Ⅰ．Abstract

 　　The second session of the 13th National People's Congresshas voted through the Foreign Investment Law of the People's Republic of China(the “Foreign Investment Law”) on 15th March 2019, which will come into forceas of 1st January 2020 and repeal simultaneously the Law of the People'sRepublic of China on Sino-Foreign Equity Joint Ventures, the Law of thePeople's Republic of China on Wholly Foreign-owned Enterprises and the Law ofthe People's Republic of China on Sino-Foreign Cooperative Joint Ventures, thusmaking the Foreign Investment Law the basic law regulating foreign investmentsin China.

 　　The Foreign Investment Law aims to provide a stable,transparent, predictable and fair competition market environment for foreigninvestors and foreign-invested enterprises. It also includes provisions withclear policy directions for encouraging and protecting foreign investors toinvest in China, showing that the Chinese government is determined to furtherpromote and open up the Chinese market and optimize the foreign investmentenvironment. It is worth mentioning that relevant provisions of the ForeignInvestment Law are consistent with some key demands of the recent China-UStrade negotiations, indicating the positive attitude of the Chinese governmentto opening up. Now, with the support of the Foreign Investment Law and itssupportive policies and documents further to be issued, foreign investors mayconsider entering the Chinese market at this desirable timing.

　　The second session of the 13th National People's Congresshas voted through the Foreign Investment Law of the People's Republic of China(the “Foreign Investment Law”) on 15th March 2019, which will come into forceas of 1st January 2020, and repeal simultaneously the Law of the People'sRepublic of China on Sino-Foreign Equity Joint Ventures, the Law of thePeople's Republic of China on Wholly Foreign-owned Enterprises and the Law ofthe People's Republic of China on Sino-Foreign Cooperative Joint Ventures(collectively referred to as “Three Laws on Foreign Investments”).

 　　The Foreign Investment Law has raised considerableattentions in the society since the draft was released for comments. The Law ofthe People's Republic of China on Sino-Foreign Equity Joint Ventures issued in1979, the Law of the People's Republic of China on Wholly Foreign-ownedEnterprises issued in 1986 and the Law of the People's Republic of China onSino-Foreign Cooperative Joint Ventures issued in 1988 were important lawsintended by the Chinese government to attract foreign capitals in the earlydays of the reform and opening-up. However, with the development of domesticand foreign economy, the Three Laws on Foreign Investments can no longer meetthe requirements and challenges for transforming to a new open economic systemin China. In addition, the Three Laws on Foreign Investments stipulateddifferent requirements for different types of foreign-invested enterprises,which put foreign-invested enterprises under different regulatory standards.Fully considering such legislation motivations, after actively absorbing theopinions from the society, the Chinese government issued the Foreign InvestmentLaw, replacing the Three Laws on Foreign Investments, which will become thebasic law unifying legislations for foreign investments in China.

 　　The Foreign Investment Law regulates “the investingactivities within China directly or indirectly conducted by foreign naturalpersons, enterprises, and other organizations (hereinafter referred to as“foreign investors”), including the following circumstances: (1) a foreigninvestor forms a foreign-invested enterprise within China alone or jointly withany other investor; (2) a foreign investor acquires any shares, equities,portion of property, or other similar interest in an enterprise within China;(3) a foreign investor invests in any green-field project within China alone orjointly with any other investor; and(4) other investments as specified in lawsor administrative regulations or by the State Council.”

 　　In view of the impact of the Foreign Investment Law onforeign investment environment in China, this article will briefly analyze itshighlights in encouraging and protecting foreign investors to make investmentsin China.

　　Ⅱ．Encourage Foreign Investments in China

 　　In terms of encouraging foreign investments in China, theForeign Investment Law has the following four highlights:

　　1. adopting a pre-establishment national treatment plusnegative list system for administrating foreign investments(Article 4 andArticle 28); 

　　2. establishing a market environment for fair competitionbetween domestic and foreign-invested enterprises (Article 9, Article 15,Article 16 and Article 30); 

　　3. further emphasizing the domestic financing means forforeign-invested enterprises (Article 17); 

　　4. further opening up the foreign investment policies(Article 14, Article 18 and Article 19).

