Foreign Investors to be on Equal Footing with Domestic Businesses in China
China is implementing a new law to strengthen the rights and protection of foreign invested businesses in China. China has been critiqued for discriminating against foreign businesses and restricting their access to specific industries, markets and consumers, long before the US-China trade war.
The new Foreign Investment Law (“FIL”) is to come into effect on 1st January 2020, whether this is in response to criticisms or simply to remain attractive to foreign direct investment is open to interpretation.
The law aims to allow further access into China by promoting foreign investment, standardising its management, protecting the rights and interests of foreign investors and instil a new pattern of opening up to foreign investment which will boost the development of the socialist market economy. For years, there have been demands for China to “create a stable, transparent, foreseeable and level-playing market environment”. The FIL stipulates that, aside from industries that are explicitly prohibited, domestic and foreign investment shall be treated uniformly. This will allow Foreign Invested Entities (“FIEs”) to bid on government procurement contracts and public financing through shares and corporate bonds offerings. The FIL guarantees the protection of foreign investors' investment, earnings and other legitimate rights and interests in a number of areas:
- free transfer of inward and outward funds from contributions, profits, capital gains, income from asset disposal, royalties of intellectual property rights, lawfully obtained compensation or indemnity, income from liquidation and so on within the territory of China in CNY or a foreign currency;
- protection of foreign investors and foreign-funded enterprises’ intellectual property rights as well as the legitimate rights and interests of holders of intellectual property rights;
- strict investigation in the case of any infringement of intellectual property;
- removal of forced technology transfer, though technology cooperation is still encouraged; and protection from State expropriation.
Likewise, the law appears to impose the same Chinese social credit system, governance and supervision standards on foreign invested entities as domestic entities.
The FIL will repeal the existing laws on Sino-Foreign Equity Joint Ventures, Wholly Foreign-owned Enterprises and Sino-Foreign Cooperative Joint Ventures. After the introduction of the FIL, the Company’s Law of the People's Republic of China will apply. There will be a 5 year transitional period for existing FIEs to reorganize in accordance with the Company Law.
The FIL addresses many of the criticisms surrounding foreign investment. It removes the current market barriers for foreign businesses which in principle, will improve investment and investor confidence amid a maturing Chinese economy.
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