Night view of Shanghai [Pixabay].

▲ Night view of Shanghai [Pixabay].

COMMENT / Jimena Puga

China's new Foreign Investment Law, which came into force on 1 January 2020, aims to accelerate the country's economic policy reforms to open up the domestic market and remove obstacles and contradictions of the previous law, goal as its main objective. As stated by the President of the People's Republic statement , the new rule aims to build a market based on stability, transparency, predictability and fair skill for foreign investors. Moreover, the Chinese authorities claim that this new law represents a fundamental part of the state's policy to open up to the world and attract more foreign direct investment.

The draft of the rule, drafted in 2015, created high expectations among Chinese reformers and foreign investors for a change in the country's foreign investment policy regime. And its publication in 2019, the year at the end of which the US and PRC presidents agreed to a hiatus in the trade war in which they are both engaged, signalled a breakthrough in this change.

However, the reality is different. Beijing's stance on foreign investment remains significantly different compared to the conception of investment in the international arena, but parts of the reformist sector of society know that the government cannot afford to miss the opportunity for improvement after the gradual slowdown of domestic investment in the Chinese market over the last decade.

On the contrary, and taking into account the image that the Middle Kingdom has sought to project to the world since the opening of the regime, it might be thought that President Xi Jinping and the leaders of the Communist Party would have seized the opportunity to give a facelift to a new policy that, in comparison with the labyrinthine and previous law, would be systematic and perceived in a more friendly way by investor countries, as a means to revive the declining rates of economic progress. The Asian power's new approach to the free market is therefore a smokescreen based on the establishment of protocols that vaguely define the limits of the rights enjoyed by foreign investors.

As a complement to the content of the foreign investment law, the regulation highlights its promotion and protection and details the necessary measures to ensure its effective implementation. It promotes investment by protecting the rights and interests of investors, standardising the administration of foreign investment, improving the environment for business establishments, as well as promoting the advancement of market opening with a broader scope.

Specifically, the precept stipulates that foreign-invested enterprises shall enjoy the same favourable policies as domestic companies. In addition, it details measures to protect business confidentiality and improve the mechanism for presentation of suggestions from foreign firms to the authorities.

It also sets out and clarifies the implementation of a negative listing mechanism for foreign investment access and details the registration and notification system for this subject of investments. Finally, it also regulates the investment policies for companies established in Hong Kong, Macao and Taiwan, and the legal responsibilities for violations of these regulations.

From a strictly legal point of view, article 2 of the precept defines the concept of foreign investment as "the activity of investing directly or indirectly carried out by foreign natural persons, companies or other organisations", and also contemplates four circumstances that are considered part of this investment subject :

  • Who establishes a business in the territory of China either alone or with another investor

  • Whoever acquires participations, shares... or other rights and interests of a business in the territory of China

  • Who invests in any new project in China, either alone or with another investor

  • Whoever invests in any other manner stipulated by law, administrative regulations or provisions of the State committee

The term "business foreign investment" refers to a business incorporated in Chinese territory under Chinese law and with all or part of its investment financed from a foreign investor.

However, as mentioned above, despite the important innovations of this law, many questions remain unanswered. For example, it does not specify what indirect investment is. Nor does it specify the scope of "foreign natural person": what about Chinese who acquire another nationality, and what about foreigners who acquire Chinese citizenship? Moreover, the legislator also fails to clarify whether investment from Hong Kong, Macao or Taiwan will be considered foreign investment.

Articles 4 and 28 of the new law state that China will adopt the management system of pre-establishment of national treatment (a principle that guarantees foreign investors and their investments access to markets without disadvantages, and thus on the same terms as domestic investors). And the Negative List system for foreign investment, which consists of special administrative measures for foreign investment access to certain fields. In other words, the government will treat all foreign investments outside the Negative List as domestic.

This Negative List system was first tested in the Shanghai SEZ and expanded across the country in 2018. Both article 4 and 28 clarify that the new Negative List will be promulgated prior to agreement of the committee of State. This means that neither ministers nor local governments will be able to place restrictions on foreign investment. What's missing? If investors want access to the sectors restricted under the Negative List, they must receive authorisation from the Ministry of Commerce, a procedure that the legislator does not include in rules and regulations.

On the other hand, Articles 34 and 37 of the new law establish the system of communication on the establishment of new investments for management and their organisation.

From agreement with these points, foreign investors are obliged to communicate all relevant information to the trading department regulated by the business Registration System or the business Credit Information System advertising . Penalties for non-compliance are also set out in these articles. But once again, in this field there is a lack of requirements as to how and what content is required for the communication of information to the department trading system.

This new turn in economic policy translates, once again, into a strategy by which Beijing aims to project itself on the international stage as a powerful and innovative economic power, trying to hide the slowdown in its domestic market and the damage suffered from the trade war against Washington. However, given the loopholes analysed in the aforementioned articles and their vague and ambiguous wording, foreign companies will have to wait to determine what this reform actually entails after its implementation at internship.

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