AN INSTITUTIONALIZED GUARANTEE
New legislation allays concerns, creates ground for foreign investors’ confidence
OThe author is a researcher with the Chinese Academy of International Trade and Economic Cooperation
n March 15, the Second Session of the 13th National People’s Congress, China’s top legislature, adopted the country’s first Foreign Investment Law to promote, protect and manage foreign investment in the changed circumstances. The new law, which will take effect on January 1, 2020, is expected to enhance the confidence of foreign-funded enterprises in China.
The law eliminates the case-by-case approval system and makes fundamental changes to the foreign investment management system, which is expected to promote all-round opening up and bring a legal guarantee for a new open economic system.
It states that foreign investment shall be managed according to the system of pre-establishment national treatment plus a negative list. Government policies supporting enterprise development will apply equally to them and they will be on par with domestic enterprises regarding participation in standardization work and government procurement activity.
The law cracks down on extra-legal curbs on foreign investment. Governments and relevant departments at all levels are required to formulate foreign investment-related regulatory documents in accordance with laws and regulations. There are also provisions that they may not undermine foreigninvested enterprises’ lawful rights or impose obligations in violation of law, and shall not set market entry and exit conditions or interfere or influence foreign-invested enterprises’ normal business activities in violation of law.
In addition, the law stresses improving investment-related services and simplifying management procedures, demonstrating the government’s commitment to creating a fair and equitable market mechanism and providing an open and transparent investment environment.
A phased approach
China’s current legal system to manage foreign investment—consisting of the Law on Chinese-foreign Equity Joint Ventures, the Law on Non-equity Joint Ventures and the Law on Wholly Foreign-owned Enterprises— was put in place in the initial phase of reform and opening up that started in 1978. Foreign investment projects are subject to administrative approval and normally enjoy preferential treatment.
After it joined the World Trade Organization in 2001, China focused on developing its legal system in line with international standards and the laws and regulations on foreign investment were amended substantially. Still, the three laws, which will be replaced by the Foreign Investment Law, are not in line with the Company Law and the Contract Law that were amended in 2018.
Since the global financial crisis in 2008, the United States and other developed countries have accelerated negotiations on free trade agreements and come up with new rules of global trade and investment. China needs to restructure the domestic economic system and creates new driving forces through a higher level of opening up as its economy has shifted from high-speed to high-quality growth.
A new round of opening up started in 2013, focusing on establishing pilot free trade zones (FTZS). The China (Shanghai) Pilot FTZ was established the same year and China began to explore a pre-establishment national treatment plus a negative list system for managing foreign investment. After a negative list was implemented in the Shanghai FTZ, which specifies the sectors off-limits to foreign investors, relevant laws on foreign investment management were suspended within the zone for a three-year trial period.
On January 19, 2015, the Ministry of Commerce (MOFCOM) published the draft Foreign Investment Law to solicit public feedback and in the following year, the preestablishment national treatment plus a negative list system was expanded across China based on the experience of pilot FTZS and trial reforms. In the same year, MOFCOM issued interim policies specifying that foreign-funded enterprises no longer need approval to invest in areas not designated in the negative list.
In June 2018, a shortened negative list for foreign investment came into effect, containing just 48 items, down from the 63 in the previous version. The new negative list, the Special Administrative Measures on Access to Foreign Investment, was jointly released by MOFCOM and the National Development and Reform Commission.
In November 2018, President Xi Jinping gave his assurance at the first China International Import Expo in Shanghai that China will speed up new foreign investment legislation, fully implement the pre-establishment national treatment plus a negative list system and develop a world-class business environment.
As China is shifting from opening up