China Adopts New Foreign Investment Law

April 2019

China's national legislature, the National People's Congress, passed the Foreign Investment Law (“the law”) at the closing meeting of its annual session on 15 March 2019. The law aims to improve the transparency of foreign investment policies and ensure domestic and foreign enterprises are subject to a unified set of rules and compete on a level playing field, according to an explanatory document. The law replaces three existing laws on Chinese-foreign equity joint ventures, wholly foreign-owned enterprises and Chinese-foreign contractual joint ventures, which have been effective for 40 years. The law will become effective on 1 January 2020. The following are the highlights of the law:

Admission administration system of national treatment plus a negative list

The law stipulates that the treatment given to foreign investors and their investments at the stage of investment admission shall not be less than that given to domestic investors and their investments and the state shall grant national treatment to foreign investment other than the negative list. The negative list will simplify the approval process of foreign investment in off-list areas and create an open, fair, transparent and predictable business environment for them.

Fair and equal treatment of domestic and foreign enterprises

Foreign-invested enterprises (“FIE”) will equally enjoy government policies supporting enterprise development, and be able to participate in standard-setting on an equal footing and in government procurement through fair competition, according to the law.

Protection of the intellectual property rights

The state shall protect the intellectual property rights of foreign investors and foreign-invested enterprises, the law stipulates. Technical cooperation based on voluntary principles and commercial rules is encouraged and no administrative offices and their staff shall use administrative means to force the transfer of technology.

Establishing and perfecting foreign investment service system

The law provides that the State shall establish and improve the service system for foreign investment, and provide consultation and services on laws, regulations, policies and measures, and information on investment projects for foreign investors and foreign investment enterprises. This will effectively promote the transformation of government functions, establish communication mechanism between government and FIEs, and make the government more proactive in providing more services and support to FIEs.

Establishment of foreign investment information reporting system

The State shall establish an information reporting system for foreign investment. Foreign investors or FIEs shall submit investment information to the competent commercial administration departments through the enterprise registration system and the enterprise credit information publicity system. Failure to do so will be subject to correction within a time limit and even a penalty between 100k to 500k RMB.

By the end of 2018, about 960,000 foreign-invested enterprises had been set up in China, with the accumulated foreign direct investment exceeding 2.1 trillion U.S. dollars. Foreign direct investment into China has ranked first among developing countries for 27 consecutive years, according to the United Nations Conference on Trade and Development (UNCTAD). The new law is expected to boost investment liberalization and confidence of foreign investors. As usual, a set of detailed implementation rules are expected to be released in the near future.