China approves new foreign investment law designed to level domestic playing field for overseas investors

China approves new foreign investment law designed to level domestic playing field for overseas investors

Attempt by Beijing to address key issues raised by US President Donald Trump as part of the US-China trade war including forced technology transfer and market access. Draft had received a lukewarm reception, but was approved by the vast majority of the National People’s Congress lawmakers on Friday in Beijing.

China approved its new foreign investment law on Friday, sending the message that Beijing wants to level the playing field for overseas investors and reassure the global community it remains an attractive investment destination.

The final draft of foreign investment law was approved by 2929 National People’s Congress lawmakers in the Great Hall of the People, with eight opposing the measures and eight abstaining.

The new law will come into effect on January 1, 2020.

Beijing rushed the legislation through the country’s largely ceremonial legislature in an effort to fend off complaints from the United States and Europe about unfair trade practices. The new law was first introduced as a draft in 2015, but its progress picked up markedly from the middle of last year to address issues identified by Washington as part of the US-China trade war.

The law attempts to address outstanding concerns from foreign investors, such as unfair treatment in terms of market access and government procurement, forced technology transfer to Chinese partners and the theft of commercial secrets from foreign businesses in China.

It was amended this week to make it clear that officials will be obliged to protect commercially confidential information they obtain from overseas businesses. The law will make it illegal for officials to misuse critical information or to provide it to local firms.

At the same time, the wording of the law, which will replace three foreign capital laws – the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on Foreign-Capital Enterprises – passed between 1979 and 1990 in the early years of China’s process of reform and opening up, is quite general, leaving many details to be addressed in other regulations and implementation procedures.

“We’ve reviewed the final draft of the [law] and are pleased with the last-minute addition of new language to further protect foreign company commercial information and trade secrets,” said Jake Parker, vice-president of China operations at the US-China Business Council.

“The addition of language imposing criminal penalties for sharing sensitive foreign company information adopts a much tougher deterrent against counterfeiting and [intellectual property] theft and will offer new avenues for the enforcement of [intellectual property] protection. Enforcement will be the key metric for evaluating success, but the business community has collectively advocated for years for the Chinese government to impose criminal penalties for [intellectual property] infringement, we need to recognise this positive progress to that end.

“We hope that delaying the implementation of the law to January 1, 2020 will offer additional opportunities for foreign companies to work with regulators to resolve our concerns around [joint venture] contracts, national security reviews, and participation in standard setting bodies.”

The law had received a lukewarm response from some quarters, with the American Chamber of Commerce in China complaining about a
lack of consultation and detail.

“We are concerned that such an important and potentially far-reaching piece of legislation will be enacted without extensive consultation and input from industry stakeholders,” it said earlier this week.

The law does not specifically mention investment from
Hong Kong, Taiwan and Macau,

but it will apply to and will not change the legal status of investments from Hong Kong, Macau and Taiwan – specifically, that they would still be considered “foreign” investments.

“It’s actually an improvement that there was a consultative period at all,” said Walker Wallace, managing partner of law firm O'Melveny's Shanghai office.

“I remember the days when it came out of a bureaucrat’s black box. Nobody had ever seen it before it came out, and everybody said it was totally impractical.”

He Weifang, an outspoken law professor at Peking University, questioned whether China’s existing government structure would be able to adequately enforce the new law.

“We need democratic supervision and justice to ensure enforcement if there are any regulations issued later. Enforcement really relies on structural changes and an independent judicial system. So, I cannot say that I will be more optimistic when more regulations come out,” he said.

“It would be even worse if we lack the implementation mechanism after we enact a law, because the outside world will not trust you no matter what law you enact in the future. We need checks and balances to ensure enforcement, otherwise, all well-intentioned enactment of laws will end in vain.”

Additional reporting by Finbarr Bermingham and Cissy Zhou es un sitio web oficial del Gobierno Argentino