USCBC Comments on MOJ's FIL Draft Implementing Regulations

November 12, 2019

The MOJ’s draft regulations contain many positive elements. We are encouraged to see the inclusion of various mechanisms for strengthening IP protection for foreign-invested enterprises (FIEs) and foreign investors. While the provisions that address forced technology transfer set up the foundation to develop a system that protects trade secrets and ensures administrative measures will not be used to coerce unwanted transfers of technology, the determining factor will be how these measures are implemented. We look forward to further positive developments on these fronts. While the draft regulations take positive steps towards creating a domestic business environment attractive to foreign investment, there is room for improvement. The draft regulations contain vague language on several issues of critical importance to our member companies, leaving key concerns only partially addressed. In particular, we would like to highlight the following suggestions:

Clarify the national security review mechanism: Our member companies were very interested in further clarification of the foreign investment national security review mechanism included in Article 35 of the Foreign Investment Law, but no further clarification was provided in the draft regulations. We encourage MOJ to add further detail to the implementing regulations to on the security review process that establishes narrow, clearly-defined national security review criteria that balance the need for an open foreign investment environment and national security concerns. We also suggest the implementing regulations establish a rules-based mechanism for appealing national security review decisions.

Clarify important terms: As suggested in our previous comments to the National People’s Congress on draft versions of the FIL, the implementing regulations should clearly define all essential terms, including “foreign investors” and “indirect involvement.” For example, the term “other investors” from Article 2 of the FIL remains undefined, which leaves uncertainty over whether Chinese natural persons 2 can establish new FIEs with foreign investors. The use of such imprecise phrasing allows room for misunderstanding and misinterpretation that could otherwise be avoided.
Ensure a public comment period: We encourage the implementing regulations to increase opportunities for foreign participation in the public comment process for new laws and regulations related to foreign investment for a period of no less than 30 days, and ideally at least 60 days.
Expedite drafting of related measures: We are pleased to see that the State Administration for Market Regulation (SAMR) will be responsible for issuing further clarification regarding the information reporting system and the five-year transition period for company formation. We encourage SAMR to release these related measures as soon as possible to ensure a smooth transition, and to include a dedicated public comment period. Sharing a public timetable for publishing such information would help improve transparency.
Consolidate information reporting systems: We are pleased to see that the government will make efforts to ensure that the existence of multiple information reporting systems does not pose an undue burden for FIEs. However, we encourage implementing regulations to consolidate the existing departmental information reporting systems into a single unified platform.
Level the government procurement playing field: Further clarity on the definition of “domestic product” is needed to ensure the government procurement process is fair for foreign invested firms. We encourage the implementing regulations to establish legal mechanisms and remedies for foreign invested firms who are unfairly denied access to the government procurement process.
Increase openness and transparency in standards setting: The draft regulations provide some additional clarification about the ability of FIEs to participate in different stages of standards drafting, but leave many questions about their rights and responsibilities in standards setting unanswered. To improve transparency in standards setting, we suggest that China create a designated unified channel to make draft versions of all standards, standards-related policies, and regulations available for public comment for a period of at least 60 days.