China’s New Foreign Investment Law: Quick Passage after a Long Wait

Publication: China Brief Volume: 19 Issue: 6

Delegates to the March 2019 annual session of the National People’s Congress, which approved a new law governing foreign direct investment in the Chinese economy.

Introduction

On March 15th, the National People’s Congress (NPC) of the People’s Republic of China (PRC) formally passed a new Foreign Investment Law (waishang touzi fa, 外商投资法) to govern the increasingly complex issues surrounding foreign direct investment (FDI) in the country. According to the state news service Xinhua, under the new FDI law “A foreign company doing business in China will enjoy a better investment environment” (Xinhua Twitter feed, March 2). Xinhua also claims that “the law will create a more stable, more transparent and predictable legal environment for foreign businesses in China” (Xinhua, March 2). The new FDI law will officially come into force on January 1, 2020 (Xinhua, March 19).

The draft law had been under discussion for some time: in 2015, a similar effort to pass a revised FDI law started but never came to fruition. Small amendments to the legal regime were made in the wake of the 2015 effort, but the changes were not a complete overhaul of policy, as now seems to be the case. The passage of the new law has been branded as the fulfillment of a long-term promise to liberalize China’s economy, with PRC Premier Li Keqiang stating that “If we make a promise on opening up, we will certainly deliver” (Straits Times, March 15). However, during Premier Li’s comments at the close of the NPC, he also noted that “a series of matching regulations and normative documents” will be necessary for the FDI law to realize its intent (Straits Times, March 15).

This article provides a summary of the PRC’s new FDI law, and seeks to examine why the full overhaul of China’s FDI policies has finally been realized (at least at a de jure level). This article is not intended to provide a legal interpretation; [1] instead, it offers discussion of the political environment surrounding the new law, and analyzes why the timing was right for a major overhaul of the state’s legal regime governing FDI.

The Background of the New Investment Law

As adopted, the new FDI law (NPC, March 15) will eventually replace the “Three Investment Laws” (Waizi San Fa, 外资三法) that currently guide foreign investment into China. These three laws are: the Sino-Foreign Equity Joint Venture Law (Zhong-Wai Hezi Jingying Qiye Fa, 中外合资经营企业法), the Foreign Invested Enterprises (FIE) Law (Waizi Qiye Fa, 外资企业法), and the Sino-Foreign Cooperative Joint Ventures Law (Zhong-Wai Hezuo Jingying Qiye Fa, 中外合作经营企业法). The “Three Laws” have guided how foreign investors do business in China throughout the Reform Era that began in the late 1970s. The Sino-Foreign Equity Joint Ventures Law was originally passed in 1979, [2] but each of the three have been continually updated; for example, the latter law has been updated roughly each decade since 1979 (Ministry of Commerce, January 14 2003). The Law on Sino-Foreign Cooperative Joint Ventures (also sometimes translated as contractual joint ventures) was originally adopted in 1988, and then updated in 2000 (Ministry of Commerce, January 27 2003).

Each of these three laws, as well as the law that manages investment from Taiwan, were amended in 2016 (ReedSmith, September 22 2016). However, the idea to create one overarching foreign investment law that would merge the existing separate laws has long been under discussion: a proposal along these lines was put forward in 2015, but was never adopted by the NPC (Ministry of Commerce, January 19 2015).

Late in 2018, PRC state media began to clearly signal that a new FDI law was in the works. On December 23, 2018, the NPC Standing Committee began reviewing a draft of the new foreign investment law (China Daily Hong Kong Edition, December 23 2018). Xinhua, in a Twitter video explaining the importance of the upcoming “Two Sessions” (Liang Hui, 两会) of the NPC and the Chinese People’s Political Consultative Conference, described the new law as “a highly expected draft law” to be “submitted to the upcoming plenary session of the NPC” in spring 2019 (Xinhua, March 2).

What Is New? What Is Not So New?

While the text and structure of the draft FDI law unveiled in December 2018 is much different than the 2015 version [3], the concept is fundamentally the same: China’s legal regime for investment is confusing to navigate, and was in need of streamlining and consolidation. One component of the law of great interest to foreign investors is the scope of the “negative list” (fumian qingdan, 负面清单) system. This basic concept holds that all sectors of the economy will be open to foreign investment, other than those explicitly listed on the negative list. Using a negative list concept is related to China’s move towards granting foreign investors pre-established “national treatment” (Xinhua, December 23 2018). According to Xinhua, in June 2018 “the country unveiled a shortened negative list for foreign investment . . . cutting the number of items down to 48 from 63” (Xinhua, December 23 2018).

The first version of a negative list for FDI in China was pioneered under the China (Shanghai) Pilot Free Trade Zone [Zhongguo (Shanghai) Ziyou Maoyi Shiyanqu, 中国(上海)自由贸易实验区], or PFTZ. The PRC State Council’s 2013 announcement of the creation of the Shanghai PFTZ laid the framework for use of a negative list in that zone (PRC State Council, September 18 2013). The negative list framework was subsequently expanded to other pilot free trade zones, such as those in Tianjin, Fujian, and Guangdong (People’s Daily Online, March 5 2017).

The 2017 NPC Government Work Report then called for the government to “revise the catalog of industries open to foreign investment” in order to improve the investment environment in China (PRC State Council, March 5 2017). The proposed changes were made in part because the first iterations of the negative list included a relatively long list of restricted sectors. In 2014, the list contained 139 restricted and prohibited areas, “down from 190 restrictions in 2013” (U.S.-China Business Council, 2014).

Why Did Passage Finally Come in 2019?

