This article about China’s new Foreign Investment Law appeared in the Norway-Asia Business Review Magazine.
With China’s new Foreign Investment Law taking effect, many experts are hoping that it will achieve its goals of facilitating the opening of the market to foreign investor and creating a uniformed legal framework and level playing field for overseas firms even if questions remain over certain issues.
Foreign businesses already operating in China, or ones that had looked into entering the country, know just how convoluted things could be from a legal standpoint. With three FDI laws governing corporate establishment and structures, the country’s evolving economy is in need of greater clarity.
In the first quarter of 2019, the Chinese government revamped the laws covering foreign investors and foreign-invested enterprises that operate in the country. The end result of these efforts was the Foreign Investment Law (FIL) that is designed to improve the overall business environment for foreign investors while also ensuring foreign-invested enterprises are able to compete equally in the Chinese marketplace.
Audry Li, Partner at Zhong Lun Law Firm points out there will undoubtedly be more uniformity of legal framework under the new law with the trio of existing FDI laws being gradually phased out after a five-year grace period. This clarity is something China wants as much as the foreign business community.
“There has been a desire in China to have this new law. In fact, the first draft of the FIL was introduced in 2015,” Li says. “After the first draft was introduced four years ago and followed up with a few rounds of comments, it was put on hold until recently. The government knew there was a need for uniformed foreign investment laws and the push for changes has come from China itself.”
The biggest concern many experts have about the new FIL is the fact it is still being filled out. Due to the rushed nature of the law’s passing, the government needed to create additional implementation regulations in the following months with certain areas still being opaque.
“The main issue with the new law is that it is still general, some regulations are not specific. There are implementation rules we are still waiting to be enacted although the draft implementation rules have recently been published. It is totally unclear yet how everything will work out,” Li explains. “How the new law will be implemented needs to be further clarified and more information on future regulations are still needed.”
One example of this uncertainty is the fact that the exact definition of foreign investment hasn’t been clearly defined. Li noted this is a question her firm receives a lot and is just one aspect that needs to be addressed
“I think people agree that the new law signifies progress and it is needed, but more clarity is required. For example, the new law doesn’t have a Variable Interest Entity (VIE) structure,” Li states.
It is not just the law that is changing. The kind of investment needed in China is rapidly shifting as well. According to the United Nations Conference on Trade and Development (UNCTAD), China is the world’s second largest FDI recipient with the total figure of accumulated FDI exceeding USD 2 trillion. But recent investments are in more forward looking industries.
“From a legal perspective, we are seeing a continued effort from the government to encourage foreign investment. However, the kind of investment needed is at different than what was of use in the past. There are opportunities, but they are changing,” Li says. “Today, investments in eco-friendly and tech-friendly sectors are more welcomed. In many ways, this makes it a good time for Norwegian businesses to come to China since many of them have products and knowledge focused on sustainable growth and development that are in real demand in the market here.”
She adds that if foreign investors think there is a genuine need for their products in China and those are not in the negative list of sectors, they do not have to worry much about the legal aspects of investment.
Click here to read the full article in the Norway-Asia Business Review Magazine.
