The New Foreign Investment Law in China
The New Foreign Investment Law in China
On March 15th of 2019, the “Foreign Investment Law of People’s Republic of China” (hereafter: foreign investment law) was adopted at the 2nd Session of the 13th National People’s Congress. The new law will come into force on January 1st, 2020. Meanwhile, the “Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures”, the “Law of the People’s Republic of China on Wholly Foreign-owned Enterprises”, and the “Law of the People’s Republic of China on Sino-Foreign Contractual Joint Ventures” will all be repealed simultaneously. As the new law that regulates what is allowed in foreign capital investments in China, the new foreign investment law attracts worldwide attention.
Foreign investment law in China
Foreign investment has always been one of the major powers to give momentum to the Chinese economic and social development since the opening-up of China. By the end of 2018 a total of 960,000 foreign-invested enterprises have been established in China. These companies have a cumulative foreign direct investment of more than two trillion US dollars. In 2018 alone, 60,533 foreign-invested entities were established, a year-on-year increase of 69.8%. The combined import and export volume of foreign-funded enterprises is close to 50% of the total import and export volume of China. Furthermore, the industrial output value accounts for almost 25% of the national total.
The Chinese foreign investment law incorporates many strategically valuable best practices from around the country into the legal system. Local government experience is copied, promoted and used as input for national laws, which than form national directions and guidelines. The foreign investment law has three major points worth closer attention. These are the equal treatment of domestic and foreign enterprises, the safeguarding of the rights of foreign investors, and the better protection of intellectual property (IP).
Equal treatment of foreign and domestic companies
First of all, foreign-invested entities will receive equal treatment according to the new foreign investment law in China. The Chinese government will implement a pre-entry national treatment for foreign companies and investors, plus a new negative list management system. Pre-entry national treatment means that foreign investors and their investments are not treated differently than domestic investors and their investments, before they have established themselves in China. With the pre-entry national treatment, the registration process of foreign entities will be further simplified.
Furthermore, the new negative list system differs from the old system, because now restrictions and special regulations for the ‘restricted’ industries apply to domestic and foreign companies equally. For more information on the negative list, please click here.
Protection of foreign investors rights.
Secondly, the foreign investment law emphasizes investment promotion and better investment protection. The foreign investment law has two special chapters for institutional regulation. For example, Article 16 stipulates that the state guarantees that foreign-invested enterprises participate in government procurement activities through fair competition in accordance with the law. In this regard, it will provide clear guidance for the government and institutions to carry out foreign investment work from a legal perspective. Furthermore, it provides legal protection for foreign investors and enterprises.
Better IP protection.
Finally, the new foreign investment law incorporates the IP issues that have plagued China for years. Article 22 of the law states that the state protects the IP rights of foreign investors and enterprises, protects the legitimate rights and interests of IP rights holders, and pursues legal liability for IP rights infringements in accordance with the law.
This article reflects the importance that China attaches to the protection of IP rights in recent years. This includes not only the protection of foreign rights but also the promotion of the free flow of knowledge, technology, and other factors. The law also aims to improve the complaints management systems for foreign enterprises, and wants to clarify the communication channels between the government and foreign businesses. Thus, making it an effective platform for safeguarding the legitimate rights and interests of foreign enterprises. The Chinese government encourages voluntary cooperation in the process of foreign investments. The conditions for cooperation are determined by negotiation between the parties in accordance with the principle of fairness. Furthermore, Administrative agencies shall not use their authority to force the transfer of technology.
China continues to open up to foreign investors. In 2018, several industrial and financial enterprises established themselves in China. Furthermore, many already established foreign enterprises, operating e.g. in the automobile and financial industries, increased their ownership ratio to over 50%. The new foreign investment law in China causes more companies in the financial and automotive industries to increase their ratio of shares to over 50% in 2021 and 2022. Before July 2019, China will revise the negative lists for industry access in China. This to further encourage foreign investment in multiple industries. If you are interested to know more about doing business in China, please feel free to contact us.