27 September 2019

In the past decade, names like Alibaba, Tencent, Xiaomi and Huawei have become recognisable across the world. With China’s fast-growing digital economy, it is no wonder that the country houses some of the world’s top tech giants, to rank among the likes of Apple, Amazon, Microsoft, Google and Facebook. And nowhere has the impact of China’s digital revolution been felt more than in the ASEAN region, where internet giants Alibaba and Tencent have invested heavily.

The question is how businesses in Singapore can embrace such rapid transformation occurring in China, and stay ahead in the future economy. It is not only in the area of technology that China is undergoing historic change. China is aiming to lead in connecting the world on many levels, and within itself, it is facilitating structural legal changes to bring about an economically progressive environment.

Connectivity

Digital transformation revolutionises connectivity, and adds a further dimension to the Belt and Road Initiative (“BRI”) - China’s global infrastructure development programme which encompasses an estimated US$1 trillion (S$1.36 trillion) of projects. Building on the idea of ancient silk routes, the BRI aims to build a trade and infrastructure network connecting Asia with Europe and Africa.

In 2015, the concept of the information or digital silk road was introduced, to cover submarine cables and satellite passageways. The resulting physical and digital connectivity brought by the BRI is envisaged to boost economies and raise living standards in the countries and regions involved.

Singapore’s challenge is to leverage on the BRI, and tap on the benefits that such a massive project can bring. It would seem natural for Singapore to build on its past and present experience with China, including government-to-government projects like the Suzhou Industrial Park (1994), Tianjin Eco-city (2007) and Chongqing Connectivity Initiative (2015), to take Sino-Singapore cooperation to a new level.

Indeed, Singapore has been an early and strong supporter of the BRI and is working with China on promoting connectivity in various areas, including finance, transportation, logistics as well as information and communications technology.

Reform

China’s receptivity to increasing bilateral cooperation and foreign investment has been manifested in economic liberalisation and legal reform over the years. After President Deng Xiaoping opened China’s door to the rest of the world in 1978, there was a promulgation of laws to promote foreign investment.

This resulted in the introduction of investment vehicles, such as the equity joint venture, the wholly foreign-owned enterprise, and the co-operative joint venture - collectively known as foreign-invested enterprises (“FIEs”) - and the establishment of special economic zones. In 1994, the PRC Company Law was introduced to regulate companies in China. The first Foreign Investment Catalogue was released the following year, setting out “encouraged”, “restricted” and “prohibited” sectors for foreign investment in China.

It comes as no surprise that there are restraints on foreign investment in China. The Foreign Investment Catalogue, however, has been calibrated and updated over the years, and the areas of permitted foreign investment have been expanded, with restrictions and prohibitions gradually lessening. This trend culminated in the first nationwide Negative List which was announced on 28 June 2018 and came into force a month later.

The Negative List 2018, which repealed the Foreign Investment Catalogue, whittled down the sectors prohibited and restricted from foreign investment from 63 to 48. The Negative List 2019, which was announced on 30 June 2019, further reduced such prohibited and restricted sectors down to 40. This brings the list of prohibited and restricted sectors to its shortest in China’s recent economic history. In particular, constraints to foreign investment in areas such as financial services, transportation, infrastructure, agriculture and mining have been relaxed.

In relation to the telecommunications sector, foreign investment in e-commerce had already been permitted prior to 2018. The Negative List 2019 further removes restrictions on foreign investment in domestic multi-party communications, storage and retransmission and call centre services, thereby opening the door to foreign investment in value-added telecommunications even wider.

Sectors which do not appear on the Negative List are considered open to foreign investment in China. In 2016, administrative reform was introduced such that projects in the encouraged or permitted sectors no longer require approval from the Ministry of Commerce or its local commissions, but are only subject to filing and registration requirements with the relevant government authorities. This has increased certainty and sped up the time taken to conclude projects and investments for foreign investors.

China’s move to provide an increasingly open and transparent environment for foreign investment has been further underlined by the passing of the Foreign Investment Law (“FIL”) by the state legislature National People’s Congress on 15 March 2019. The FIL will replace Chinese laws governing FIEs which have been in place since the 1980s.

The thrust of the FIL is that FIEs and local companies will be treated on the same footing. Unless they fall under restricted sectors in the Negative List, FIEs would be treated the same way as local enterprises, including undergoing the same incorporation process and conforming to the same governance rules set out in the PRC Company Law. Government policies supporting business development and government procurements will apply equally to both FIEs and local companies. Additionally, the FIL protects the intellectual property rights of foreign investors and FIEs and those responsible for any infringements will be strictly held legally liable.

China observers are eagerly watching how the FIL, now in the form of broad guidelines, will be encapsulated. The detailed rules and regulations are likely to be revealed when the FIL comes into force on 1 January 2020.

Opportunity

China’s ongoing transformation, marked by increasing openness and a drive for connectivity, presents opportunities aplenty for businesses across the world. Singapore is strategically placed as a gateway between eastern and western economies and cultures. The challenge is how Singapore businesses can likewise transform to harness the opportunities brought about by economic, technological, social and political changes in China. The first step would be to keep a close eye on the political and legal developments occurring in the most populous country in the world.

(This article first appeared in the SID Directors Conference Book 2019 published by the Singapore Institute of Directors. The published version of this article can be found on the Allen & Gledhill website www.allenandgledhill.com by clicking here.)

 

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