China is set for major reforms on the 1st of January 2020, the current regulations the Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures, Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures and Law of the People’s Republic of China on Foreign Investment Enterprises (the “Three Laws on Foreign Investment”) being superseded by the Foreign Investment Law of the People’s Republic of China.
The Foreign Investment Law (FIL) will greatly simplify the legislative environment with only 42 articles over six chapters. However, it is likely that the implementing documents which are yet to be released will be extensive as the provisions in the FIL only provide the framework for the implementing rules.
The following are some of the most notable changes set to be introduced in the FIL in January 2020.
Pre-admission National Treatment and the Negative List
This is the most significant aspect of the FIL, ever since the inception of the free trade zones (FTZ) in China, there has been continuous progression and expansion of the policies across the FTZs in China, which now have finally culminated in national legislation. Article 4 and it’s implementing documents will supersede the “Special Administrative Measures for Foreign Investment Access (Negative List 2019) and the “Negative List of Market Access (2019)”.
Article 4 seems to be consistent with the previous policy direction, but we will have to wait for the implementing documents to be released to see if there are major changes made when compared to the Negative Lists of 2019. It’s inclusion in the legislation is a good indicator of the government’s intention to promote foreign investment by simplifying the prosses and clearly establishing which industries and sectors have additional investment requirements.
Article 4 also provides for the pre-admission “National Treatment”. National treatment ensures that foreign investors are treated no less favourably than national investors. The FIL ensures pre-admission national treatment, which means that the establishment of foreign-invested enterprises will no longer be subjected to the requirement for special approval, as long as the enterprise is not investing in a sector or business mentioned in the negative list.
Domestic financing for foreign-funded enterprises
The FIL will provide the mechanism for foreign-funded enterprises to list on the National Equities Exchange and Quotations (NEEQ), as well as to issue corporate bonds, convertible bonds and utilise non-financial enterprise debt financing instruments.
Repatriation of profits made easier
When contrasted with the current environment for the repatriation of profits, the FIL has clearly provided the groundwork for a relaxation of the rules which will be a boon for foreign enterprises, once again however we need to wait for the implementing rules to see the extent of the change, although it is a promising step and a signifier of the governments intentions.
Intellectual Property Rights
One of the issues commonly faced by foreign enterprises, was the forced transfer of intellectual property rights to their Chinese subsidiary or partner, under Article 22 in the FIL, this forced transfer is now expressly forbidden. Forced technology transfer was a major point of contention in the Sino-American trade war, and source of concern for foreign enterprises, which now appears will be addressed this coming January.
Preparation for existing firms
Companies which are established as WFOE's for the moment do not have to prepare for the new Foreign Investment Law.
However due to the corporate governance changes which are due to be implemented for Joint Ventures, the foreign partners should prepare to engage in negotiations with the Chinese Party.