On March 15, 2019, the National People’s Congress of China (the “NPC”) approved the Foreign Investment Law of the People’s Republic of China (the “FIL”), which is set to become effective on January 1, 2020. The FIL introduces sweeping changes to China’s current legal regime governing foreign investments and, if properly implemented, holds the promise of ushering in a new era for foreign investments in China.
The FIL, when effective, will supersede three laws separately governing foreign investments, namely the Foreign Invested Enterprise Law (the “FIE Law”), the Sino-Foreign Equity Joint Venture Law (the “EJV Law”) and the Sino-Foreign Cooperative Joint Venture Law (the “CJV Law”, and together with the FIE Law and EJV Law, the “Existing Laws”). Under the current regime, which of the Existing Laws applies to a foreign investment depends entirely on the type of Chinese entity through which such investment is made (such entity being referred to as a foreign invested enterprise, or “FIE”). An FIE that is a wholly owned Chinese subsidiary of the foreign investor is subject to the FIE Law, whereas investments in Chinese joint venture entities are governed by either the EJV Law or the CJV Law. FIEs of one type typically have equity and governance structures that are different from those of other FIEs, as well as those of Chinese domestic companies. Furthermore, the current regime is marked by its disparate treatment of FIEs and Chinese domestic companies. For example, FIEs, especially joint ventures, are typically subject to governmental approval or filing requirements at every step of its life cycle and generally cannot be listed on a Chinese stock exchange. By unifying the currently fragmented regime, the FIL will simplify the structuring of foreign investments and also, for the first time in the context of a national law, provide for equal treatment as between FIEs and Chinese domestic companies.
A central theme under the FIL is the “national treatment” of FIEs, i.e., equal treatment between FIEs and Chinese domestic companies. There are two aspects of the national treatment. Article 4 provides for national treatment at the market entry stage for foreign investments outside of sectors listed on the “negative list”. This means that an FIE in a sector not listed on the “negative list” can be incorporated in the same manner as a Chinese domestic company. Furthermore, all FIEs, whether or not in sectors listed on the “negative list”, will have the same equity and governance structure as a Chinese domestic company, as provided under the Company Law of China (Article 31).
In addition, the FIL contains many provisions that include the word “fairly” or “equally”, which apparently seek to assure foreign investors that they will continue to be entitled to national treatment during the operational stage of the FIEs. For example:
- all national policies aiming at promoting and supporting enterprise development will apply equally to FIEs (Article 9);
- the FIEs will have the right to equally participate in the making of industrial and other applicable standards (Article 15);
- the FIEs will have the right to participate in governmental procurement through fair competition, and governmental procurement cannot discriminate against products or services of FIEs manufactured or provided within the territory of China (Article 16);
- FIEs may conduct financing through public offering of equity or debt securities, similar to domestic companies (Article 17); and
- where a permit is required to engage in certain activities, the permit granting agency should apply the same conditions and procedures applicable to domestic companies in reviewing and approving the permit applications of FIEs (except as otherwise required by law or regulation).
The FIL provides that a “negative list” will be promulgated or approved by the State Council. The “negative list” will set forth sectors or industries in which foreign investments are either prohibited or restricted (subject to satisfaction of certain conditions).
The concept of a “negative list” was already introduced in 2016 and the current version of the “negative list” was issued by the Ministry of Commerce and the National Development and Reform Commission in June 2018 and contains 48 items in the prohibited or restricted categories. Notable “prohibited” sectors include selection and production of genetically modified organisms, mining of certain rare earth minerals, sale of tobacco products, domestic postal and mail delivery services, internet content services, law firms, mandatory education institutions, news and publications, broadcasting services, and movie production and distribution companies. Notable “restricted” sectors include whole-car manufacturing (foreign investment not more than 50%, except with respect to special vehicles and new energy vehicles), construction and operation of utilities systems (Chinese control), airlines (Chinese control, no single foreign investor can exceed 25%), basic telecommunications (Chinese control), value-added telecommunications (foreign investment not more than 50%, except with respect to e-commerce) and securities firms and life insurance companies (foreign ownership no more than 51%). The current “negative list” also provides for the sunset of several restrictions in one to three years.
