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Basic law for China's foreign investment -- an interpretation of the Foreign Investment Law (Draft for Comment)

Based on the nature and positioning of the foreign investment law as the basic law in the field of foreign investment, the legislators hope that it will meet the requirements of China's economic development and basic national conditions, and comply with the requirements of international common rules, and create more stable, transparent and predictable laws for foreign investment.


On 23 December 2018, the Foreign Investment Law of the People's Republic of China (Draft for Comment) (hereinafter referred to as the 2018 draft) has been deliberated at the seventh session of the Standing Committee of the 13th National People's Congress of the People's Republic of China. Based on the nature and positioning of the foreign investment law as the basic law in the field of foreign investment, the legislators hope that it will meet the requirements of China's economic development and basic national conditions, and comply with the requirements of international common rules, and create more stable, transparent and predictable laws for foreign investment.

 

1. Legislative background

(1) The formulation of the Foreign Investment Law is to further expand the opening-up to the outside world

Since the reform and opening-up, China has formed a foreign-invested legal system based on the Sino-foreign Joint Venture Enterprise Law, the Wholly Foreign-owned Enterprise Law, and the Sino-foreign Cooperative Enterprise Law (the three foreign investment laws). It provides effective legal guarantee for opening-up to the outside world and actively utilizing foreign capital and makes a major contribution to China’s reform and opening-up. However, as China's opening-up to the outside world continues to deepen and foreign capital is facing a new situation, the three foreign investments laws turned out be lagging to the need to build a new open economic system. Therefore, it is urgent to formulate a unified basic law for foreign investment based on past practices and experience, to provide a more powerful rule of law guarantee for further opening-up to the outside world and actively and effectively utilizing foreign capital under the new situation.

(2) The formulation of a foreign investment law is also a need to implement high-level decision-making

In recent years, China intends to implement a high-level trade and investment liberalization and facilitation policy, fully implement the management system of pre-establishment national treatment and negative list, greatly relax market access, and promote the formation of a comprehensive new opening pattern. Chinese President Xi Jinping said in his keynote speech at the opening ceremony of the first China Import Expo that China will speed up the legislation on foreign investment, improve the open and transparent foreign-related legal system, and comprehensively implement the management system of pre-establishment national treatment plus negative list. [1]In order to implement these decisions, a basic foreign investment law is urgently needed.

(3) The formulation of the Foreign Investment Law is also a response to international concerns

In the field of international trade and economics, there has always been an argument that China still needs improvement in terms of intellectual property protection and technology transfer. This is not necessarily a fact. However, under the background of Sino-US trade frictions, through such a law, defining relevant issues in the field of foreign investment and further optimizing the business environment is also a positive response to the international concerns of China's business environment.

 

2. Legislative content and highlights

Compared with the Foreign Investment Law of the People's Republic of China (Draft for Comment) (hereinafter referred to as the 2015 draft) on 19 January 2015 by the Ministry of Commerce with 11 chapters and 170 articles, the 2018 draft only consists of 6 chapters and 39 articles. In addition to the general provisions, legal liabilities and supplementary provisions, the other three chapters are investment promotion, investment protection and investment management.

(1)  Investment promotion

In order to actively promote foreign investment, the 2018 draft provides for high-level investment liberalization and facilitation policy in the country, establishes and improves foreign investment promotion mechanisms, and creates a stable, transparent and predictable investment environment. It is mainly stipulated in five aspects as follows:

No.

Related system

Specific articles

1

The management systems of pre-establishment national treatment and negative list

Article 4 The State shall implement the management systems of pre-establishment national treatment and negative list for foreign investment; save as otherwise provided under international treaties or agreements that the People's Republic of China concludes or joins in, such provisions shall prevail.

For the purpose of the preceding paragraph, the negative list refers to the special administrative measures for access of foreign investment in specific fields as stipulated by the State. The negative list will be issued by or upon approval by the State Council.

2

The equal application of all policies on the development of domestic enterprises

Article 9 Save as otherwise stipulated under laws and administrative regulations, the State shall support the equal application of all policies on the development of domestic enterprises to foreign-invested-invested enterprises.

Article 10 Opinions and suggestions of foreign-invested enterprises shall be listened to in regard to the formulation of laws, regulations and rules relating to foreign investment.

Normative documents and judicial judgments relating to foreign investment shall be published according to the law in due time.

Article 11 The State shall establish and perfect a foreign investment service system and provide foreign investors and foreign-invested enterprises with consultation and services in respect of laws and regulations, policies and measures, investment project information and so on.

3

The equal participation in standardization work and government procurement activities

Article 15 Foreign-invested enterprises shall equally participate in standardization work, and information disclosure and social supervision shall be reinforced for the formulation of standards.

