Draft law unveils China's open stance of competitive neutrality

By Yang Fanxin
0 Comment(s)Print E-mail China.org.cn, March 10, 2019
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Two cargo ships loaded with containers are seen at Jingtang port area of Tangshan port, north China's Hebei province, Oct. 14, 2018. [Photo/Xinhua]

China's new foreign investment law has entered the countdown stage with the beginning of the second session of the 13th National People's Congress (NPC). 

Once the draft law is approved, it will produce significant changes in practice regarding the protection of foreign investors' intellectual property rights (IPR), prohibition of forced technology transfer by administrative means, national treatment of foreign-invested enterprises, and equal treatment in government procurement processes for products produced in China by foreign-invested enterprises. 

The draft foreign investment law, released for public review and comment late last December, is an innovation in the legal system on foreign investment replacing three existing laws (Chinese-Foreign Equity Joint Ventures Law, Wholly Foreign-owned Enterprises Law, and Chinese-Foreign Contractual Joint Ventures Law). 

The new one will serve as the basic law on foreign investment as China continues to open up in the new era. This is a fundamental change in China's foreign investment management system, helping to create a more open, transparent and predictable environment for investors and provide a stronger legal guarantee and further improve the investment environment.

It aims to further expand the scope of opening-up, actively promote foreign investment, protect the lawful rights and interests of foreign investment, make new ground in opening up on all fronts, and promote the healthy development of the socialist market economy. 

The draft law consists of six chapters and 41 articles, with clear provisions on the protection of foreign investors' rights regarding issues such as intellectual property rights protection and forced technology transfer that are of common concern to foreign investors.

Principal features of the draft law include:

Definition of "foreign investment": a positive action of China's opening-up

"Foreign investment" is defined as investment activity conducted by foreign natural persons, enterprises, and other organizations ("foreign investors") directly or indirectly in Chinese mainland, including new projects, establishment of foreign-invested enterprises and capital increases by foreign investors alone or jointly with other foreign investors in China; acquisition of shares, equity, shares of property or similar rights and interests through mergers and acquisitions; and foreign investment through other means as provided by laws, administrative regulations or the State Council (Article 2). 

This is a positive action in abolishing the statutes governing the existing three laws, as joint ventures have found it difficult to establish anywhere in corporate form. The new law also does not establish a minimum percentage of foreign ownership to qualify as foreign investment. 

It is very clear that investments from Hong Kong, Macao and Taiwan regions are distinctive in that they are not deemed to be foreign investment, and yet are not entirely equivalent to domestic capital; in practice, they are managed with reference to foreign investment requirements.

Implementation of "pre-establishment national treatment plus negative list with respect to foreign investment": a new market access opportunity

A new negative list, jointly issued by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) on June 28, 2018, means China will conduct a high-level investment liberalization and facilitation policy. 

The negative list is now a standalone document, under which there is no longer two-fold ("Restricted/Prohibited") categorization. Instead, the industry sectors listed are categorized according to the Industrial Classification for National Economic Activities (GB/T4754-2017). 

An aerial photo of the Lujiazui area in Pudong, Shanghai, on May 14, 2017. [Photo/Xinhua]

The negative list enlarges market access opportunities. It loosens or cancels certain restrictions on foreign investment in a number of sectors, including agriculture (removing equity requirements on selection of new crop varieties and production of seeds, except wheat and maize), mining (removing restrictions on the exploitation and exploration of graphite and special or rare coal), shipping vessels (removing restrictions on the design, manufacture and repair of ships), aviation and weapons manufacturing, infrastructure (removing restrictions on electricity grid construction and operations), transportation (removing restrictions on the foreign investment-to-equity ratio of passenger vehicles), and technological services (relaxing restrictions on foreign-invested companies providing internet access to the general public), etc. 

Moreover, China's predilection for establishing pilot policies and measures as well as special economic zones are to be elevated to statute level (Article 13).

Equal application of various investment promotion policies to foreign-invested enterprises: a new concept of competitive neutrality

Articles 9-19 are consistent with the concept of "competitive neutrality." Articles 9-11 state that government policies supporting enterprise development will apply equally to foreign-invested enterprises.

They will be consulted for comments and suggestions in the formulation of foreign-investment-related laws, regulations and rules; regulatory documents and judicial judgments related to foreign investment will be published in a timely manner; the government will develop a foreign investment service system to provide consultation and services for foreign investors and foreign-invested enterprises with respect to laws and regulations, policy measures and investment project information.

Articles 15-16 allow foreign-invested enterprises equal participation in standardization work, and government procurement gives equal treatment to products manufactured by foreign-invested enterprises in Chinese mainland, guaranteeing fair competition in accordance with law.

Article 17 is a positive development in raising funds through public offerings on Chinese domestic stock exchanges (e.g., A shares). It states that foreign-invested enterprises may raise capital by publicly issuing stocks, corporate bonds, and other securities in accordance with law as well as through other means in China. 

Provisions on strengthening protection of foreign investors' lawful rights and interests: firm adherence to rule by law

The new law calls for protection of the IPR of foreign investors and foreign-invested enterprises in accordance with law and encourages technological cooperation on a voluntary basis and conforming to commercial norms. The conditions for technology cooperation should be negotiated and agreed upon by the investment parties; and forced technology transfer through administrative measures is prohibited (Article 22). 

The State will generally not expropriate foreign investments. In the event of expropriation required in accordance with social and public interests, this will be undertaken in accordance with legal procedure, and fair and reasonable compensation will be paid (Article 20). 

An addition is that foreign investors' capital contributions, profits, capital gains, income from asset disposal, intellectual property right royalties in Chinese mainland, as well as the compensation or indemnification they receive therein in accordance with law, may be freely transferred into or out of China's mainland in RMB or foreign currency (Article 21). 

The law limits extra-legal restrictions on foreign investment (Article 23) and calls on local governments to abide by the commitments (Article 24). 

The new legislation also calls for improving the mechanisms for complaints and protection of the rights and interests of foreign-invested enterprises. The State will establish working mechanisms to achieve this, coordinating and improving the major policy measures for handling complaints and promptly handles the issues. Foreign investors and foreign-invested enterprises may establish and voluntarily join chambers of commerce or associations in accordance with law to safeguard their lawful rights and interests (Articles 25 and 26). 

This year marks the 70th anniversary of the founding of the People's Republic of China. The draft foreign investment law demonstrates China's continued willingness to open up its market to foreign investors and its firm will to strengthen the protection of foreign investors' lawful rights and interests.

The author is Associate Research Fellow with Chongyang Institute for Financial Studies, Renmin University of China. 

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