A Brief Introduction of the Foreign Investment Law of the People's Republic of China

In order to facilitate China's opening up policy and level the playing field for foreign business competing with domestic enterprises, the Foreign Investment Law of the People's Republic of China (hereinafter referred to as the "Foreign Investment Law" has been enacted on Jan. 1, 2020. After more than a year's implementation, despite the fact that the COVID-19 pandemic outbreak in 2020 has slowed down the global pace of cross-border investment, China is still bucking the trend. According to data from relevant departments of the Chinese government, China's utilization of foreign investment has increased by 4.5% in 2020, and the scale and global share of foreign investment has reached a record high, making China the world's largest recipient of foreign investment. Moreover, in the World Bank Doing Business Report, China's ranking jumped from 78th in 2018 to 31st in 2020, ranking among the top 10 economies with the fastest improvement in the world's business environment for two consecutive years. Before the year of 2020, there is no specific law regulating for foreign investment enterprises, therefore the Foreign Investment Law has played a significant role in promoting foreign investment. Below is the brief introduction of the Foreign Investment Law.

On one hand, the Foreign Investment Law provides more support to newly-established foreign enterprises in the following aspects:

I. Investment promotion

1. Foreign-invested enterprises (FIEs) may participate in government procurement activities through fair competition in accordance with the law, and the products and services produced and provided by FIEs in China are treated equally in government procurement according to the law. In the past, China's public procurement market was not fully open to FIEs due to the national security, state secrecy, cyber security etc., and FIEs are excluded from certain bids.

2. FIEs may, in accordance with the law, conduct financing through public issuance of stocks, corporate bonds, other securities and other means.

II. Investment Protection

1. Stronger protection of intellectual property rights of foreign investors and FIEs has been enforced, and Business secrets shall be kept confidential according to law.

2. To strengthen the continuity of government policies, local governments at all levels and their relevant departments are required to fulfill their policy commitments and contracts made to foreign investors and FIEs according to law, so as to protect the legitimate rights and interests of FIEs to the greatest extent. The foundation of the clause is that the local government has to be elected every four year and many FIEs are concerned that the new government will not admit the commitment of the last government and the clause in this law makes the concerns not necessary.

3. Protect and loose FIEs in terms of expropriation, capital contribution, profits, capital gains and income from asset disposal, intellectual property rights licensing fees, compensation or compensation obtained according to law, and remittance and export of liquidation income. There is a strict foreign exchange control in China, but the Foreign Investment Law gives FIEs a permissive environment.

III. Investment Management

1. Pre-establishment of national treatment: in the stage of investment access, foreign investors and their investments shall be treated no less favorably than domestic investors and their investments.

2. The negative list system:
  • The negative list system means that foreign investors are not allowed to invest in areas prohibited by the negative list.
  • Foreign investors shall make investments in the areas restricted by the negative list for foreign investment access, in accordance with the conditions stipulated in the negative list.

The areas outside the negative list will be managed in accordance with the principle of consistent domestic and foreign investment. That is to say, the establishment of new enterprises will be much more easier: the original examination and approval system will be changed to a registration system and the Foreign Investment Law, the Company Law and the Partnership Law will be the guidance. Meanwhile, various cumbersome provisions in the previous era of foreign investment are abolished. According to current practice, newly established FIEs (those not on the negative list) only need to submit relevant materials that meet the requirements to the industrial and commercial registration authorities.

On the other hand, wholly foreign-owned enterprise, sino-foreign joint ventures, sino-foreign cooperative enterprises in China are facing a big challenge in corporate governance under the foreign investment law and implementation regulations. For example, the organizational form, capital structure, governance structure (board of directors, function and composition of the board of supervisors, etc.) have to be fully in accordance with the law, within five years of transition. Therefore, during the transition period, the negotiation between the Chinese and foreign parties on the corporate and governance structure will become the key work that the above-mentioned companies have to face and need to implement as soon as possible.

In short, with the implementation of the Foreign Investment Law, foreign investment in China will further develop and bring more vitality to the Chinese economy in the future.

In short, with the implementation of the Foreign Investment Law, foreign investment in China will further develop and bring more vitality to the Chinese economy in the future.

View more details, please contact: Ms. Zhang Linlin via zhanglinlin@oelawfirm.com

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