China’s Foreign Investment Law and its supplementary regulation took effect on Jan 1, marking an official shift in the country’s supervision of foreign investment from the old model of case-by-case approval to negative list management.
Foreign investment supervision enters stable and mature period
The introduction and utilization of foreign capital is an important part of China’s basic national policy of opening-up and the opening economic system. It is also one of the country’s significant achievements in reform and opening-up for more than 40 years. China’s success in attracting and utilizing foreign investment is the result of many factors. For instance, the previous management and legal system related to foreign investment played a significant role.
However, shortcomings of the old foreign capital regulatory models have become increasingly prominent; and, as the international environment changes, while the Chinese economy thrives and the country’s economic system reform deepens.
Therefore, in recent years, China has been gradually simplifying foreign investment approval procedures and exploring ways to deepen the reform of the foreign investment management system, in order to adapt to the current economic situation where average foreign direct investment is continuously growing and channels are becoming increasingly diversified.
The Foreign Investment Law and its supporting measures summarize the practical experience of foreign investment utilization for more than 40 years since the reform and opening-up policy was implemented. They adapt to the new situation, meet the new requirements, and make unified regulation on the access, promotion, protection and management of foreign investment. They help build the basic framework of the new legal system for foreign investment, and provide a more stable and mature legal regulatory environment.
Legal protection for continuous promotion of higher-level opening up
The Foreign Investment Law establishes the pre-establishment national treatment and negative list management system, which is a fundamental change in China’s foreign investment management system. It will help further enhance the transparency and predictability of China’s foreign investment regulatory framework and optimize China’s business environment.
Since China began to introduce a negative list management system in the Shanghai free trade zone in 2013, the country’s efforts in opening-up have continued to increase.
Between 2013 and 2019, the negative list for the FTZs was reduced from 190 items to 37. The list for nationwide implementation shortened from 93 items, as then stipulated in the Catalogue of Industries for Guiding Foreign Investment (2015 edition), to 40 items in 2019.
In order to ensure the fair and efficient implementation of the Foreign Investment Law in the judicial field, Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Foreign Investment Law also came into force on Jan 1. The above-mentioned new laws and regulations will provide China with a strong legal guarantee for setting up a new system of comprehensive opening-up.
Responding to concerns and demands of foreign investors
Actively responding to the demands of foreign-invested enterprises in China has been an important part of China’s foreign investment supervision during the past 40 years of reform and opening-up.
After the Foreign Investment Law was passed in 2019, foreign enterprises have paid extensive attention to the proposed foreign investment information reporting system, worrying that the reporting system may lead to the leakage of enterprise operating information or become an “administrative approval” in disguise.
To address these concerns, the Ministry of Commerce and the State Administration for Market Supervision have jointly formulated the Measures for Reporting Foreign Investment Information, which came into effect on the same day as the Foreign Investment Law.
The Foreign Investment Law and its implementation regulations also responded to China’s intellectual property protection environment. The law’s Article 23 stipulates that the administrative organs and their staff members respect the confidentiality of the business arrangements of foreign investors and foreign-invested enterprises during the performance of their duties, and that they must not disclose or illegally provide any details to others.
With respect to foreign investors’ concerns regarding forced technology transfer issues, Article 24 of the Regulation for the Implementation of the Foreign Investment Law stipulates that administrative organs and their staff members are prohibited in using the implementation of administrative licenses, administrative inspections, administrative penalties, administrative coercions, or other administrative means to force foreign investors or foreign-invested enterprises to transfer technology.
Dividends need to be gradually implemented
The Foreign Investment Law replaces three old laws and becomes the basic law in the field. The newly minted law, together with other supporting regulations that came into effect on the same day, will assume the important task of China’s foreign investment supervision in the new era and is committed to creating a stable, transparent, predictable and fair market environment in China.
In order to ensure a smooth transition from the old management system to a new one, there is a five-year transition period for foreign companies.
Under the old regulatory model, China promulgated a large number of laws related to foreign investment, administrative regulations and rules with different levels of effectiveness. The implementation of the new law means that the previous laws, regulations and regulatory documents need to be abolished or revised. Therefore, the authorities concerned are currently cleaning up the outdated terms. But it will still take some time.
In addition, the improvement of the new foreign investment legal system, taking the Foreign Investment Law and its supporting regulations as a core, is not a one-time event. It needs to be gradually optimized. Negative list management is a kind of institutional innovation, and its effective implementation also requires a change in people’s attitudes－which cannot happen overnight. Therefore, foreign investors need to wait patiently for the gradual release of the dividends brought by the Foreign Investment Law and its supporting regulations.
In summary, the implementation of the Foreign Investment Law and its supporting regulations indicates that after more than 40 years of exploration, China’s supervision of foreign investment has entered a new era characterized by stability and maturity. The release of dividends brought by China’s institutional opening-up is generating fresh development opportunities for foreign investors.
The author is a deputy researcher at the Institute of World Economics and Politics, which is part of the Chinese Academy of Social Sciences.