 　　1.Adopt a Pre-establishment NationalTreatment plus Negative List System for Administrating Foreign Investments

 　　At present, China adopts a case-by-case examination andapproval system for the establishment of foreign-invested enterprises, whichmeans foreign-invested enterprises can only be established after obtaining theapproval from relevant commerce departments.

 　　At present, China adopts a case-by-case examination andapproval system for the establishment of foreign-invested enterprises, whichmeans foreign-invested enterprises can only be established after obtaining theapproval from relevant commerce departments.

 　　2. Establish a Market Environment for FairCompetition between Domestic and Foreign-invested Enterprises

 　　The Foreign Investment Law is believed to contribute toestablishing a market environment for fair competition between domestic andforeign-invested enterprises by reinforcing many explicit policy directions,such as clarifying that “the state’s various policies to support thedevelopment of enterprises shall equally apply to foreign-invested enterprisesin accordance with the law,” that “the compulsory standards formulated by thestate shall equally apply to foreign-invested enterprises,” that “the Stateguarantees that foreign-invested enterprises participate in governmentprocurement activities through fair competition according to law,” that“products manufactured and services provided by foreign-invested enterpriseswithin China shall be equally treated in government procurement according tolaw,” and that “unless otherwise provided by laws or administrativeregulations, relevant competent department shall review the applications forlicense filed by foreign investors based on the same conditions and proceduresas those for domestic investment.”

 　　3. Further Emphasize the Domestic FinancingMeans for Foreign-invested Enterprises

 　　Reading from Opinions on Issues relating toForeign-invested Listed Companies and Code No. 17 on the Rules for theCompilation of Reports of Information Disclosure by Public Shares IssuingCompanies - Special Provisions on the Contents and Format of Prospectuses ofForeign-invested Companies Limited by Shares, in fact, there are no policybarriers for foreign-invested enterprises to conduct financing by issuingshares or listing on stock exchanges in China. However, foreign-investedlisting companies account for only a small proportion in the China’s capitalmarket and foreign-controlled listed companies are few and far between. Thereason lies in the strict supervision of foreign capitals entering the China’scapital market.

 　　The Foreign Investment Law again emphasizes that “aforeign-invested enterprise may conduct financing according to law by meanssuch as the public offering of shares, corporate bonds and other securities orby other means ” and emphasizes the financing means for foreign-investedenterprises in China by making the Foreign Investment Law a fundamental law. Itis believed that, following the issuance of the Foreign Investment Law, theChinese government is likely to make and enact a series of supportiveregulations or policies, in order to guarantee foreign-invested enterprises toconduct financing by means of listing on stock exchanges, issuing bonds orthrough other ways and relax the approval for the financing by foreign-investedenterprises.

 　　4. Further Open Up the Foreign InvestmentPolicies

 　　The Foreign Investment Law puts forward many measures tocreate a more open investment environment. For example, it clearly stated that“foreign investors and foreign-invested enterprises may enjoy preferences inaccordance with laws, administrative regulations or provisions issued by theState Council,” that “the local people's governments at county level or abovemay make policies on promotion and facilitation of foreign investment withintheir respective statutory powers in accordance with the provisions in laws,administrative regulations or local regulations,” and that “appropriategovernment departments shall make and publish guidelines for foreign investmentto serve and facilitate the investment of foreign investors andforeign-invested enterprises.”

　　Ⅲ．Protect Foreign Investments in China

 　　With respect to protecting foreign investment in China,the Foreign Investment Law has three highlights:

　　1. emphasizing the protection of foreign investors’assets (Article 20 and Article 22); 

　　2. guaranteeing the freedom of foreign investors’ fundsto flow in and out (Article 21); 

　　3. regulating local governments’ administration offoreign-invested enterprises (Article 23, Article 24, 　　Article 25 and Article26).

