China’s new foreign investment regime in force from 1 January 2020
20 January 2020
The new Foreign Investment Law (“FIL”) of the People’s Republic of China (“PRC”) has come into effect from 1 January 2020. It was adopted by the PRC National People’s Congress on 15 March 2019.
Also coming into force on 1 January 2020 were the Implementing Regulations of the FIL of the PRC (“Implementing Regulations”) and the Interpretation of the Supreme People’s Court on Several Issues concerning the Application of the FIL of the PRC (“Interpretation”).
Foreign Investment Law
The 1980s saw the promulgation of laws to promote foreign investment, in particular, the introduction of three investment vehicles including the Equity Joint Venture, the Wholly Foreign-Owned Enterprise and the Co-operative Joint Venture. With the coming into force of the FIL, the three laws - the pillars of the former foreign investment regime - have been repealed as stipulated in Article 42 of the FIL.
Foreign-invested enterprises (“FIEs”) established before the coming into force of the FIL will enjoy a five-year transition period from 1 January 2020 in which to adjust their organisational structure.
The FIL mandates that FIEs and local companies are to be treated on the same footing, that is, they will have the same “national treatment”. In short, unless they fall under restricted sectors in the Special Administrative Measures for Foreign Investment Access (Negative List) (“Negative List”), FIEs will be treated the same way as local companies, including undergoing largely the same incorporation process and conforming to the same governance rules as set out in the PRC Company Law or the PRC Partnership Enterprise Law. Government policies supporting business development and government procurements will apply equally to both FIEs and local companies.
On 26 December 2019, the PRC State Council issued the Implementing Regulations, which details or clarifies certain provisions of the FIL. Notably, it has now been confirmed that Chinese nationals are able to directly establish joint venture companies with foreign investors. This was not permitted under the former foreign investment regime and was not specified in the FIL.
Additionally, from 1 January 2020, the requirement for FIEs to file with the Ministry of Commerce (“MOFCOM”) in relation to sectors not on the Negative List has been simplified and relaxed to be a reporting requirement. Going forward, MOFCOM will take a back seat, by only monitoring foreign investment through its information reporting system. Practically, FIEs will be able to register with the State Administration for Market Regulation (“SAMR”) (as all local companies do) and complete reporting formalities through one online portal, easing the administrative burdens in entering the Chinese market. On 30 December 2019, MOFCOM and SAMR jointly issued the Measures on the Reporting of Foreign Investment Information, which lay the groundwork for the administration of FIE establishment and changes. These measures also took effect on 1 January 2020.
The Interpretation was issued by the Supreme People’s Court on 26 December 2019 and came into effect on 1 January 2020. The Interpretation provides guidance on how Chinese courts will handle disputes over the application of law and the validity of contracts in relation to foreign investment.
For example, the Interpretation provides that where a party to a contract for investment in a field outside of the Negative List claims that the contract is void or has not become effective on the ground that the contract has not been approved by or registered with the relevant administrative department, the court shall not sustain such claim. Further, where a foreign investor invests in a field which is prohibited under the Negative List, or restricted under the Negative List and a party claims that the investment contract is void on the ground that it has violated the special administrative measures for restrictive access, the court shall sustain such claim. Where a foreign investor invests in a field which is no longer prohibited or restricted before the court renders a judgment, and a party claims that the investment contract is valid, the court shall sustain such claim.
The new foreign investment regulatory regime aims to further liberalise foreign investment in China and streamline the relevant procedures. The overhaul is ongoing. The FIL and the Implementing Regulations are silent on several matters, such as legality of VIEs (variable interest entities) as well as the housekeeping of some other regulations and implementation rules which should be amended in order to bridge discrepancies between the new and old regimes. It is expected that these issues will be clarified through the issuance of rules and regulations in due course.