China Passes Landmark New Foreign Investment Law

Four decades ago, on July 1, 1979, the Chinese National People’s Congress (the “NPC”) passed the epoch-making “Sino-foreign Equity Joint Venture Law” (the “EJV Law”), inaugurating the period of “reform and opening” and launching China on an entirely new relationship with the outside world. Almost exactly forty years later, on March 15, 2019, the NPC passed the landmark “Foreign Investment Law of the People’s Republic of China” (the “FIL”), bringing the process of foreign investment legislation full circle and consolidating recent changes to China’s foreign investment regime.

To properly appreciate the significance of the Foreign Investment Law, one needs to understand its historical context. When the EJV Law was passed, China’s paramount leader Deng Xiaoping stated that it was “a statement of political intent, rather than a piece of legislation.” Indeed, with a mere 16 articles the EJV Law was a barebones piece of regulation at best, but it signified a radical departure from the closed-door policy that preceded it. In like manner, although representing less dramatic of a change, the new FIL can be seen as marking the consolidation of a new phase in China’s regulation of foreign investment. Similarly, it should be understood, like the EJV Law forty years ago, as embodying a statement of policy as much as if not more than being understood as a piece of detailed legislation.

Of greatest significance for foreign investors, the FIL formally adopts at the highest level of law the principle of “pre-establishment national treatment plus negative list” for all forms of foreign investment. In practical terms, this allows the vast majority of foreign investment projects to be established without prior government approval, providing instead for a process of establishment by simple online filing. This approach was first advocated in the early 2010s during the negotiations for the as-yet-to-be-agreed US-China Bilateral Investment Treaty. Subsequently, the principle was piloted in 2013 on a limited scope in the Shanghai Free Trade Zone and from late 2016 it was implemented throughout China on a national basis via simple amendments to the EJV Law and other related legislation. The importance of the FIL is that it now enshrines this principle of “pre-establishment national treatment” in China’s first-ever comprehensive law governing foreign investment promulgated by the country’s highest legislative organ.

In addition to setting out the overall regulatory approach governing foreign investment, the FIL includes several articles specifically addressing issues of intellectual property rights protection and forced technology transfer, in direct response to the demands of the Trump Administration trade negotiations (indeed, the original timetable for the passage of the FIL was accelerated and its passage was rushed through the Chinese legislative process in order to respond to the requirements of the trade negotiations). It should be noted, however, that while these provisions are positive legal developments, they are brief and general in nature, and will need to be supplemented by additional regulation and robust enforcement if they are to be more than symbolic provisions with limited practical effect. The actual challenges of foreign technology owners on the ground are of a more detailed and specific nature, and while the type of high-level statements found in the FIL are most welcome, they are but a first step towards addressing a far more complex reality in practice.

The adoption of the FIL also represents the close of the period of a separate legal regime for foreign invested enterprises (“FIEs”) in China, and promises increased national treatment for them (a process that began with the passage of the unified PRC Contract Law some twenty years ago in 1999). This shift will require the passage of a number of subsidiary rules and regulations from the key government regulators, in particular by the PRC Ministry of Commerce (MOFCOM). The three existing FIE laws (namely, the EJV Law, the Cooperative Joint Venture Law and the Wholly Foreign-owned Enterprise Law) will become void on January 1, 2020 and already established FIEs will be given a period of five years to bring their legal structures into conformity with the PRC Company Law.

Going forward, the focus of foreign investors will likely shift to the scope of the Negative List, which sets out those areas of the economy that are either restricted or prohibited to foreign investment, and to the implementing legislation needed to make the promises of the FIL into realities. How these areas will develop in the coming year will no doubt influence the continuing popularity of China as a destination for foreign investment.

Tarrant Mahony is an Associate Professor and Director of the Temple-Tsinghua Master of Laws Program in Beijing, and a Specially-invited Professor of Law at Tsinghua University, Temple’s partner school in China. He teaches U.S. Property Law, International Business Transactions, and Chinese Foreign Investment Law.

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