Second Review on Chinese Draft Foreign Investment Law

Introduction

The Draft Foreign Investment Law has been submitted to the National People's Congress Standing Committee of China (NPCSC) as it began their bimonthly session last year. The full text has been published on the website of National People’s Congress on December 26, 2018 and it will be open for public comments until February 24, 2019. The draft has gone through its second review on January 29, 2019.

It is China's first unified law aimed at regulating foreign investment. Once adopted, the law will become the fundamental law for foreign investment in China, and replace three existing ones that regulate joint ventures, cooperative enterprises and wholly foreign-owned enterprises.

This article will elaborate on several highlights of the new draft.

Re-definition of “Foreign Investment”

Compared to the 2015 draft, the new draft makes some changes and appears more concise by significantly shortening the articles from 170 to 39. Article 2 defines “foreign investors” as any “natural person, enterprise, or other organization of a foreign country” and “foreign-invested enterprises” as any enterprise established under Chinese law that is wholly or partially invested by foreign investors. The draft further defines “foreign investment” as any foreign investor’s direct or indirect investment in mainland China, including:

• Investing in new projects, establishing Foreign investment entities (FIEs), or increasing investment, either individually or jointly with other investors;
• Obtaining stock shares, stock equity, property shares, and other similar interests in Chinese domestic enterprises through mergers or acquisitions;
• Making investment in mainland China through other means provided by laws, administrative regulations, or State Council provisions.

It is noteworthy that the new draft does not reflect the issue of variable interest entities (VIE) by not adopting the investment model of “controlling domestic enterprises or hold equities in domestic enterprises by contracts, trust or other ways” and the “actual control by foreign investors” provided in 2015 draft. 

National Treatment and Negative List Principle

The draft reaffirms China’s pre-establishement national treatment and negative list principle for foreign investment, and sets out several regulating measures for foreign investment access. For example, Article 27 provides that foreign investors are barred from investing in prohibited industries on the negative list and must comply with the specified requirements when investing in restricted industries on that list. Furthermore, Article 29 states that when a license is required to enter a certain industry, they must apply for one, and the government must treat the application the same as one by a domestic enterprise, except where laws or regulations provide otherwise. 

The second review further clarifies the pre-establishment national treatment and negative list principle, and gives more specific explanations on its definition.

Prohibition of Forced Technology Transfer

The new draft underlines protection of intellectual property rights of foreign investors and foreign companies. It also encourages voluntary technological cooperation complying with business rules. 

According to Article 22, the conditions of technological cooperation concerning foreign investment should be decided by all parties of investment through negotiation, while government departments and officials cannot use administrative means for forced technology transfers. That compares with a general statement in Article 116 of 2015 draft that foreign firms' intellectual property rights would be protected. 

Anti-trust Review

Updated on the first draft, Article 32 the second review of the draft adds stipulation of anti-trust review, where a foreign investor acquires a domestic enterprise in China or participates in the concentration of business operators by other means, anti-trust review of foreign investment should be conducted in accordance with China Anti-trust Law. 

Information Report Rules

The draft provides that China establish a foreign investment information report system, with the contents and scope of information report to be determined under the principle of necessity and strict control. Foreign investors or foreign-funded enterprises are required to submit investment information to the competent department through the enterprise registration system and the enterprise credit information publicity system.

The second review adds penalty provision to information report rules where a penalty ranging from RMB100,000 to RMB500,000 shall be laid in case of breach.

Conclusion

Before being submitted for formal approval, the law will go through several readings which could take another year or more in China. It was also suggested that the foreign investment law be adopted by the 2019 NPC session in March. However, the release of the draft for public comments while the NPCSC is still in session and the closely-following second review send a signal of the law’s imminent passage.