The compulsory standards formulated by the State shall equally apply to foreign-invested enterprises.

Article 16 The State shall guarantee foreign-invested enterprises' fair participation in government procurement activities. Products produced by foreign-invested enterprises within the territory of China shall be equally treated under government procurement.

4

Financing in accordance with the law

Article 17 A foreign-invested enterprise may conduct financing by means of the public offering of shares, corporate bonds and other securities and so on.

5

Foreign investment promotion policies of local people's governments

Article 18 Local people's governments at all levels may formulate foreign investment promotion policies within the respective statutory authorities.

Article 19 People's governments at all levels and their relevant departments shall, under the principle of convenience, efficiency and transparency, further enhance foreign investment services.

Relevant competent departments shall prepare and publish foreign investment guidelines and provide foreign investors and foreign-invested enterprises with services and convenience.

(2)  Investment protection

Article 5 of the 2018 draft stipulates that the state protects the investment, earnings and other legitimate rights and interests of foreign investors in China according to law. Therefore the 2018 draft has refined the aspects of property rights protection, restrictions on the formulation of normative documents, supervision of government compliance, and complaints and rights protection mechanisms.

No.

Related system

Specific articles

1

Property protection

Article 20 The State shall not expropriate foreign investment; where the State expropriates foreign investment as per public benefit requirements in a special circumstance, statutory procedures shall be followed, and fair and reasonable compensation shall be paid.

Article 21 A foreign investor may, according to the law, freely transfer out its contributions, profits, capital gains, royalties of intellectual property rights, lawfully acquired compensation or indemnity and so on within the territory of China in Renminbi or a foreign currency.

Article 22 The State shall, according to the law, protect the intellectual property rights of foreign investors and foreign-invested enterprises, protect the legitimate rights and interests of holders of intellectual property rights and the relevant right holders, and encourage technology cooperation based on free will and business rules.

In the process of foreign investment, technology cooperation conditions shall be determined by all investment parties upon negotiation, and no administrative organ or functionary working therein shall force the transfer of technologies by administrative means.

2

Restriction on the formulation of normative documents

Article 23 In formulating normative documents concerning foreign investment, the people's governments at all levels and their relevant departments shall comply with laws and regulations, and shall not illegally impair the legitimate rights and interests or increase any obligation of a foreign-invested enterprise, illegally set any market access and withdrawal conditions, or illegally intervene or affect any normal production and operation activity of a foreign-invested enterprise.

3

Supervising Local people's governments to keep promise

Article 24 Local people's governments at all levels and their relevant departments shall strictly keep policy commitments lawfully made to foreign investors and foreign-invested enterprises and perform all contracts entered into according to the law.

If any policy commitment or contract needs to be changed due to national interests or public interests, legal authority and procedures shall be followed strictly, and the foreign investor or foreign-invested enterprise concerned shall be compensated for losses incurred thereby according to the law.

4

Complaint and rights protection mechanism

Article 25 The State shall establish a complaint mechanism for foreign-invested enterprises, coordinate the improvement of major policy measures for complaints from foreign-invested enterprises, and responsively solve problems encountered by foreign-invested enterprises.

Where a foreign-invested enterprise deems that the administrative behavior of an administrative organ or functionary working therein infringes its legitimate rights and interests, it may seek resolution thereof through the complaint mechanism for foreign-invested enterprises.

Article 26 A foreign investor or foreign-invested enterprise may legally establish and freely join in a chamber of commerce or association, conduct relevant activities according to laws, regulations and the articles of association thereof, and maintain the legitimate rights and interests thereof.

 

(3)  Investment management

According to the 2018 draft, the competent department for commerce and the competent department for investment under the State Council shall, as per the division of duties, push forward, protect and manage foreign investment; and, other relevant departments under the State Council shall, within the scope of their respective duties, take charge of the promotion, protection and management of foreign investment. The 2018 draft mainly regulates investment management from the following aspects:

No.

Related system

Specific articles

1

Implementation of the management system pre-establishment national treatment and negative list

Article 27 A foreign investor shall not invest in any field with investment forbidden by the negative list of access of foreign investment.

A foreign investor shall meet the investment conditions stipulated under the negative list for any field with investment restricted by the negative list of access of foreign investment.

Concerning fields not mentioned in the negative list of access of foreign investment, management shall be conducted under the principle of consistency of domestic and foreign investment.

2

The verification, record-filling, licenses formalities, registration, tax, accounting, foreign exchange and other matters

Article 28 The verification and record-filing of foreign investment projects shall be subject to relevant state provisions.

Article 29 With respect to industries and fields with licenses necessary to be obtained lawfully for investment by foreign investors, relevant licensing formalities shall be handled according to the law.

