China's Draft Foreign Investment Law Leaves Room for Protectionism

February 18th, 2015

Jake Laband

China’s Draft Foreign Investment Law, which will restructure the foreign investment legal regime, leaves significant room for protectionism, according to US-China Business Council (USCBC) comments recently submitted to the Ministry of Commerce (MOFCOM). The proposed law combines the three current laws governing foreign investment—the Wholly Foreign-Owned Enterprise Law, the Sino-Foreign Equity Joint Venture Law, and the Sino-Foreign Contractual Joint Venture Law—while removing language on corporate structure and adding new requirements for national security reviews, reporting, and inspection. Though the draft does contain some positive elements that could be helpful to foreign company operations, USCBC remains concerned by continued distinctions between foreign and domestic companies, as well as additional requirements and limitations for foreign companies that do not apply to their domestic counterparts. Such limitations are not in line with principles of national treatment that have been raised by both Chinese leadership and in the context of ongoing Bilateral Investment Treaty (BIT) negotiations.

Some of the most positive developments in the draft remove requirements for corporate governance and registered capital, bringing treatment of foreign companies in line with the Company Law. The draft law also integrates important principles from BIT negotiations, including pre-establishment national treatment and the adoption of a negative list approach. Such developments could ease foreign investment approvals easier for some investors, while proactively tackling some of the issues likely to come up in BIT discussions.

Despite some steps in the right direction, however, the draft law provides too many opportunities for protectionism and discriminatory behavior. Such provisions directly conflict with Premier Li Keqiang’s January 2015 remarks at the World Economic Forum in Davos, Switzerland, when he said that “Chinese and foreign companies will be treated as equals.” Ultimately, the Chinese government should consider eliminating the Foreign Investment Law altogether, and subject foreign and domestic companies to equal treatment under the Company Law. In lieu of such a measure, USCBC recommends the following modifications:

  • Eliminate provisions that discriminate between foreign and domestic investment  USCBC recommends revisions that would make foreign-invested companies subject to the same legal and reporting requirements as domestic companies. Such revisions would be in line with the spirit of national treatment and would support China’s ongoing BIT negotiations with the United States. To achieve this goal, USCBC suggests that regulators consider eliminating extensive reporting requirements and additional supervision and inspection requirements that apply to foreign-invested but not domestic companies.
  • Clarify the scope, form, and revision process for the negative list  USCBC remains concerned that dividing the negative list into “prohibited” and “restricted” categories will encourage the inclusion of more—not fewer—restrictions, resulting in a list that is not in line with the spirit of a negative list approach. USCBC requests that MOFCOM use a unified negative list with a specific, limited number of industries in which investment is prohibited, and clarify its relationship to the existing Catalogue Guiding Foreign Investment. USCBC also asks that MOFCOM clarify its plan for drafting and revising the negative list, ensuring that these processes are carried out in a transparent manner. This includes consulting actively with outside stakeholders, such as members of the foreign business community.
  • Increase transparency in all review procedures  Language in the current draft permits MOFCOM to collect input from other ministries and stakeholders, including Chinese companies, during market entry review and national security review processes. This process creates opportunities for protectionism, as it would allow input from parties who could hold conflicts of interest with foreign investors. USCBC recommendations include structuring all review mechanisms in a transparent, efficient manner that limits third party influence; increasing administrative efficiency by reducing industrial licensing requirements; and broadening the scope of national security review criteria to consider the positive effects of open trade and foreign investment.
  • Clarify the relationship between this law and other relevant laws and regulations  It remains unclear how the draft law, once enacted, will affect existing regulations related to foreign investment, including the Provisions on the Takeover of Domestic Enterprises by Foreign Investors, the Guidelines on Market Access Administration for Foreign Investment, and other regulations on foreign exchange. In addition, it remains to be seen what, if any, regulatory overhaul will occur, and whether there are any legislative plans to follow up on those regulations. USCBC recommends clarifying these relationships to minimize conflicts.

More details on these, and other specific changes submitted for consideration, can be found in the complete USCBC submission.