In January 2020 the Foreign Investment Law of the People’s Republic of China will come into force. The three laws, Chinese-Foreign Equity Joint Ventures Law, Wholly Foreign-Owned Enterprise Law and the Chinese-Foreign Contractual Joint Ventures Law, that have regulated foreign investments in China up to now, will then be abolished.
The sudden adoption of a shortened version of the Chinese Investment Law, which has been discussed since 2015, leaves the impression that this is a hasty reaction to the trade war between US and China. The new law contains some political statements aiming towards a more open and transparent market, but as so often the Chinese government keeps loopholes for rowing back.
So what is this new streamlined foreign investment framework all about? At first glance, the law seems to emphasize an equal treatment of foreign and domestic investors and therefore further opening and more transparency of the Chinese market for foreign companies.
This is reflected by a shortened negative list of industries restricted or prohibited for foreign investment, which is for the first time incorporated into the law, and a replacement of the prior system of approvals for investment by a registration system. However, these regulations are not really new, but have already evolved during the last few years. It is also worth noticing that the opening of some branches for foreign companies, like e-commerce, comes at a time where it will be very hard for foreign companies to compete with the domestic companies, which had time to establish a very firm standing on the Chinese market without having to deal with competitors.
What will probably have the biggest impact on foreign enterprises in the short run is that after the abolition of the EJV Law, WFOE Law and the CJV Law they will have to follow the corporate governance rules according to the Chinese Company Law. This means the board of directors will no longer be the highest decision making authority, but the shareholders. As Joint Venture contracts will have to be changed accordingly, extensive negotiations with the Chinese partner can probably not be avoided.
Further regulations are supposed to encourage foreign investment, e. g. by allowing foreign companies to participate in public procurement or standards-making. It remains to be seen, if these promising but very abstract regulations will be followed by acts, as in further specific implementation rules, which will be necessary for companies to actually benefit from the new law. Furthermore, it will be interesting to see, if China’s broad definition of foreign investment will include investment made by foreigners in restricted areas via Variable Interest Entities (VIE).