China Passes New Foreign Investment Law in Response to International Criticisms on Issues Including Market Openness and Lack of Protection on IPRs

The National People's Congress (NPC) of the People's Republic of China on March 18, 2019 passed a new Foreign Investment Law (the "New Foreign Investment Law"), which will come into effect on January 1, 2020 and replace the existing three foreign investment-related laws, i.e. the Chinese-Foreign Equity Joint Venture Law, Chinese-Foreign Contractual Joint Venture Law, and Wholly Foreign-owned Enterprises Law. According to the New Foreign Investment Law, foreign-invested enterprises already established under the existing laws could maintain their forms and institutions for a period of five years after the New Foreign Investment Law enters into effect.

Background

There is speculation that the Chinese government passed the New Foreign Investment Law in response to international criticisms, especially those from the U.S., concerning its market openness status, lack of protection on intellectual property rights and forced transfer of technologies, etc.

According to the Chinese government, the New Foreign Investment Law is intended to implement market openness as state policy, and to nurture a stable, transparent, predictable and fair competition legal environment (Art.3).

Below is a summary of the new investment law prepared by Dechert partners, including Xiao Yong (former Assistant Chair of the Foreign Investment Law Division, the Legal Department of MOFCOM, the body which drafted the original Foreign Investment Law).

Features of the New Investment Law

The New Foreign Investment Law reflects heavily the Chinese government's declaration to the international community on its protection and equal treatment of foreign investments in China. Below are some significant features: 

• Protection of IPRs and Trade Secrets: the new law explicitly states the protection of IPRs of foreign investors and foreign-invested enterprises, prohibits administrative organs and their officials from forcing transfer of technologies, and requires them to keep confidential trade secrets obtained from foreign investors and foreign-invested enterprises in accordance with law. (Arts.22 and 23)  
• Prevention of Additional Hardship or Undue Interference in Conduct of Business: the new law explicitly prohibits administrative bodies from reducing foreign-invested enterprises' rights and interests, adding to their obligations, imposing conditions on their entry into or exit of market, or unduly interfering in their normal conduct of business in China. (Art.24)  
• Equal Treatment in Government Procurement Activities and Obtaining Licenses: the new law requires government and supervising authorities to treat foreign investors/enterprises and domestic parties equally in their participation of government procurement activities and application for relevant licenses; (Art.16 & 30) The law also allows foreign-invested enterprises to participate in formulation of industry standards "equally and in accordance with the law." (Art.15)  
• Explicit Prohibition of Expropriation and Due Compensation Principle: the new law explicitly declares that the government will not expropriate foreign investments, saving for reasons of "public interests," under which circumstances, fair and reasonable compensation shall be given in time. (Art.20)  
• Negative List, Antitrust Review and Security Review: the new law allows foreign investors to invest in sectors outside a "Negative List" which will be formulated and announced by the Chinese government. For those areas under the Negative List where limited foreign investments are allowed, special investment conditions will apply; (Art.28) further, antitrust review will apply where a proposed acquisition by a foreign investor triggers concentration concerns; (Art.33) also, the government will conduct security review of foreign investments in China where it believes the investment will or may impact national security; the decision of the security review is of final effect and there is no appeal mechanism. (Art.35) 

Conclusion

The New Foreign Investment Law responds to many complaints from foreign investors, including limited degree of market openness, no fair and equal treatment, undue interference in business operations, lack of protection of IPRs, etc. Although detailed implementation rules are still in process and not yet available, the New Foreign Investment Law sends out strong signals of the Chinese government's aim to create a better legal environment for foreign investments.