Save as otherwise stipulated under laws and administrative regulations, relevant competent departments shall review the licensing applications of foreign investors as per conditions and procedures the same as those for domestic investment.

Where licensing formalities need to be handled by several organizations of one competent department, one organization shall be appointed to uniformly accept the licensing application, and uniformly deliver the licensing decision; where licensing formalities need to be respectively handled by two or more competent departments, such competent departments shall optimize and integrate the handling processes, and facilitate the foreign investors in license applications by such means as unified acceptance, joint handling and information sharing.

Article 30 The registration, tax, accounting, foreign exchange and other matters of foreign-invested enterprises shall be subject to relevant laws, administrative regulations and relevant state provisions.

3

Information report system

Article 31 The State shall 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. A foreign investor or foreign-invested enterprise shall submit investment information to the competent department for commerce concerned through the enterprise registration system and the enterprise credit information publicity system; the investment information able to be obtained by interdepartmental information sharing shall not be required to be submitted again.

4

Safety review system

Article 33 The State shall establish a safety review system for foreign investment, under which the safety review shall be conducted for foreign investment influencing or probably influencing the state security.

A decision on safety review made according to the law shall be final.

 

3. Our observations

We can grasp the foreign investment system established by the 2018 draft from the partial and overall perspectives:

(1)  Institutional innovation

A. The definition of foreign investment

Different from the 2015 draft, the 2018 draft does not explicitly include the form of “controlling domestic enterprises or holding the rights of domestic enterprises through contracts, trusts, etc.”. Under the new law, it is still an issue of wide concern whether the VIE structure will be explicitly prohibited or whether the State Council will issue separate regulations. We will wait and see.

B. The equal participation in formulation of normative documents and standardization work

The 2018 draft clearly states that the opinions and suggestions of foreign-invested enterprises shall be listened to regarding the formulation of laws, regulations and rules relating to foreign investment and foreign-invested enterprises shall equally participate in standardization work, a reflection of China's move toward institutional openness.

C.   Complaint and rights protection mechanism

The 2018 draft clearly states that the State shall establish a complaint mechanism for foreign-invested enterprises, coordinate the improvement of major policy measures for complaints from foreign-invested enterprises, and responsively solve problems encountered by foreign-invested enterprises. Where a foreign-invested enterprise deems that the administrative behavior of an administrative organ or a functionary working therein infringes its legitimate rights and interests, it may seek resolution thereof through the complaint mechanism for foreign-invested enterprises.

(2)  General features

In general, the 2018 draft comprehensively reflects how the China's top decision-makers deploy the widened opening-up policy. Learning from the practical experience of China's foreign investment in the past 40 years of reform and opening-up, and reflecting the latest achievements in reform and innovation of foreign investment management, especially the achievements in China's free trade pilot zones in recent years. As a basic law in the field of foreign investment, the 2018 draft has the following characteristics:

First, more emphasis has been placed on the establishment of investment promotion and investment protection systems. Compared with the 2015 draft, the 2018 draft focuses more on investment promotion and investment protection when establishing a system for the promotion, protection and management of foreign capital. This can also be seen from the structural layout of the investment promotion-investment protection-investment management in the 2018 draft itself. It reflects China's legislative intention to expand opening-up and actively use foreign capital.

Second, more attention has been attached to the connection with relevant laws and administrative regulations. The 2018 draft establishes a corresponding system necessary for foreign investment management and pays more attention to the connection with relevant laws and administrative regulations. For instance, the 2018 draft stipulates that the approval and filing of foreign investment projects shall be carried out in accordance with relevant state regulations. The registration of foreign-invested enterprises and matters such as taxation, accounting, and foreign exchange shall be handled in accordance with relevant laws, administrative regulations, and relevant state regulations. Through these invoking clauses, the 2018 draft itself has been organically linked to other relevant laws and administrative regulations on the above matters.

Third,more emphasis has been placed to establishing a basic institutional framework for foreign investment. Compared with the 2015 draft, the 2018 draft is streamlined and simplified, rather than all-inclusive, but the main framework of foreign investment has been covered, accurately reflecting the positioning of foreign basic laws, which meets the current actual needs and also leaves room for further deepening reforms. For example, foreign investment information reporting, security review and other systems, the 2018 draft only provides a principled provision, as a legal basis for the introduction of supporting normative documents in the future.

In summary, we look forward to and pay attention to the introduction of a series of normative documents matching the 2018 draft, which clearly define terms such as “indirect” and “other ways” and provides scientific and reasonable specific operational specifications within the institutional framework specified in the 2018 draft.


[1] 新华网:http://www.xinhuanet.com/politics/leaders/2018-11/05/c_1123664692.htm, 2018年 11月5日


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