Foreign Investment Law Carving Path to All-Dimensional Opening Up

The new law is regarded as a significant step in opening up the Chinese market to foreign businesses. It also addresses complaints that have been prevalent among foreign investors.

China will introduce the law on foreign investment at a faster pace, and institute an open and transparent system of foreign-related laws, as Chinese President Xi Jinping remarked in his keynote speech delivered at the opening ceremony of first China’s International Import Expo (CIIE) in Shanghai, Nov 5, 2018.

China has attracted a great amount of foreign investment in the four decades since the beginning of its reform and opening up in the late 1970s. According to the report released by China’s MOFCOM on Mar 9, China’s efforts promoting foreign investment have been very effective. In 2018, more than 60,000 foreign-invested companies were newly established, up by 69.8%, with a paid-in FDI of RMB 885.6 billion, up by 0.9%, or US $135 billion, up by 3%, which were achieved amid a 19% drop in global cross-border direct investment flows.

Since October 2013, China has carried out successful pilot reforms of the foreign investment approval system in Shanghai, Guangdong, Tianjin and Fujian. In 2014, the Foreign Investment Law entered the State Council’s legislative plan for the first time. One year later, the Ministry of Commerce published a draft for soliciting opinions on its website. And in late December 2018, the final draft of the legislation was released for public review and comment.

Deputies to the 13th National People’s Congress (NPC) attend the opening meeting of the second session of the 13th NPC at the Great Hall of the People in Beijing, capital of China, March 5, 2019. (Photo/Xinhua)

The draft law clarified at the second plenary meeting on the sideline of the second session of the 13th National People’s Congress (NPC) in the afternoon on March 8. During the third plenary on the morning of March 12, each delegation will hold plenary meetings and group meetings to review the draft. It will be voted on the morning of March 15 at the fourth plenary. The whole world is looking forward to the implementation of the Foreign Investment Law. This is regarded as a significant step in opening up the Chinese market to foreign businesses. It also addresses complaints that have been prevalent among foreign investors.

China Focus interviewed Hisham AbuBakr Metwally, First Economist Researcher under Egypt’s Ministry of Foreign Trade and Industry, Ali Farmandeh, Chairman of China Sweden Business Council, Nick Coyle, CEO and Executive Director of the AustCham China, Matthias Müller, Neue Zürcher Zeitung correspondent, and Erkin Öncan, a journalist with Sputnik Turkey. They have presented their views on the unified law that will replace the three existing laws, the changes China’s investment environment will meet and how China can further open up to foreign investment in the future.

The New Law Is a Breakthrough in the Investment Road

China did not have a separate foreign investment law in the past. In the early days of reform and opening up, China formulated three foreign capital laws, which laid the foundation for attracting foreign investment. These were the Sino-Foreign Joint Venture Enterprise Law, the Foreign Enterprise Law and the Chinese-Foreign Cooperation Enterprise Law.

However, the existing laws could hardly keep up with the changing requirements in building a new open economic system, as noted in the eighth session of the Standing Committee of the NPC during the second reading of the foreign investment law.

The new law gathers all the required laws dealing with investment into just one law, making it easy to understand and follow. China, for the first time, will allow foreign companies sole ownership of a business in China, which is a major breakthrough in the country’s further opening up of foreign investment, said Abu Bakr.

AustCham will be encouraged by the efforts to promote foreign firms’ investment in China.  The bilateral free trade agreement between China and Australia has been a boost over recent years to such investment, particularly in the services sectors.  The draft Foreign Investment Law is potentially another positive step in the same direction, says Coyle.

China is truly showing the world that it stands for fairness, honesty, cooperation, and development with the new law. The differences in three main subjects concerning, joint ventures, direct investment and intellectual property are really speeding up cooperation and making it much easier to see that a true win-win situation can be created for enterprises, according to Farmandeh.

China was already the most successful country for 25 consecutive years in terms of attracting foreign capital. This new law can be considered due to China’s decision to resolve concerns about China’s investment conditions. The new law will ban forced tech transfer and close the way for government intervention in the activities of foreign companies. This is a new phase and an important decision, Öncan told China Focus.

China will Attract More Foreign Investment in a Healthier Investment Climate

The law is a fundamental change in China’s foreign investment management system. It will improve the openness, transparency and predictability of the investment environment and provide more effective legal protection for the formation of a fully open new pattern.

The new Foreign Investment Law implements the management system of pre-establishment national treatment with a negative list for foreign investment and eliminates the case-by-case approval management model. The areas where foreign investment is prohibited or restricted will be clearly listed, while the areas beyond the list will be fully open and both local and foreign investment will enjoy the same advantages. In addition, the new law clearly addresses issues such as a foreign investment management system, intellectual property protection and technology transfer.

“It changes the old impression,” said AbuBakr. The new law permits the same advantages for foreign investment as locals. Foreign investors can feel more comfortable because they will all be equal in a healthier investment climate.

In the recently released DBIC report, only 24% of companies reported the investment climate as deteriorating and we hope to see Australian investment in China continue to grow. With regard to the draft law, there should be positive outcomes for companies in managing disputes and the commitment to equal treatment for foreign firms with regard to policies promoting the development of enterprises, Coyle told China Focus.

Farmandeh held a rather objective view of the new law’s implications. He said that passing the law is one thing and the real impact of the law another. All laws first have an impact when they are set to be practiced, but the actual impact when they are practiced is very important. But he thinks the Chinese investment environment will be even more open for joint ventures than ever more.

“It’s too early to give an outlook. But it’s a step in the right direction. It’s a clear sign that China is willing to open its economy and wants foreign investors to upgrade the economy. The big if is whether the Chinese government is really willing to implement the new law word by word e.g. supporting a level playing field etc.,” says Müller.

How Can China Further Open Up to Foreign Investment in the Future?

China has vowed to expand opening up by diversifying export markets, expanding imports, boosting foreign investment inflows and advancing the Belt and Road Initiative, which will provide reassurance to the global economy, according to the government work report delivered by Chinese Premier Li Keqiang Tuesday morning at the second session of the 13th NPC.

As Premier Li said, “China’s investment environment is all set to get better and better, which means more and more business opportunities for foreign companies in China are a sure thing.”

So what are the foreigners’ expectations for the further improvement in China’s investment environment?

“Actually, the new investment law is a good step forward for more opening up in China. This is a very good time for investment. I expect that China will open more economic sectors for foreign investments and continue its road on allowing foreign investments to play a more active role in the Chinese economy,” said AbuBakr.

Opening more sectors for foreigners and abolishing hurdles like the pre-condition to have a Chinese partner to get access and abolishing the constraint of handing out know-how, is very important. A new negative list would also be helpful. It’s in the interest of China to open more sectors for foreigners and stimulate competition, Müller told China Focus.

“I think the next real step is and should be cultural exchanges within the business community,” said Farmandeh. He believes that the new law will really be enforced and contribute to better business opportunities. China should exercise the law to its full potential in the future, which means there will be a need for even more cultural exchanges both within China and between the international community and China.

Coyle remarked that our members desire that foreign investment is treated on its overall merits and AustCham will be keeping a close eye on the implementation of this law and its future developments.