UPDATE 4 (Jan. 2, 2019): For our latest thoughts on the next steps for the Foreign Investment Law, please see this post.
UPDATE 3 (Dec. 27, 2018): We have translated the draft in full on China Law Translate.
UPDATE 2 (Dec. 27, 2018): We revised our prediction about the legislative timetable for the Foreign Investment Law in light of recent state media reports. [superseded by UPDATE 4]
UPDATE 1 (Dec. 27, 2018): We have updated this post with a summary of the latest draft Foreign Investment Law.
The NPC Standing Committee (NPCSC) unexpectedly released the draft Foreign Investment Law [外商投资法] on Wednesday for public comments for an unexpectedly long period—61 days—until February 24, 2019.
The original Chinese PDF of the draft can be accessed here. Our English translation is available here. The accompanying explanation of the draft (in Chinese) can be read here.
To submit comments online, please refer to these instructions. Comments can also be mailed to the NPCSC Legislative Affairs Commission [全国人大常委会法制工作委员会] at the following address:
Chinese: 北京市西城区前门西大街1号 邮编：100805
English: No. 1 West Qianmen Avenue, Xicheng District, Beijing 100805
Please clearly write “外商投资法草案征求意见” on the envelope.
While we have yet to fully parse the draft, we did note that it is significantly shorter than the 2015 Ministry of Commerce’s draft—39 vs. 170 articles. The State Council has cut most of the detailed rules that were in the 2015 draft, possibly to give itself more leeway to craft implementing rules after the Law’s enactment, subject to laxer public consultation requirements. National security review, for instance, was governed by an entire chapter in the earlier draft, but is mentioned in only one article in this new draft. Further, based on a rough reading, it appears that even of the meager 39 articles, most are still aspirational, unenforceable policy statements.
Like the 2015 draft, however, the new draft would still repeal the three existing foreign investment laws (all adopted by the NPC) and is still envisioned as a “basic law for the field of foreign investment.” We thus still think it needs the full NPC’s approval. Given the length of the comments period—which will end just days before March 5, the putative opening date of the 2019 NPC session—we do not believe it will be adopted by the NPC that month. Rather, 2020 is more likely. Yet the release of a draft law for public comments while the NPCSC is still in session has been a sign of the law’s imminent passage. We will know whether the Foreign Investment Law will be on the agenda of the 2019 NPC session on Saturday.
UPDATE 2 (Dec. 27, 2018): In reports on Thursday, Xinhua and other state media quoted NPCSC member Li Fei [李飞] as recommending that the Foreign Investment Law be adopted by the 2019 NPC session next March. His recommendation is significant because he heads the NPC Constitution and Law Committee, which largely determines when a bill is ready for a vote (subject to the Council of Chairmen’s veto, of course). Plus, the release of the draft for public comments while the NPCSC is still in session is also a sign of the Law’s imminent passage. We will know whether the Foreign Investment Law will be on the agenda of the 2019 NPC session on Saturday. UPDATE 4 (Jan. 2, 2019): Please see this post for updates.
We plan to update this post with a brief summary of the draft soon. UPDATE 1 (Dec. 27, 2018): A summary of the draft follows.
Summary of Draft
As noted above, the draft includes six chapters with a total of 39 articles. It defines “foreign investors” [外国投资者] as any “natural person, enterprise, or other organization of a foreign country” and “foreign-invested enterprises” (FIEs) [外商投资企业] as any enterprise established under Chinese law that is wholly or partially invested by foreign investors (art. 2). The draft further defines “foreign investment” [外商投资] as any foreign investor’s direct or indirect investment in mainland China, including:
- Investing in new projects, establishing FIEs, or increasing investment, either individually or jointly with other investors;
- Obtaining stock shares, stock equity, property shares, other similar interests in Chinese domestic enterprises through mergers or acquisitions;
- Making investment in mainland China through other means provided by laws, administrative regulations, or State Council provisions.
As general principles, the draft reaffirms China’s “basis State policy of opening up,” vows to “build a stable, transparent, and predictable investment environment,” and establishes “pre-establishment national treatment plus a negative list” as the basic statutory scheme (arts. 3–4).
Chapter II sets out a list of policy measures for promoting foreign investment. Under this Chapter, China will treat foreign and domestic investment equally with respect to the application of business development policies (art. 9) (except otherwise provided by laws or regulations), the application of compulsory standards (art. 15), and government procurement (art. 16). In addition, the government will consult FIEs when formulating rules on foreign investment (art. 10); will promptly make public legal documents or judicial rulings related to foreign investment (id.); will provide counseling and services on a range of topics to foreign investors and FIEs (art. 11); and will publish foreign investment guidelines for their convenience (art. 19). FIEs are also allowed to raise capital by issuing securities or through other means (art. 17).
Chapter III lists a few protective measures for foreign investment. Article 20 provides that the government generally will not expropriate foreign investment, except under “special circumstances,” in which case it will provide “fair and reasonable compensation.” Article 22 prohibits forced technology transfer by administrative measures. Article 23 essentially bars local governments from interfering with national foreign investment laws and policies. Article 24 requires local governments to “strictly fulfill” their policy commitments to and contracts with foreign investors and FIEs. Were national or public interest to require changing the commitments or contractual terms, they must compensate foreign investors and FIEs for any loss incurred. And article 25 allows FIEs to file complaints against administrative agencies and their employees through an “FIE complaint working mechanism” [外商投资企业投诉工作机制].
Chapter IV includes a few vague rules regulating foreign investment. Foreign investors are barred from investing in prohibited industries on the negative list and must comply with the specified requirements when investing in restricted industries on that list (art. 27). When a license is required to enter a certain industry, they must apply for one, and the government must treat the application the same as one by a domestic enterprise, except where laws or regulations provide otherwise (art. 29). Article 31 requires foreign investors or FIEs to file information reports, whose content and scope must be “really necessary and strictly controlled.” Article 32 requires national security review of foreign investment that “affects or may affect national security” and provides that national security review decisions are final (presumably not subject to administrative reconsideration or judicial review.)
Chapter V governs legal responsibilities. If a foreign investor invests in a prohibited industry, it will be ordered to cease investment activities, restore the status quo ante by, for instance, disposing of its stock shares or assets, and forfeit any illegal proceeds. And if a foreign investor investing in a restricted industry violates the conditions specified by the negative list, it will be ordered to make corrections to satisfy the conditions. If it does not comply, then it will be deemed to have invested in a prohibited industry, subject to the applicable penalties. Lastly, any violation of laws or regulations by a foreign investor or an FIE will be subject to joint punishment by the relevant government agencies under China’s rapidly expanding social credit scheme.
The draft authorizes China to take reciprocal measures against countries that discriminate against Chinese investment (art. 37). It also makes clear that foreign investment in financial industries or financial markets is subject to other applicable laws or regulations (art. 38). Finally, as mentioned before, upon taking effect the Foreign Investment Law will repeal China’s three current foreign investment laws: the Wholly Foreign-Owned Enterprises Law [外资企业法], the Chinese-Foreign Equity Joint Ventures Law [中外合资经营企业法], and the Chinese-Foreign Contractual Joint Ventures Law [中外合作经营企业法]. FIEs will then have five years to transform their structures in accordance with laws governing corporate forms including the Company Law [公司法] (art. 39).
If you like this Blog, please consider subscribing to our blog posts, following us on Twitter, or liking us on Facebook—and making a donation!
Comments & Pingbacks