In 2013, reform momentum seemed high as Xi Jinping began to consolidate power. “Supply-side structural reforms” (gongjice jiegouxing gaige, 供给侧结构性改革) gained momentum in officially-sanctioned discourse, and in 2015 the Ministry of Commerce released a draft revision of the foreign investment law (Ministry of Commerce, January 1 2015). [4] The Chinese Communist Party (CCP) Central Economic Work Conference held in 2015 highlighted the need to continue actively utilizing foreign capital, and coverage of the work conference stated that foreign and domestic enterprises should be treated equally (People’s Daily, December 22 2015). However, the 2016 amendments to the investment laws did not fully clarify the administration of foreign-invested enterprises (ReedSmith, September 22 2016).

According to Economic Daily, in 2017 China’s foreign investment decreased relative to 2016, but “quality and efficiency increased steadily” (zhiliang he xiaoyi wenbu tisheng, 质量和效益稳步提升) (Economic Daily, January 22 2018). [5] However, the government’s concern was clear: a reduction in investment from abroad could hurt China’s ability to continue moving toward a “moderately prosperous society in all respects” (Xinhua, October 17 2017).

The key difference between stalled passage of the draft FDI law in 2015, and of the rapid passage of a revised law in 2019, is the greater sense of government urgency produced by China’s slowing growth and continuing trade tensions with the United States. Growth in China is slowing: Zhang Xiaojing of the Chinese Academy of Social Sciences predicts the growth of China’s gross domestic product (GDP) slowing to 2 or 3 percent (Caixin, January 9). The World Bank predicts slower growth as well, but notes that “the slowdown in China is projected to be gradual” (World Bank, January 2019). Other indicators are no better: according to the business publication Caixin, there is increasing risk in the housing market and “subprime risks are rising,” and patterns in China’s household debt are approaching those seen in “the 2008 subprime mortgage crisis in the U.S. that led to the Great Recession” (Caixin, January 9).

A second major impetus behind the new FDI law is the series of tariffs imposed by the United States, which have clearly motivated Chinese officials to seek means of boosting investor confidence. In the explanatory introduction that accompanied the December 2018 draft version of the FDI law, the text stated that “China’s opening and use of foreign capital are facing a new situation” (wo guo duiwai kaifang he liyong waizi mianlin xin de xingshi, 我国对外开放和利用外资面临新的形势). The explanation also highlighted the need to “defend against risks” (fangfan fengxian, 防范风险) as a general principle of the law—a use of language suggestive of CCP formulations connected to social stability and regime security. [6]

Conclusions

Boosting investor confidence is an important component of maintaining Chinese economic growth. The NPC explanation of the draft law states that investment promotion mechanisms will be improved (Article 3); that national treatment will be provided to foreign businesses, albeit with the negative list system still in place (Article 4); and that standards and regulations will be applied equally to foreign business (Articles 15 and 16).

However, the real challenge still lies ahead in implementation. According to the U.S.-China Business Council’s 2018 Member Survey, foreign companies operating in China have reported “increased scrutiny from regulators” in China (USCBC, 2018), and this is unlikely to stop simply because of vague commentary on “improving” investment services in a national-level law. The explanation of the draft law encourages the government at all levels to improve the level of its foreign services (Articles 18 and 19), but foreign businesses know that the devil is often in the regulatory details.

Slowing growth in China, and the course of U.S.-China trade talks, appear to have created the sense of urgency necessary for the PRC to finally overhaul its outdated legal regime for foreign investment. The Chinese leadership clearly wanted to send a message with the passage of the FDI law, and hopes to encourage continued FDI—and thereby maintain economic growth and stability in the financial environment. However, the real work has only just begun. Regulations and methods for enforcing the new FDI law will be far more important than passage of the law itself. The nature of the implementing regulations will show the seriousness of China’s commitment to national treatment of foreign businesses—and whether or not foreign firms will be treated fairly within China’s domestic economy.

April A. Herlevi is a research scientist with CNA, a nonprofit research and analysis organization in Arlington, VA, and a Fellow with the National Asia Research Program (NARP). She has a PhD in international relations and comparative politics from the University of Virginia, where her dissertation examined strategies for attracting foreign direct investment. This work represents her own views, and should not be regarded as representing the opinions of CNA or its sponsors.

Notes

[1] For legal analysis, see China Briefing by Dezan Shira and Associates or the NPC Observer blog.

[2] The Law on Sino-Foreign Equity Joint Ventures was originally adopted on July 1, 1979 (MOFCOM, January 14, 2003) and is often referred to in English as the EJV law. According to one legal scholar, between 1979 and 1982, “over twenty laws directly relating to foreign investment” and “over sixty laws and regulations indirectly dealing with foreign investment in the PRC were implemented” (L. Crawford Brickley, University of Pennsylvania Journal of International Law, Spring 1988).

[3] The December 2018 draft FDI law has 5 chapters, with 39 individual articles whereas the 2015 version had 11 chapters with 170 distinct articles.

[4] For an English translation of the 2015 Law, the U.S. China Business Council provided a link from Jones Day on its website: https://www.uschina.org/sites/default/files/2015%20Draft%20Foreign%20Investment%20Law%20of%20the%20People%27s%20Republic%20of%20China_JonesDay_0.pdf.

[5] Interestingly, data released later from both the PRC National Bureau of Statistics and the United Nations World Investment Report contradicted some of the initially reported information regarding investment slowdown in China (National Bureau of Statistics, 2018; UNCTAD, June 2018).

[6] During the notice and comment period, the explanation for the law could be accessed on the NPC website. However, after the notice and comment period ended on February 24, 2019, the link was no longer active. The NPC Observer blog maintained a PDF copy of the explanation, which can be accessed from their site in the original Chinese (NPC Observer, February 2019).