New Foreign Investment Law, China’s Biggest Reform & Opening-Up Initiatives

China’s Foreign Investment Law that came into effect from the 1st of January 2020 may have a positive impact for foreign investors. The new FIL is providing a more level playing field and giving enhanced investor protections. In the opinion of the expert China business lawyers, Chinese authorities have taken a streamlined approach to the supervision of foreign investment in the new FIL. The new law will further expand the scope of China’s reform and opening-up.

The investment Quota limitations of QFII and RQFII had been removed. Previously, China’s government always had strict rules on how foreign investors work in China’s capital market. The Implementation Regulations provide that government agencies shall not discriminate against foreign investors regarding required permits or licenses unless laws or regulations provide otherwise.

Key Changes in China’s new Foreign Investment Law-

The Combination of Three Laws

According to Article 42 of the Foreign Investment Law, the law will replace the three older laws beginning 1 January 2020. In other words, the Foreign Investment Law will apply to all wholly foreign-owned enterprises, Chinese-foreign equity joint ventures and Chinese-foreign contractual joint ventures.

Room for Equal Participation

Foreign companies are entitled to equal participation as their domestically-invested peers in the formulation and revision of national, industrial and local standards in accordance with the law. They can make standards-related recommendations and undertake such work as setting standards.

Changes in Corporate Governance

The FIL provides a 5-year grace period for FIEs whose corporate governance is inconsistent with the Company Law, Partnership Law or other business organization laws to come into compliance. JVs will also be able to retain some flexibility after the 5-year period.

Article 16 is amended

“The state shall ensure that foreign-invested enterprises participate in government procurement activities through fair competition in accordance with the law. The government shall, in accordance with the law, give equal treatment to products and services produced and provided by foreign-invested enterprises within the territory of China in government procurement. This means that government procurement includes both goods and services.

To appropriately deal with the FIL, foreign investors in China should:

Actively monitor developments in the as-yet incomplete new framework.

Strategize on how to comply with the FIL and leverage benefits under the FIL when undertaking a new investment.

Have a plan for adjusting the structures and constituent documents of your FIE subsidiaries.

Be ready to follow the new foreign investment reporting system under the FIL.

The intellectual property rights of foreign businesses are protected in a better way. Conditions for technology cooperation shall be determined by all investment parties upon negotiation under the principle of equity. No administrative department or its staff member shall force any transfer of technology by administrative means.

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The Promising Aspects of China’s New Foreign Investment Law

On March 15, 2019, China passed its new Foreign Investment Law at the dual ‘Two Sessions’ meeting of the Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC), China’s chief legislative body. The new law will come into force on January 1, 2020, replacing the Chinese-Foreign Equity Joint Ventures Law, the Foreign Capital Enterprises Law, and the Chinese-Foreign Contractual Joint Ventures Law.

An Overview of China’s New Foreign Investment Law

In the opinion of the market experts, the new foreign investment law promises equal government support to both foreign and domestic enterprises. The Chinese government will start to give equal importance when applying for license and the overseas companies will be able to take part in setting industry standards and in government procurement. However, the Chinese authorities can conduct a National Security Reviews where decisions are final and appeals will be accepted. Recent amendments have included adding a right to appeal non-security related decisions together with a complaints mechanism. The law’s prime objectives are to improve the openness, transparency and predictability of the investment environment for foreign investors.

Primary Features-

By general consensus, the most important features of the Foreign Investment Law include:
  1. Protection of the intellectual property rights of foreign investors
  2. Give foreign businesses a broader market access
  3. Prohibition of forced technology transfers
  4. National treatment of foreign-invested enterprises
  5. Equal treatment in government procurement
  6. A last-minute change imposing criminal penalties for sharing sensitive foreign company information

How the Investment Law Will Help Colling Down China-US Trade Tensions

Amidst the China-US trade war negotiations, the new investment law may work as a confidence-building process. The Chinese government believes that the new foreign investment law will become the most valuable legal measure for China’s continuous process of opening up to the outside world, following China’s entry into the World Trade Organizations in the year 2001. It is a well-conceptualized decision by the Chinese authorities to boost the investment and involvement of more foreign companies in the Chinese soil that will help the country to become a high-grade manufacturing power.

Final Thoughts

From a business perspective, the Foreign Investment Law embodies China’s resolve to continue to refine its laws to accommodate the ever-changing global economy. It is expected that the overseas companies doing business with China and in China will welcome the rules laid down in the new Foreign Investment Law for the promotion and protection of their investment in China.

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