The adoption of the new Foreign Investment Law at the Second Session of the 13th National People's Congress (NPC), China's top legislature, on March 15 shows China's determination to open up further for foreign businesses and allay foreign investors' concerns. The law, which takes effect as of January 1, 2020, will be a new legal guarantee for a more sound, stable and transparent foreign investment climate.

Homegrown reasons

The law has five key provisions:

Foreign-funded enterprises will receive the same treatment as domestic ones;

The pre-establishment national treatment plus a negative list management system will be fully implemented. A negative list spells out the sectors where foreign capital is banned or limited. Investment in areas not on the list enjoys national treatment;

Specific policies and measures to attract foreign investment will be instituted;

Foreign investment management is to be simplified; and Domestic market access and investment standards will conform to international norms.

The law will help establish an environment where foreign companies can compete fairly in China, and better protect the legitimate rights and interests of foreign investors, Wang Shouwen, Vice Minister of Commerce, said at a news conference during the Two Sessions, the annual meetings of the NPC and the National Committee of the Chinese People's Political Consultative Conference (CPPCC), China's top political advisory body.

Wang added that the law will also protect the intellectual property rights (IPR) of foreign investors and encourage voluntary cooperation on technology based on commercial rules.

The law is not due to U.S. pressure, Justin Yifu Lin, a member of the 13th CPPCC National Committee, said in a panel discussion on March 9, referring to the trade frictions between China and the U.S. that cast a shadow on the global economy in 2018.

"Launching such a law is an inevitable move as part of our efforts to deepen reform and opening up," Lin said.

After reform and opening up began in 1978, three laws were introduced to manage foreign businesses—the Law on Chinese-Foreign Equity Joint Ventures, the Law on Chinese-Foreign Non-Equity Joint Ventures, and the Law on Wholly Foreign-Owned Enterprises. But as the Chinese economy developed, these laws proved ineffective. The six-chapter law, which covers promotion, protection, administration and legal responsibilities of foreign investment, will replace the three old laws.

Lin said over the past 40 years, reform and opening up sought to let the market play a bigger role in the allocation of resources to optimize China's market economy system. The introduction of the law, he said, is motivated by domestic considerations, and along with the negative-list management system, will help China benefit from resources in both domestic and international markets. 

Reassurance to investors

The law is regarded as a significant step in opening up the Chinese market to foreign businesses. It addresses the complaints prevalent among foreign investors and will play a significant role globally as anti-globalization trends rise.

"China has essentially become a leader in promoting globalization," Li Daokui, a member of the 13th CPPCC National Committee and a professor at Tsinghua University, told Beijing Review.

Li pointed out that the government has repeatedly declared its determination to push ahead with its multilateral policies. President Xi Jinping has in various international platforms reiterated the government's commitment to further China's opening up.

The introduction of the law boosts the construction of an open and transparent system of foreign investment-related regulations, putting into practice the commitment that China's door will continue to open wider.

"The law will replace the three laws that have played an important role in China's reform and opening up. As a fundamental law targeting foreign investors, it will serve as an exemplary case in the world," Li said.

According to Li, the most important effect will be the reassurance the new law gives to foreign investors in China, as it involves IPR protection, routine operations in China, market access as well as participation in government procurement services. It is also concerned with the formulation of China's national standards.

The new law reflects the demands in the new era of globalization. It doesn't differentiate between countries, but focuses on commerce and global economic integration, Li said. He commended the measures related to IPR protection and government procurement.

The new law accurately targets the problems foreign businesses in China have faced in recent years, Li said. In addition, the law reiterates China's stance of preventing forced tech transfer and government intervention in the activities of foreign companies.

He suggested that the negative list be elaborated on and items on the list be further cut. "The concepts are not only in line with China's economic interests but also global interests," he remarked.

The CPPCC member felt that the law will encourage enterprises in China, including foreign-funded ones, to pursue indigenous innovation. Once the new law takes effect, the influx of high-end foreign manufacturing investment will help enhance domestic industries, he predicted.

Expected results

The Foreign Investment Law will function as a fundamental law in China's foreign investment sector and an essential part of the new round of reform and opening up, according to Vivian Jiang, a member of the 13th CPPCC National Committee and Deputy Chairperson of Deloitte China.

"The Foreign Investment Law will boost foreign investors' confidence to increase their investment in China," Jiang told Beijing Review.

Compared to the laws to be replaced, the new law is much more detailed and broader, and offers far more advantages. For example, it pays more attention to the principles of foreign investment and its protection as well as the management of related enterprises.

However, some issues still have to be fine-tuned, she said. First, the transition from the existing laws has to be handled carefully so that it is smooth. Second, there should be detailed rules related to foreign investors remitting their profits and other legal incomes freely. Third, the foreign investment information reporting system and security review system require more detailed regulation.

Last but not least, preferential policies for foreign investors may give them super-national treatment in some areas, so investment services for domestic enterprises should also be promoted to ensure a fair market atmosphere.

Copyedited by Sudeshna Sarkar

Comments to maxiaowen@bjreview.com