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China: Foreign Investment Law Passed

(May 30, 2019) On March 15, 2019, China’s National People’s Congress (NPC) passed the Foreign Investment Law of the People’s Republic of China (PRC or China). Effective on January 1, 2020, the Law will replace the three primary laws regulating foreign-invested enterprises (FIEs) in China: the Law on Sino-Foreign Equity Joint Ventures, the Law on Wholly Foreign-Owned Enterprises, and the Law on Sino-Foreign Cooperative Joint Ventures (collectively the “Three FIE Laws”). (PRC Foreign Investment Law (adopted by the NPC on Mar. 15, 2019, effective Jan. 1, 2020), NPC website (in Chinese), English translation, Invest in China website; Ulrike Glueck & Angela Chen, Introduction to the Foreign Investment Law, LEXOLOGY (Mar. 19, 2019).)

The new Foreign Investment Law contains 42 articles under the following six chapters: general provisions, investment promotion, investment protection, investment management, legal liability, and supplementary provisions. (Id.) “Foreign investment” under the Law refers to investment activities directly or indirectly conducted by a foreign natural person, enterprise, or other organization (“foreign investor”). An FIE is “an enterprise that is incorporated under the Chinese laws within the territory of China and is wholly or partly invested by a foreign investor.” (Id. art. 2.)

The highlights of the Law are as follows:

  1. Replacement of the Three FIE Laws

The Three FIE Laws were first passed in the late 1970s and 1980s, when the PRC started the “open door policy” to allow foreign businesses to enter the country. (NPC, Explanation on the PRC Foreign Investment Law (Draft) (Mar. 8, 2019), NPC website (in Chinese).) When the Foreign Investment Law takes effect next year, the Three FIE Laws will be abolished at the same time. The organization forms, institutional frameworks, and standards of conduct of the FIEs will be subject to the provisions of the PRC Company Law, the PRC Partnership Law, and other relevant laws. (Foreign Investment Law art. 31.) Existing FIEs incorporated under the Three FIE Laws will have a grace period of five years, during which they may retain their original organizational form. (Id. art. 42.)

  1. Market Access of Foreign Investment

According to the Law, China implements a “pre-establishment national treatment” plus “negative list management” system for foreign investment. “Pre-establishment national treatment” refers to the treatment given to foreign investors and their investments in respect of market access, which cannot be less favorable than that given to their domestic investors and their investments. The “negative list” refers to the special administrative measures for the access of foreign investment in specific fields, which will be issued or approved for issue by the State Council. The Law provides that the state will give national treatment to foreign investment that falls out of the negative list. (Id. art. 4.)

The negative list system for market access of foreign investment was implemented before the Law was passed. The 2017 version of the Catalog for the Guidance of Foreign Investment Industries introduced a nationwide negative list system, which cut 30 “special administrative measures” that prohibited or restricted foreign investment—from 93 in the 2015 version of the Catalog to 63 in the 2017 version. (Laney Zhang, China: Catalog of Foreign Investment Industries Updated, GLOBAL LEGAL MONITOR (Aug. 7, 2017).) The currently effective 2018 list contains 48 special administrative measures. (National Development and Reform Commission (NDRC) & Ministry of Commerce, Special Management Measures for the Market Entry of Foreign Investment (Negative List) (2018 Version) (June 28, 2018, effective July 28, 2018), NDRC website (in Chinese).)

  1. Protection of Foreign Investment

The Foreign Investment Law affirms promotion and protection of foreign investment concerning investment safety and further market liberalization, and emphasizes the protection of intellectual property. (Glueck & Chen, supra.) The Law specifically prohibits the government and government officials from forcing transfer of technology, while technology cooperation on the basis of free will and business rules is encouraged by the state:

Article 22 The State shall protect the intellectual property rights of foreign investors and foreign-funded enterprises, and protect the legitimate rights and interests of holders of intellectual property rights and relevant right holders; in case of any infringement of intellectual property right, legal liability shall be investigated strictly . . . in accordance with the law.

During the process of foreign investment, the State shall encourage technology cooperation on the basis of free will and business rules. Conditions for technology cooperation shall be determined by all investment parties upon negotiation under the principle of equity. No administrative department or its staff member shall force any transfer of technology by administrative means.

The Law further provides that the government and government officials must keep confidential any trade secret of foreign investors or FIEs they become aware of during the performance of their duties, and are prohibited from divulging or illegally providing such secrets to others. (Id. art. 23.)

Lawyers practicing in China have commented that, although nearly all stipulations of the new Foreign Investment Law are an improvement compared to the existing Three FIE Laws, the provisions of the new Law are relatively general and vague. Implementation rules and other ancillary regulations are expected to be formulated subsequently, which will provide the decisive details and show whether the Law will indeed bring major improvements to foreign investors in China. (Glueck & Chen, supra.)