China’s new Foreign Investment Law, together with its implementation regulations issued by the State Council, came into force on January 1st, 2020, effecting far-reaching changes to the regulatory framework that has governed foreign investment in China for the past four decades. This law replaced the three Laws respectively governing Sino-Foreign Equity Joint Ventures (EJV), Sino-Foreign Cooperative Joint Ventures (CJV) and Wholly Foreign-owned Enterprises (WFOE). It marks an unprecedented shift to a new era for foreign investment in China. In the following comments, I will be briefly addressing three issues: the main changes in the new framework, the positive assessment and negative concerns about the new law and lastly, the adaption of foreign investors to this regime.

1. A Snapshot of the New Framework

The FIL, composed of 42 articles in six chapters, focuses on foreign investment promotion, protection and administration, and imposes legal liabilities on both foreign investors and Chinese regulators in the case of violation. This Law provides for greater promotion and protection of foreign investment as well as enhanced regulatory transparency. In addition to the Law and its implementation regulations, the Supreme People’s Court issued a short judicial interpretation regarding investment contracts which also came into effect on January 1, 2020. Furthermore, the framework for foreign investment include the Special Administrative Measures for Foreign Investment (also known as the "Negative List") and the Catalogue of Encouraged Industries for Foreign Investment ("Encouraged Industries Catalogue"). The latest versions took effect on July 30, 2019.

The most significant highlights of the FIL and related instruments are summarized here.

1. Broad scope of foreign investment

 “Foreign investment” is defined broadly, covering both direct and indirect foreign investment. In terms of investment forms, it includes greenfield investments via set-up of an FIE, and brownfield investment through M&A, and so-called “new investment projects” which can be subject to broad interpretation as well.

2. Pre-Establishment national treatment

One of the FIL’s key changes is national treatment, transformed from post-entry NT into pre-entry NT. Under the new Law, China implements a “pre-establishment national treatment coupled with negative list” system. This means that foreign investors are treated no less favorably than Chinese investors at their entrance stage, as long as the invested industry is not on the negative list. According to the Supreme Court judicial interpretation on the FIL, a court should not nullify a contract regarding a sector not on the negative list because of lack of approval or registration, but should nullify a contract regarding a sector on the negative list. That said, investment contracts regarding sectors on the negative list can still become effective if the parties take necessary corrective measures before courts adjudicate the case. If a contract involves a sector on the negative list, it can still be effective if such restriction is removed before a court issues a decision.

3. Primacy of national security

 The FIL requires a national security review (“NSR”) of any foreign investment that has or may have an impact on China’s national security. This is important because under the pre-establishment national treatment coupled with the negative list system, China is not approving foreign investment case by case as previously did. Therefore, under the new regime, national security review acts as the safe valve. But the FIL lacks details in this regard.

4. Unified corporate governance

 Replacing the three previous FIE Laws involves repealing the separate corporate law framework that applies only to FIEs. Under the new Law, a business entity’s corporate governance depends on its form, not on whether it is foreign- or Chinese-invested. Thus, as domestically invested companies, FIEs are only subject to China’s Company Law, Partnership Law and the other laws that regulate business organizations. This offers investors with more flexibility in structuring and operating FIEs. The Law provides a 5-year grace period for FIEs whose corporate governance needs to adapt.

5. Foreign investor protections

 The Law provides various measures for the encouragement and protection of foreign investment, including a formal entitlement of foreign investors to national treatment, an assurance that foreign investors can participate in the government procurement market, allowing a foreign investor to remit lawful income out of China, and a restriction on expropriation, etc. 

6. IP protection

 The Law contains a number of provisions to address concerns among foreign investors about IP protection in China, including a prohibition against the use of administrative measures to force technology transfers, a requirement that government authorities protect foreign investors’ business secrets, and enhanced remedies for IP infringement, etc. 

7. Integrated foreign investment reporting system

The FIL requires establishment of an integrated foreign investment reporting system for the submission of investment information to the Ministry of Commerce (MOFCOM) via the enterprise registration and the “enterprise credit information publicity” systems administered by the State Administration for Market Regulation (SAMR). To this end, the MOFCOM and SAMR jointly issued new regulations and lay the groundwork for the reporting system, which also took effect on January 1, 2020.

2. Positive assessment of the FIL and negative concerns thereof

First, a unified governing law for foreign investment could help reduce the previous confusion for foreign investors, easing the process of investing and doing business in China.

Second, the FIL offers a range of benefits for foreign investors in China, such as a shift to more permissive corporate governance rules, greater flexibility in funding FIEs, leveling the playing field, as well as enhanced protection of IP, etc.

Third, the new Law seeks to address common concerns from foreign businesses and governments, such as by explicitly prohibiting forced technology transfers, promising better intellectual property rights protection, and ensuring equal treatment for foreign firms in government procurement. The local government has to standardize their administrative actions on foreign investment and make sure their officials act lawfully. Accordingly, illegal behavior by officials – such as the misuse of authority, neglect of duty, self-seeking misconduct, and disclosure of trade secrets – may result in criminal charges.

However, the other side of the coin is the remaining concerns whether the legislation will truly benefit foreign investors looking to do business in China. This is largely because the new Law, and implementation regulations, SPC interpretation, and other related instruments, are still way too general in nature and leaves many gaps to be filled. The lack of details could cause loopholes that may bring difficulties and uncertainties for foreign business operating in China. For example, the FIL forbids forced technology transfer by “administrative means,” but does not define what “administrative means” are. There are many issues waiting for clarification, including the so‑called “variable interest entity” or “VIE structure” issues, national security review, and etc. The concerns over the vague wording and lingering uncertainties needed to addressed in order to provide more transparency in regulating foreign investment in China.

III. Adapting of foreign investors to the new system

The legislation and related instruments establishe a new legal framework for the management and promotion of foreign investment in China. Foreign investors and their subsidiaries in China need to familiarize themselves with this new regime in order to comply with and benefit from it. There is no ‘one size fits all’ prescription here. Rather, different foreign investors should have different “to do” lists depending on their individual situation. In general, investors should seriously assess the FIL’s impact as it develops further, keeping a close eye on the related legislation, regulations, local administrative approvals, and even “window guidance” of relevant bureaus in charge.

Much uncertainty still remain until more details are phased in and until amendments to other Chinese legislation are made. It is thus critical for foreign investors to actively monitor the latest developments and seek professional advice whenever needed. For example, a new piece of development is that just 5 days ago, MOFCOM promulgated the Working Procedure for Lodging Complaints by FIE (2020/08/31), which is a key step to safeguard the lawful rights and interests of FIEs and worthwhile for the foreign investors to pay attention. It will take effect on Oct. 1, 2020. In particular, investors should pay attention to other missing details, such as the specifics and procedures of national security review, as well as the attitudes towards VIE, etc.