27 March 2019

Signs of a trade war armistice? Reforms to China’s Foreign Investment Legal Regime

This article was written by Adrian Perkins and Sharon Yin.

Are we seeing signs of an armistice in the trade war between the U.S. and China?

This month China’s National People’s Congress passed the “Foreign Investment Law of the PRC” which establishes the framework for major reforms to its foreign investment laws aimed at improving the status and rights of foreign investors in the country.

Foreign investors into China have long observed that historically China has maintained a protectionist foreign investment regime that is less favourable than those of Western nations, that China fails to adequately protect investor intellectual property rights and that it forces foreign investors to effectively transfer technology and proprietary know-how as a condition to doing business in China. Importantly the changes to China’s foreign investment laws, to be effected on 1 January 2020, appear to bring China’s foreign investment laws into closer alignment with the foreign investment regimes of Western nations, including Australia.

While there is still plenty of detail to be unveiled in the regulations that will supplement the primary Foreign Investment Law of the PRC, the latest moves can be viewed positively by the international trade and investment community and politicians alike. In the context of a trade war, no doubt many will see these reforms as a genuine and positive effort by China to respond to appeals by foreign investors to liberalise its foreign investment regime. Others may view these reforms as an attempt to jump start foreign investment into China’s softening economy. Whatever the motivation, the new Foreign Investment Law of the PRC promises to usher in a new era for foreign investment in China. It seems to be good timing for Australian businesses, particularly those looking to take advantage of projects like the Greater Bay Area Project.

Key Changes

  1. Consolidation of 3 existing laws into one.
  2. In principle clarification that the new law covers a broader range of direct and indirect investment.
  3. A streamlined and more transparent approval process, including the:
    • enhancement of the “negative list” of industry sectors in which foreign investment is either prohibited or restricted; and
    • introduction of a security review system for projects that affect (or may affect) national security.
  4. Enhanced protection of intellectual property rights.
  5. Improved foreign investor rights compared with those of domestic businesses, for example, participation in government procurement activities, relaxation of fundraising restrictions, increased freedom to remit funds into or out of China, in Renminbi or any other currency.

Key Challenges

  1. The new law is a general framework only and the devil will be in the detail, as well as in the application and enforcement of the new investment regime. For example, specific regulations regarding the negative list (including how broad the concept of “indirect investment” is), the national security review and the record keeping, reporting and filing requirements for foreign invested enterprises are yet to be published.
  2. As a result of the new law, some concepts that exist under the current law, for example “Sino-foreign equity joint venture contracts” and “Sino-foreign contractual joint venture contracts”, will cease to exist and it is anticipated that all foreign invested enterprises will be subject to PRC “Company Law”. Companies with existing investments in China will need to review their business structures to see what legal and operational changes are required to accommodate the new law.
  3. Some analysts have expressed concerns regarding the possible operation and application of Article 40 of the new law which provides regulators with the ability to take similar measures against countries that enact “discriminatory” prohibitions against Chinese investment. It remains to be seen how this policy setting will play out on the global stage but from an Australian perspective, one cannot help but speculate that Australia’s blocking of Huawei’s involvement in the development of Australia’s 5G network and the recent approach of some Chinese ports to preference Indonesian coal over Australian coal for “environmental reasons” is an example of this policy setting at work. The use of non-tariff barriers like these continue to feature in the cut and thrust of global trade and geo-political strategy.

That said, overall, the reforms appear to reflect a commitment by the Chinese government to relaxing foreign investment policy and making it more attractive for foreign businesses to invest in China. We may see further favourable reforms, with China this month also easing restrictions on the capital management of transnational companies to facilitate further cross-border trade and investment.

For more information on the new Foreign Investment Law of the PRC, view this article written by our KWM PRC colleagues.

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