 　　1. Emphasize the Protection of ForeignInvestors’ Assets

 　　The Foreign Investment Law emphasizes the protection offoreign investors’ assets, inter alia, intellectual property rights. Article 20of the Foreign Investment Law provides that “the state will not expropriate anyinvestment made by foreign investors. Under certain special circumstances, thestate may expropriate or requisition the investment made by foreign investorsin the public interests in accordance with the law. Such expropriation orrequisition shall be made pursuant to statutory procedures and fair andreasonable compensation shall be made in a timely manner.” Article 22 of theForeign Investment Law provides that “the state protects the intellectualproperty rights of foreign investors and foreign-invested enterprises andprotect the legitimate rights and interests of owners of intellectual propertyrights and relevant right holders; in case of any infringement of intellectualproperty rights, legal liability shall be investigated strictly in accordancewith the law. The state encourages technology cooperation on the basis of freewill and business rules in the process of foreign investment. Conditions fortechnology cooperation shall be determined by all investing parties throughequal consultation under the principle of fairness. No administrativedepartment or any of its staff may force the transfer of any technology byadministrative means.”

 　　In the past, due to the underdeveloped level of scienceand the lack of technology in China, the foreign investors were always expectedto contribute their technologies to become a shareholder when they entered theChinese market. As a result, many foreign investors were worried about “beingforce to transfer technology” when investing in China, whereby exchanging themarket with technology, especially when they established Sino-foreign jointventures or Sino-foreign cooperative joint ventures. At the internationallevel, some technology-developed countries in Europe and the United States havebeen accusing China of forcing foreign investors to invest and establishenterprises in China at the expense of technology transfer. The issuance of theForeign Investment Law exactly intends to eliminate the worries of foreigninvestors by way of legislation.

 　　2. Guarantee the Freedom of ForeignInvestors’ Funds to Flow in and out

 　　Under China's current legal system, foreign investors areallowed to remit their currency earnings from China to overseas. However, inpractice, there are certain obstacles, which is largely due to China's strictforeign exchange control. For example, the State Administration of ForeignExchange will provide “window guidance” to commercial banks and give a certainamount of foreign exchange quotas to each commercial bank annually. Commercialbanks are only allowed to exchange and remit for their customers within suchlimit, and additional approvals are required if the amount exceeds the limit.

 　　However, the Foreign Investment Law reinforces that “aforeign investor may, in accordance with the law, freely transfer into and outof China, its contributions made, profits, capital gains, proceeds fromdisposition of assets, royalties of intellectual property rights derived from,compensation or indemnity lawfully obtained, income from liquidation, amongothers, within China, in CNY or a foreign currency”, which shows China’scommitment to the freedom of foreign investors’ funds to flow in and out ofChina. We believe that with the implementation of the Foreign Investment Law,combining with the supportive documents issued later, certain obstacles for thefree inflow and outflow of foreign investors' funds will be removed.

 　　3. Regulate Local Governments’Administration of Foreign-invested Enterprises

 　　“Administrative departments and their staff shall keepconfidential, according to law, any trade secret of foreign investors orforeign-invested enterprises to which they have access in performing theirduties, and neither divulge nor illegally provide others with such secrets.”“In developing regulatory documents involving foreign investment, the people'sgovernments at all levels and their relevant departments shall comply with lawsand regulations; and in the absence of any basis in laws and administrativeregulations, such documents shall not derogate from the lawful rights andinterests or increase the obligations of foreign-invested enterprises, shallnot set any market access and withdrawal conditions, and shall not intervenethe normal production and distribution activities of foreign-investedenterprises.” “The local people's governments at all levels and their relevantdepartments shall fulfill their policy commitments legally made to foreigninvestors and foreign-invested enterprises and various contracts legallyconcluded. Where any policy commitment or provision of a contract needs to bechanged in the national or public interest, such change shall be made accordingto the statutory powers and procedures, and foreign investors andforeign-invested enterprises shall be compensated according to the law fortheir losses so incurred.” All of these are the requirements stipulated in theForeign Investment Law for the Chinese administrative departments, people'sgovernments and their staff at all levels, which are to regulate localgovernments’ administration of foreign-invested enterprises in course of work,and to ensure the legitimate rights and interests of foreign investors andforeign-invested enterprises, and to prevent the occurrence of an opaque andunfair environment due to illegal intervention and self-contradiction of suchgovernment authorities.

