Today, the National People’s Congress (NPC) approved China’s new foreign investment law as expected. Promising to ensure an equal playing field for overseas investors, the legislation aims to address longstanding complaints among foreign companies about issues such as limited market access and forced technology transfers.
In particular, it is intended to keep global businesses optimistic about China as its economy slows and reassure them that the country remains a highly attractive destination for investment. The law is also believed to be a sign of good faith from Beijing to Washington as they continue trying to iron out a deal during their ongoing trade negotiations.
The new law will come into effect on January 1, 2020.
What is the background?
While the original version was first drafted by China’s Ministry of Commerce in 2015, the momentum behind the planned legislation appeared to pick up dramatically last year. It was likely fast-tracked by lawmakers as Beijing has looked to defuse economic tensions with Washington by demonstrating its willingness to address some of the main points of friction.
What will it replace?
Hailed by Xinhua News Agency as a unified “fundamental law,” the Foreign Investment Law will replace and streamline the current laws that regulate joint ventures (JVs) and wholly foreign-owned enterprises (WFOEs). These include the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures, and the Law on Foreign-Capital Enterprises which were passed between 1979 and 1990 during the early days of China’s reform and opening up.
What will it do?
The main thrust of the new law lies in its pledges to build a more open and transparent business environment and treat all companies equally. It vows to prohibit forced technology transfers as well as to strengthen intellectual property protection for foreign firms. Chinese authorities have not yet officially released the full text of the legislation.
How do foreign firms view the law?
By and large, foreign firms have welcomed the law – and its pledges to improve China’s business climate for them – as a positive step forward. That said, they’ve also expressed concerns about the broad and vague language used in the draft bill. The details on how the legislation will actually be put into practice and enforced will need to be fleshed out in future regulations and procedures.
What can businesses expect?
As always, the extent to which the new law improves China’s business environment for overseas players will depend upon how fully the promising commitments are delivered upon. However, with China looking to shore up its flagging economic growth, as well as re-stabilize relations with the U.S., foreign companies may well find that the new law has an impact that exceeds their expectations.