By Thomas Mattei and Anna Huang*
IPO PANG XINGPU ATTORNEYS AT LAW
Approved at the Second Session of the 13th National People’s Congress on March 15th, 2019, the high-profiled Foreign Investment Law of the PRC (hereinafter referred to as “FIL”) unfolds a new chapter of the foreign direct investment in China. This new law, coming into force on January 1st, 2020, is aimed at promoting foreign investments in China with its relaxation of investment criteria in some sectors and standardization of management of foreign investment to streamline dispute resolution. The goal is simple: China wants to establish greater investor confidence and enhance investment stability to attract more foreign investments. According to figures released by the Ministry of Commerce last December, foreign direct investment (FDI) in the month fell 27.6 per cent year on year to US$13.6 billion. Stabilization of foreign investment is one of the top economic policy priorities of Beijing as FDA growth rate had been slowing for the past several months. Is this new FIL the answer?
Article 3 of the FIL states emphatically that its mission is to “create a stable, transparent, foreseeable, and level-playing market environment” for all investors. The idea is to implement procedural convenience and simplicity, and enhance ease of management and speed of approvals. Lofty goals for a FIL that at this point, lacks clarity and implementation regulations. This article is part of a series of blogs on this subject that will aim to examine the impact of the law, analyze the procedural differences to foreign investors and open a series of discussions focused on the development and implementation of this new law. In this premier post, we begin with an overall summary of the highlights of this new FIL.
The Law in General
The law takes a comprehensive measure to promote a better investment environment for foreign investors. The State will establish:
- A Service System (Article 11): a set of consultation and services with regards to laws and regulations, policies and procedures, and investment information will be provided to foreign investors in order to promoting a better understanding of all the rules by the foreign investors.
- A Complaint Mechanism (Article 26): in case of any infringement by “any administrative act of an administrative department or its staff member”, the foreign investors can resort to coordination, resolution, and administration review or litigation via a complaint mechanism of foreign-invested enterprises.
These two measures are new and intriguing, but how they will be implemented remains to be seen. Pursuant to Article 19, these services will be governed in accordance with three basic principles: convenience, efficiency and transparency. The purpose of these provisions is to provide foreign investors a more friendly and modern administration of this sector.
Foreign investors will also be entitled to take a part in the decision-making:
- Article 10 sets forth that when the government formulates laws and regulations in relation to foreign investment, it will take into account suggestions and comments from foreign investors. This is an interesting promise, which triggers questions on: how it will be done? through what mechanisms? to what degree the foreign investor’s suggestions would be accepted?
- According to Article 15, foreign investors can equally participate in formulating standards and the mandatory standards shall equally apply to the foreign-invested enterprises.
Is this an attempt on the part of China trying to appease or attract foreign investors by establishing the rules that apply to them? Will this attempt to strengthen investor confidence to invest in China succeed? Perhaps, but until the provisions of this new law are clarified and the procedural aspects are solidified, ultimate impact of the law on foreign investors remains to be seen.
The new law also intends to create an environment that puts foreign investors on equal footing with domestic investors, an often complaint of unfair bias against foreign investors. First, unless the investment relates to sectors on the negative list (as established by Beijing), foreign investors in all other sectors will be provided a pre-establishment national treatment and international treaty offering preferential treatment will prevail. This approach reflects a broader adherence to the WTO principles and to the general principles of international investment law. A significant and material upgrade. Second, Article 9 recognizes an equal application of “national policies on supporting the development of enterprises” to foreign investors. Preferential treatments would also be afforded to foreign investors who invest in specific industries and areas, such as high technology (artificial intelligence, robotics, to name a few), environmental technology and health care related areas. Moreover, in application for licenses to operate in China, foreign investors shall be treated the same as domestic investors in the sector. Another significant and material upgrade.
A third material upgrade is that now foreign investors are allowed to access the public for financing, which had been previously limited strictly to domestic companies. The ability to seek public offerings is essential to growth of enterprises and China recognizes that this access is a driving vehicle for growth in a healthy global economy. A testament to China’s will and vision to open up its market.
Finally, the new FIL attempts to address one of the most important topic to foreign investors: protection of intellectual property rights. Article 22 of this law emphasizes the State’s commitment to protect the IP rights of foreign investors and to ban forced technology transfers. Moreover, administrative bureaus and their worker are obliged to keep confidential of foreign investors’ information accessed by them in performing their official duties and will be liable for any breach or damage. How this will work remains to be seen. Perhaps when implementation regulations are issued, we will have greater guidance on this point.
One step forward, but not a giant leap
This new law, as sweeping as it may appear, continues to show fragments of protectionism. For example, Article 4 sets aside the dispute settlement system of the WTO laws by allowing unilateral retaliation against trade measures taken by a foreign State which are considered by China in its discretion to be detrimental to the interests of Chinese investors in that foreign State. A WTO “no no”. Under the WTO laws, even if a State takes trade-limitative measures against the foreign investors in its territory, the State of the aggrieved foreign investors should first afford an opportunity for consultation with the infringing State with a view to settling the dispute. The complaining State could also request the Dispute Settlement Body of WTO to establish a Panel to solve the conflict by adjudication in the case where consultation is no longer effective. Unilateral retaliation is never permissible under the WTO system.
Second, the provisions of this new law are too general that readers could hardly imagine how it will work in practice. Premier Li said, “the government will introduce a series of matching regulations and directives to protect the rights and interests of foreign investors, such as on working mechanisms for handling complaints filed by foreign-invested enterprises”, “these will be the important things for the government to do in the following weeks and months to see that this law will be truly operable.” We are expecting to see these substantive rules and regulations to be issued before the effective date of this law on January 20th, 2020. The devil is in the details. We remain anxious to read and blog about the regulations when they come out.
Next Discussion: Upcoming Organizational and Structural Reforms to Foreign Companies Under FIL
The new FIL abolished the “old big three” foreign investment laws which have been the mainstay of foreign investment regulation in China for the last decade (Law on Sino-Foreign Equity Joint Ventures, Law on Wholly Foreign-owned Enterprises, and Law on Sino-Foreign Cooperative Joint Ventures) as set forth in Article 42 of the FIL, the structures and organizations of the existing foreign companies will need to be modified and evolved over the next five years to stay in compliance with the Company Law — the new governing law. Next blog we will discuss the influences of this new law on the Equity Joint Ventures (“EJVs”). What differences will be brought to the EJVs by the FIL? What benefits could the EJVs derive from this law? What changes on its organization shall an EJV make? Should foreign EJV companies have anything to worry about?
*This blog was written with substantial contributions from Thomas Mattei, an intern at the Firm from the Université Paris-Sud (France) and Anna Huang, an attorney at the Firm and a returning scholar after receiving her LLM at the University of Oslo. IPO PANG XINGPU is a premier international law firm headquartered in Shanghai in the early 1990’s with primary emphasis on assisting foreign companies doing business in China. Contact : [email protected], attention, Managing Partner.
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