New Investment Law Regulations

The draft for china’s new foreign investment law (fil) regulations has been published for 2020, showing a significant development for foreign investors. So how clear are the new regulations?

On November 1 the Ministry of Justice, Ministry of Commerce and the National Development and Reform Commission released the Draft Regulations on the Implementation of Foreign Investment of the People’s Republic of China for public consultation.

The draft implementation regulations are part of a highly anticipated document that many hope will provide clarity on the new measures introduced by the Foreign Investment Law (FIL), set to take effect January 1, 2020.

What do the draft implementation regulations say?
Many of the common concerns long-expressed by foreign investors in China are addressed, such as forced technology transfers, profit repatriation and trade secrets. Some of the key issues include:

  • Allowing capital gains, royalties and IP license fees gained by foreign investors and foreign employees to be freely remitted in RMB or foreign exchange in accordance with the law and after paying tax (Article 23);
  • Establishing punitive damages systems for the infringement of IP rights (Article 24);
  • Limiting the extent, scope, and exposure of material concerning a foreign business’ ‘trade secrets that will be required to be handed over to administrative bodies and protecting the internal management system to protect this information (Article 26).

It also clarifies certain terms used within the law, such as:

  • “Other investors” – which is now defined to include Chinese individuals, with Article 3 of the Draft Regulations expressly allowing foreign investors to make investments in China jointly with Chinese individuals.

In addition, the draft makes a concerted effort to improve communication channels between government departments and foreign businesses to create a more transparent business landscape. Some notable provisions are:

  • The government and its relevant departments should ensure laws, regulations, rules, normative documents and policy measures are in writing and published on national government service platforms and should provide consulting and guidance services for foreign investors and companies (Article 11);
  • All policy commitments made by the local government will be in written form and not exceed the statutory authority given to them (Article 28).

Finally, the draft implementation reminds FIEs to make changes to the governing structure within six months after the five-year transitional period deadline (January 1, 2025), in which case FIEs will no longer be able to make other changes, and the incompliance will be shown in the Enterprise Information Publicity System (Article 42).

What do the experts think?
The new draft implementation regulations come less than two months prior to the FIL coming into force and marks a step towards making significant improvements to China’s business climate for foreign businesses.

While some business associations like the EU Chamber have been impressed with the first draft of the implementing regulations, calling it “accommodating,” others raise concerns about issues that remain unaddressed.

The US China Business Council (USBC) criticized the first round of the draft as being too light on details and containing “language that is unlikely to be enough to allow equal participation for foreign companies.”

The US China Business Council (USBC) criticized the first round of the draft as being too light on details

In particular, the senior vice president at USBC, Jake Parker, voiced his concern about the lack of explanation about the scope of key terms, such as ‘trade secrets’ ‘national interests’ and ‘social public interests.’

However, Lorena Miera Ruiz, Senior Associate of Dezan Shira & Associates’ International Business Advisory Department, notes that “though these draft regulations still leave a few questions unaddressed, it makes significant headway on many key issues concerning the FIL – such as whether the definition of ‘investors’ will encompass Chinese individuals and how the transitional period will work.”

This article was first published by China Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in in ChinaHong KongVietnamSingaporeIndia, and Russia. Readers may write info@dezshira.com for more support.