With the passage of the FIL, it remains to be seen whether the current “negative list” would be further trimmed down.
Intellectual Property Protection
Another highlight of the FIL is its clear pronouncement against forced technology transfer, another key area of concern for many foreign investors. Article 22 provides that technology cooperation in all foreign investments will be done on a voluntary basis and governed by terms fairly negotiated by the parties, and no governmental agencies or personnel may force the transfer of any technology by administrative means.
Other Rights and Protections
Other provisions in the FIL seeking to protect and promote foreign investments include the following:
- all contributions, profits, gains, proceeds from asset sales, royalties, compensation and other income of a foreign investor may be freely remitted into and out of China in Renminbi or foreign currencies (Article 21);
- governmental agencies at all levels may not impair FIEs’ lawful rights, increase their obligations, impose entry or exit conditions or interfere with their normal business operations, except on the basis of any law or regulation (Article 24);
- local governmental entities must fulfill policy promises to, and perform contracts with, foreign investors or FIEs made in accordance with law; changes to policy promises or contracts can only be made for national interests or public interests reasons and in compliance with lawful authority and procedures, and local governmental entities making such changes must compensate losses of foreign investors or FIEs resulting from such changes (Article 25); and
- a mechanism will be established to receive and resolve complaints filed by FIEs or their investors on a timely basis, including any complaint of any action by a governmental agency or its personnel that violates their rights (Article 26).
National Security Review and Information Reporting
The FIL provides that a foreign investment information reporting system will be established for FIEs and foreign investors to file or submit certain investment information to the competent authority (Article 34). The FIL does not specify what information is to be submitted. To allay concerns of leakage of business secrets by governmental employees, the FIL requires all governmental agencies and their employees to keep confidential, and not disclose to any other party, any business secrets obtained by such agency or employee in performing their responsibilities (Article 23).
The FIL also requires any foreign investment that could impact national security to be subject to national security review (Article 35), but does not provide any detail on the proposed national security review system. At present, national security review is subject to several regulations, such as Circular of the General Office of State Council on Establishing the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors, Provisions of the Ministry of Commerce on the Implementation of the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors, and Circular of the General Office of the State Council on Issuing the Tentative Measures for the National Security Review of Foreign Investment in Pilot Free Trade Zones. It remains to be seen whether the passage of the FIL would accelerate the adoption of a comprehensive new law regarding national security law for foreign investments.
The FIL provides a 5-year transition period for FIEs (including joint ventures) established before the effective date of the FIL (Article 42). The State Council will issue implementation measures for the transition period. Until those measures are issued, foreign investors in existing FIEs face uncertainty in a number of respects, including with respect to what rules and procedures will govern the interpretation, amendment and enforceability of existing joint venture contracts and organizational documents, and how to restructure governance arrangements to comply with the Company Law of China. Furthermore, the FIL presents a dilemma for foreign investors planning to establish FIEs between now and January 1, 2020 as to whether they should follow the Existing Laws or the Company Law in setting up the organization, equity and governance structure of their FIEs.
The FIL was approved to become law in under three months since the draft form was published for public comments on December 26, 2018. The timing, speed and focus of the FIL appear to have been influenced by recent geopolitical events, and were intended to demonstrate China’s intent to reduce barriers to foreign investment. However, as a result, the FIL largely consists of broad pronouncements of policy goals and general principles, and lacks the specificity and clear guidance many foreign investors had hoped for. It is clear that the FIL is intended to be a framework legislation and will be supplemented by detailed implementation rules to be promulgated in the future. While the FIL represents a welcome step toward greater access and protection for foreign investments in China, the implementation rules and their actual execution at various levels of government will truly determine whether the promise to a new era for foreign investments will become a reality.
 There are separate laws addressing foreign investments in alternative organizational forms, such as partnerships, but this article will not discuss these laws.
 There is a separate “negative list” for the free trade zones, which is relatively less restrictive.