Ama Doyal
Foreign investment in China has always been wrought with contention, accented by the latest trade disputes between the United States and China. In March, the People’s Congress of China took active steps to create change and to ease anxiety foreign investors face when it passed the Foreign Investment Law (“FIL”).[1] The new law replaces three existing laws that have governed foreign investment since the 1980s.
The law is expected to create a positive shift for those investing in Chinese markets by promoting trade, streamlining efficiency, and protecting foreign investors. The law will go into effect on January 1, 2020, but will have few immediate short-term effects.2
The long-term forecast, however, is more promising, with projections of $1.5tn of inbound investment into China within ten years.[2] Nonetheless, such sweeping changes will bring new legal challenges. Lawyers will be operating with little guidance until regulators weigh in on implementation concerns.
The double-edged nature of the FIL is its overly broad policies, which allow for flexibility. Critics find the law fails to outline changes that will yield improvements to the investment scheme.[3] However, the FIL shows China’s willingness to adapt. Through the process of trial and error, regulators will create guidelines to implement the ideals outlined in the FIL. Until then, foreign investors should consider balancing these concerns and weighing the risks of moving new ventures into China.
More specific changes in the FIL include clarification of what qualifies as a foreign investment enterprise (“FIE”).[4] While better than its predecessors, which lacked clear categories and focused mostly on foreign direct investments, the FIL definition expands the scope of what qualifies as an FIE. However, ambiguity remains for foreign investors. Additionally, it remains unclear if Chinese investors can invest in FIEs.
Some of the provisions formally adopt existing policies, such as the Negative List for foreign investments and the pre-establishment national treatment.[5] Expanded nationwide in 2018, the Negative List opens all sectors not listed to foreign investors.[6] The pre-establishment national treatment grants these foreign investors and their investments equitable market access with domestic investors and investments.
Another change is the formal switch to the registration system, where foreign investors register instead of the previous system, which required approval by the Minister of Commerce for each decision. However, the FIL also created new reporting obligations that are not described in detail.[7] These additional reporting requirements leave many unsure of the burden on foreign investors.
Perhaps the most substantial legal challenge moving forward for foreign investors is the requirement for FIEs to modify their governance structure to comply with PRC Company Law. Those FIEs which currently exist under the current laws have a five-year grace period to revisit their corporate structures and become compliant with the unified corporate regime. The old FIL provided for a specific corporate framework between foreign and Chinese investors. Previously, the board of directors was the decision-making body, and laws required unanimous approval on certain issues to protect minority shareholders.[8] Now, shareholders will become the decision-making authority with two-thirds approval required. Companies may want to renegotiate the terms of joint ventures they entered before this change was enacted.
Joerg Wuttke, European Union Chamber of Commerce in China president, believes the FIL addresses the concerns of foreign investors.[9] The additional protections for trade secrets and valuable technology foreign companies bring to China have long been sought by both the U.S. and the EU. Wuttke also believes when the FIL is fully implemented, it will address significant business complaints brought by both the EU and the U.S. but is also concerned about its lack of clarity.
While there are many more provisions and changes encompassed in the FIL, the sentiment remains that this is the first step toward fair trading for foreign investors in China. Although much must happen before investors see a tangible benefit, China has now come to the bargaining table with sincerity.
[1] (中华人民共和国外商投资法) [Foreign Investment Law of the People’s Republic of China] (promulgated Mar. 15, 2019, effective Jan. 1, 2020), P.R.C. Laws, 41. English translation: http://www.fdi.gov.cn/1800000121_39_4872_0_7.html.
2 Lucy Hornby, China passes law in bid to ease overseas investor concerns, Financial Times (Mar. 14, 2019), https://www.ft.com/content/7e796b92-46bf-11e9-b168-96a37d002cd3.
[2] Id.
[3] See generally Evelyn Cheng, EU Chamber says China’s new foreign investment law is ‘surprisingly accommodating’, CNBC (Oct. 21, 2019), https://www.cnbc.com/2019/10/21/eu-chamber-chinas-foreign-investment-law-is-surprisingly-accommodating.html.
[4] See [Foreign Investment Law of the People’s Republic of China] art 2. English translation: http://www.fdi.gov.cn/1800000121_39_4872_0_7.html.
[5] See [Foreign Investment Law of the People’s Republic of China] art 4, 28. English translation: http://www.fdi.gov.cn/1800000121_39_4872_0_7.html.
[6] Z. Alex Zhang & Vivian Tsoi, China adopts New Foreign Investment Law, White & Case (Mar. 29, 2019), https://www.whitecase.com/publications/alert/china-adopts-new-foreign-investment-law.
[7] See [Foreign Investment Law of the People’s Republic of China] art 34. English translation: http://www.fdi.gov.cn/1800000121_39_4872_0_7.html.
[8] Zhang, supra note 7.
[9] Cheng, supra note 4.