 　　In particular, the Foreign Investment Law has alsoestablished “a working mechanism for complaints of foreign-invested enterprisesto address concerns of foreign-invested enterprises and their investors in atimely manner, and coordinate and improve the relevant policies and measures.”Once this mechanism is put into effect, it will facilitate timely and effectivecommunication between local governments and foreign-invested enterprises, solveproblems and enhance the confidence of foreign investors in China'sadministrative environment. In addition to the application of coordination toresolve issues through the working mechanism for complaints of foreign-investedenterprises, the Foreign Investment Law also provides that where aforeign-invested enterprise or its investor deems that any administrativeaction taken by an administrative department or any of its staff infringes itslegitimate rights and interests, it or its investor may also apply foradministrative review, or institute an administrative litigation. Through thoseremedies of the working mechanism for complaints of foreign-investedenterprises, the ways of administrative review, and administrative litigation,the legitimate rights and interests of foreign investors and foreign-investedenterprises will be more comprehensively protected.

 　　The recent China-US trade negotiations, which haveattracted much attention from the public, closely focus on the issues such astechnology transfer, the protection of intellectual property rights, andnon-tariff barriers. In particular, it is reported that “two parties attachgreat importance to the protection of intellectual property rights andtechnology transfer, and agreed to further strengthen cooperation. Creating a marketenvironment with fair competition is in line with China's reform andopening-up. The Chinese side declared it would actively respond to the USconcerns. With the enactment of the Foreign Investment Law, we can see thatrelevant provisions of the Foreign Investment Law are consistent with some keydemands of aforementioned China-US trade negotiations, indicating the positiveattitude of the Chinese government to opening up.

 　　The Foreign Investment Law aims to provide a stable,transparent, predictable and fair competition market environment for foreigninvestors and foreign-invested enterprises, and it also includes provisionswith clear policy directions for encouraging and protecting foreign investorsto invest in China. It is definitely a signal that the Chinese government istaking it seriously in optimizing the foreign investment environment.

 　　China is currently a country with huge manufacturingsector, and to some extent, it is becoming less attractive to foreign investorsfor the reasons of rising labor costs, industrial relocation, etc. However,from the perspectives of consumption upgrading, and industrial transformationand upgrading, there are still tons of opportunities in China's serviceindustry, financial industry and consumer industry. Now, with the support ofthe Foreign Investment Law, and possible supportive regulations and documentsfurther to be released , it is clear that the determination of Chinesegovernment's opening-up has not changed and is being further promoted.Therefore, foreign investors may consider entering the Chinese market at thisdesirable timing.

References:

1. See Foreign Investment Law of the People's Republic ofChina on 15th March 2019, athttp://www.npc.gov.cn/npc/xinwen/2019-03/15/content_2083532.htm.

2. See Into A New Era: Changes and Challenges in the ForeignInvestment Legal Regime of China by King & Wood Mallesons on March 18th,2019, athttps://www.chinalawinsight.com/2019/03/articles/corporate/foreign-investment/into-a-new-era-changes-and-challenges-in-the-foreign-investment-legal-regime-of-china/.

3. See Brief Analysis of the Influence of the ForeignInvestment Law (Draft) on the Relevant Practical Issues by Shi Jun and Wang Yuon 29th December 2018, athttp://www.allbrightlaw.com/CN/10475/1680fb0f5d2559e5.aspx.

4. See Chinese Legislation Protects Intellectual PropertyRights of Foreign Investors and Eliminates Concerns of Foreign-investedEnterprises in terms of Law by www.huanqiu.com on 24th December 2018, athttp://www.sohu.com/a/284021943_162522.

See China-US High-level Trade Negotiations Ended byxinhuanet on 1st February 2019, athttp://www.gov.cn/xinwen/2019-02/01/content_5363002.htm?_zbs_baidu_bk.