China’s new Foreign Investment Law (FIL), which comes into effect on 1 January 2020, promises to make it easier for foreign companies and individuals to invest in China, and has the broader goal of “opening China to the outside world”.
The law will cover a range of parties and scenarios, including foreign-owned enterprises in China, either together with Chinese investors or on their own; foreign purchase of stocks, shares, property shares and equity; new investment projects; and, other forms of investment identified by the States Council.
Businesses must be registered in China to benefit from the new legal provisions.
Rethinking the Negative List
The law reduces the number of industries that appear on the so-called Negative List, officially known as the ‘Special Administrative Measures for the Access of Foreign Investment 2019’. The Negative List indicates which industries are not open to foreign investment, and the restrictions surrounding them have attracted some criticism from foreign investors and governments looking for a level playing field. While some of these protections would be regarded as excessive or unnecessary in a Western context, Western governments might do well to share the Chinese Government’s caution over the risks of foreign investment in other areas, and rather than pushing for ever greater liberalisation, might do well to learn from the approach adopted by the Chinese.
The 2019 Negative List sees the number of restricted sectors and sectorial segments drop from 48 to 40 by comparison with 2018.
Among the areas liberalised are oil and gas exploration; molybdenum, tin, antimony and fluorite exploration and mining; small city urban gas and heat facilities; domestic marine shipping agencies; certain value-added telecom services; wild fauna and flora protection; and, movie theatre construction and operation.
Among the areas where foreign investment is partly or fully excluded include the following:
- Critical seeds and crops (points 1-3);
- Inland fisheries (point 4);
- Rare earth metals (point 5);
- Printing (point 6);
- Radioactive minerals and nuclear fuel (point 7);
- Chinese herbal medicines (point 8);
- Automobile manufacturing (point 9);
- Satellite TV (point 10);
- Nuclear power plants (point 11);
- Large city utilities (point 12);
- Tobacco and cigarettes (point 13);
- Domestic water (point 14);
- Certain air traffic, civil airports and air traffic control (points 15-18);
- Domestic post (point 19);
- Telecommunication (point 20);
- Online media (point 21);
- Financial and legal services (points 22-25);
- Market research, social surveys and social science research institutions (points 26-27 and 29);
- Stem cell technology (point 28);
- Surveying and cartography (point 30);
- Education (points 31-33);
- Media (points 34-38);
- Cultural relics and cultural performance groups (points 39-40).
The Chinese approach offers a number of protections and benefits, including restricting foreign espionage; protection of the health and wellbeing of Chinese people from careless or malicious foreign actors; the retention of domestic control over critical resources and infrastructure; and, the safeguarding of culturally sensitive objects of national heritage.
In other instances, as with nuclear power plants, the resource is of such great importance to national security and environmental protection that while it is likely that foreign companies, such as the French, might have greater competence in their construction, the consequences from sudden loss of that capacity are so great that it is essential to retain domestic control.
While a certain protectionist motivation may well be playing into areas such as control of automobile manufacturing, in general terms, the Negative List undoubtedly has an important role to play in protecting Chinese national security, and is an example that Western governments should look to learn from. Indeed, Article 6 of the Foreign Investment Law places a duty on foreign investors to ensure that their activities do not harm Chinese national security, a provision that has few parallels in Western legislation.
Promoting and Protecting Investment
Articles 11-19 establish the general principle that commercial law shall equally apply to companies controlled by national and foreign investors, and make provisions for foreign investors to be consulted on changes to laws and administrative regulations. Furthermore, the Government commits to a range of promotional activities to encourage investment by foreign parties.
Foreign-invested companies will in future be able to raise capital through the Chinese stock market and securities exchanges (article 17), and foreign investors and companies will have the right to repatriate firms either in RMB or a foreign currency under the Law.
The most contested area of foreign investment in China is almost certainly the problem of intellectual property protection and technology transfer. Articles 22 and 23 demand respect for the intellectual property of foreign companies investing in China, but may well come short of the expectations of many foreign corporations.
The Law also encourages coordinated engagement of foreign-invested enterprises, and asks that all layers of government stick by commitments made to foreign-owned companies.
The Foreign Investment Law should not be interpreted as merely a response to the ongoing trade negotiations with the United States, although clearly these are playing a role. More likely, it is a reflection of a growing awareness of the need to diversify foreign direct and indirect investment on the part of the Chinese Government.
China’s middle classes are growing in affluence, and with one of the most highly educated populations in the world, the attractiveness for basic manufacturing enterprises of investing in China, and for its increasingly sophisticated workers, is diminishing quickly. So, while certain manufacturers of light goods might be looking to relocate, China is seeking to attract far more sophisticated foreign enterprises and investors looking to benefit from the increasing capacity for high-end production and services. For these investors, the protection of intellectual property will be of paramount importance.
While the success of the law will depend on an absolute rather than contingent commitment to the protection of investor rights, in the short term, the biggest factor shaping China’s opening of its domestic markets to greater overseas investment is likely to be geopolitical. Only if China and the United States are able to commit to greater respect for the national and economic security of the other party, while acting in a manner designed to engender greater mutual trust, respect and responsiveness will the preconditions exist for sustainable growth in mutual investment. For the time being, there are too many thorns in the batter for both sides to think about munching down the pancake.
Article Licence: CC BY-ND 4.0