies available under existing law.

The FIL further contains measures to safeguard foreign investments from arbitrary expropriation. Under special circumstances, however, the State may expropriate or requisition the investment of foreign investors in the public interest (Article 20). The FIL pledges that such actions will be done in accordance with legally prescribed procedures for which “fair and reasonable compensation” will be offered.

Replacement of approvals by registration

The FIL formally ends the prior systems that required approval by the Ministry of Commerce and registration with the Administration of Industry and Commerce before a foreign investor could gain access to the Chinese market. With the exception of investments under the restricted industries in the Negative List, foreign investors will from 1^st January 2020 only be required to register with the relevant authorities.

About the author

Richard van Ostende is Chief Representative of the Netherlands Business Support Office (NBSO) located in Nanjing. The NBSOs are an integral part of the Dutch Government’s network in China and support Dutch companies in doing business in and with China. Richard is also a Doctor of Literature Candidate at Monarch Business School. Subject of research is ‘Foreign Direct Investment into China: Determinants of the Strategic Decision-Making Process by Dutch Companies’.

[1] 13^th Session of the National People’s Congress Constitutional and Legal Committee: About the Foreign Investment Law of the People’s Republic of China Report on the Outcome of the Consideration of the Draft Foreign Investment Law, National People’s Congress, 15^th March 2019, viewed 21^st March 2019, <http://www.npc.gov.cn/npc/xinwen/2019-03/15/content_2083503.htm>