The Ministry of Commerce of China (MOFCOM) released a draft version of the Foreign Investment Law (FIL) for public comments on January 19 2015.
The Draft Law is intended to replace the three existing legal frameworks governing foreign investment. Theses existing laws include:
- Sino-Foreign Equity Joint Venture Law (EJV Law)
- Sino-Foreign Cooperative Joint Venture Law (CJV Law)
- Wholly Foreign Owned Enterprises Law (WFOE Law)
It will bring radical change to the 25 year old foreign investment regime and its purpose is to consolidate the laws and regulations that were previously inconsistent and contradictory to other existing laws.
When the law will eventually be disseminated remains unknown, as is the extent of the revisions and alterations that will be made after public comment. The PRC Law drafting is long and laborious which leads most to believe that its implementation is not imminent.
The draft adopts a negative list, reflecting that which was first implemented in 2013 in the Shanghai Free Trade Zone. Projects in permissible sectors are ‘reduced to mere filing procedures’ (Clifford Chance, 2015) but those in the restricted sectors would still require a market entry permit with prior government scrutiny. The FIL aims to streamline regulatory procedures applicable to foreign investment and, depending on what the negative list ultimately comprises of, should result in further opening of the Chinese market to foreign investment.
Foreign investment, under the new law, will no longer need pre-approval from the State Council. Instead, any information reporting regime will be implemented, in which a report should be submitted to the local department responsible for handling foreign investment within a 30-day period. This reporting system seeks to remove complicated procedures of current approval system.
Identity of the foreign investor has undergone significant changes, and newly defined as ‘only domestic enterprises established in China but controlled by a foreign investor will be deemed to be a ‘foreign-invested enterprise’. This will apply, not only within the PRC but to offshore transactions where foreign investors gain control of PRC domestic businesses.
Despite consolidation and simplification, even in its preliminary stages the FIL has created some confusion and doubt. Many questions remain: how certain articles are to be interpreted; how existing foreign investment regulation will align with the structure of this new law; how will the new regime be enforced and regulated?
One example being the acquisition of domestic firms by foreign investors, currently governed under the M&A Rules – a separate set of MOFCOM regulations. The Draft does not address how these rules will interact or if one will prevail over the other.
The Draft no longer defines industries that would trigger national security review. Instead circularly stating a review is necessary if ‘the proposed foreign investments would have or possibly have national security concerns.’
According to Morrison & Foerster’s report on the Draft, ‘following from the WTO accession, China has gradually moved toward “national treatment” for foreign investors while concurrently, developing means of keeping the gate shut to foreign investors when it has been deemed necessary to do so.’ Expecting a similar rationale for the Draft FIL, its purpose can be defined as opening the door wider to foreign investment, whilst simultaneously enforcing review or limitations to those considered unqualified or sensitive investments.
- Consolidation of the current foreign investment regime (EJV Law, CJV Law and WFOE Law) under one FIL law
- Adoption of negative list to reduce approvals in certain industries
- Identity of the foreign investor update – FIEs as domestic enterprises controlled by a foreign investor
- Extended restrictions on foreign investment to VIEs – no longer able to circumvent the restrictions imposed by Chinese law
- Implementation of an information gathering and reporting scheme to streamline approval system
Further information and resources:
- Morrison & Foerster, Client Alert – China’s Draft Foreign Investment Law: A Paradigm Shift in Regulation of Foreign Investment, Jan 2015
- Clifford Chance, Briefing Note – China proposes new Foreign Investment Law, Jan 2015
- O’Melveny & Myers LLP, Newsroom – China’s New Foreign Investment Law, Jan 2015
- Mayer Brown JSM, Legal Update – Draft Foreign Investment Law: Fundamental Changes to Foreign Investment Regime in China, Jan 2015
- Dezan Shira & Associates, China Briefing – China Releases Draft Foreign Investment Law, Signaling Major Overhaul for Foreign Investment, Jan 2015
- King & Wood Malleson, AmCham Shanghai Legal Committee Roundtable , Feb 2015
AmCham Shanghai Legal Committee: AmCham Shanghai Legal Committee Homepage