Foreign Investment Law (hereinafter referred to as FIL or this Law) newly passed on the National People’s Conference (NPC) earlier this year will become effective as of January 1, 2020.
According to Article 3 of this Law, China will uphold opening up as a fundamental national policy, and shall “develop high-level investment policy of liberalization and facilitation, put in place and improve foreign investment promotion system, build a stable, transparent, predictable and level-playing business environment”. Chinese Premier Li Keqiang responded on the press conference of this year’s NPC session, that this Law is also to regulate government’s acts, requiring the government to perform its functions in accordance with the law, and that the government will observe the principles of this Law and promulgate a series of matching regulations and directives to protect the rights and interests of foreign investors and foreign investment enterprises (Hereinafter referred to as FIEs).
FIL is taken as an active response addressing concerns of FIEs all these years, especially under trade frictions between China and U.S., or even anti-globalization across the world. The past 7 months saw some actions taken by the central government, including related government authorities, in building the right business environment, which demonstrate their commitments and point to a positive and promising direction, however, much more is called forth and expected to fulfill the Law.
Government’s latest actions
Since the enactment of the FIL, a series of actions have been taken by Chinese government to fulfill its commitments therein, focusing on more opening-up, building an internationalized business environment under rule of law and convenience, which is called forth not only by the FIL, but also by China’s new phase of economic development and opening up, as well as in response to the new challenges in world economy and current obstacles in globalization.
Amendment of IP rules
• On April 23, 2019, the NPC standing committee decided to amend the PRC Trademark Law, to be implemented as of November 1, 2019, covering 6 articles, in relation to willful trademark registration, increased compensation for trademark infringement, counterfeiting registered trademark. China National Intellectual Property Administration will develop some matching rules to ensure that these amendments be enforced.
• The fourth amendment to the PRC Patent Law is reportedly expected to be accomplished by the end of this year, in which IP protection will be strengthened, and rules on punitive damages for IP infringement will be tightened so as to largely increase cost for breaking the law.
Release of Lists of Encouraged Industries for Foreign Investment (2019 version) and Negative Lists(2019 version)
• NDRC and MOFCOM on June 30, 2019 released two lists, one is List of Encouraged Industries for Foreign Investment, which has two sub-lists (one applies nationally, called National List of Encouraged Industries for Foreign Investment while one applies in mid – western areas and north eastern areas, called List of Advantageous Industries for Foreign Investment in Mid-western Areas ), the other consists of List of Special Administration Measures on Foreign Investment Access (Negative List) (2019 version), and List of Special Administration Measures on Foreign Investment Access in Free Trade Trial Zones(Negative Lists)(2019 version) . The Negative Lists were implemented as of July 30 this year.
• On the National List the original 48 items were cut to 40, with restrictions loosened or abolished in 7 areas, namely shipping forwarder, urban fuels & gases, cinema, performance brokers, value-added telecommunications, oil& gas production, etc. , while on the List for free trade zones, the original 45 items were reduced to 37.
Free trade trial zones to build within China
• On August 29, the State Council issued a circular on General Plans of 6 Specific Free Trade Trial Zones, separately in Shandong Province, Jiangsu Province, Guangxi Province, Hebei Province, Yunnan Province and Heilongjiang Province.
• For each Zone, it is generally required that the Zone shall be a new-level highland for opening-up in a new era.
• In terms of strategic positioning and objectives, with innovation of rules as the core, in line with internationally advanced norms and practices, the Zones shall be high-caliber and high-quality ones for facilitation of trade and investment, with full financial services, secured and efficient oversight, as well as prominent radiating and exemplary roles, while there are some variations specifically tailored to each Zone.
• The key tasks and measures cover speeding up transformation of government roles (building internationally first-rate business environment), furthering reforms of investment mechanism (to advance investment liberty and convenience, and to improve investment promotion and protection), promoting trade up- gradation, deepening opening-up and innovation in the financial sectors, advancing innovation-driven development, etc. There are also some variations specifically tailored to each Zone.
Rules on Optimization of Business Environment enacted by the State Council
• The State Council on October 23 released the Rules on Optimization of Business Environment (The Rules), which is to be effective as of January 1, 2020.
• As stated in Article 4 in the Rules, Optimization of business environment shall follow principles of marketization, rule of law and internationalization, with market participants’ needs oriented, deepening transformation of government roles as the core, by innovating constitutions and mechanisms, strengthening synergy and collaboration, improving rule of law, in line with international advanced norms and practices, so as to create a stable, fair, transparent and predictable environment.
• The Rules covers protection of market participants, market environment, administrative services, supervision and law enforcement, rule of law.
Other noticeable actions to build a fair and clean government, as well as business environment
• The State Council on April 15 released revised Rules on Government Information Disclosure, to be implemented as of May 15, 2019.
• As reported by Xinhua News Agency on May 6, General Office of Chinese Communist Party Central Committee and General Office of the State Council released Rules on Building Government under Rule of Law and Supervision of Responsibility Fulfillment. The new rules will be implemented as of April 15.
• On April 30, 2019 the State Council released Several Rules on Online Governmental Services, effective as of the same day of release.
• The State Council on May 8 released Interim Rules on Process of Important Administrative Decision-making, which is to be implemented as of September 1 the same year.
• On July 26, 2019 China’s Ministry of Finance released Circular on Furthering Fair Competition in Government Procurement and Improving Business Environment, providing for requirements in 5 aspects: First, to completely sort out and rectify those rules and practices which impede fair competition; Second, to strictly implement scrutiny for fair competition purpose; Third, to strengthen execution management in government procurement; Fourth, to speed up electronic government procurement; Fifth, to further improve transparency; Sixth, to improve a mechanism for query & complaints and administrative resolution. The Circular was implemented as of September 1 this year.
• On August 20, 2019, several agencies under the State Council issued a circular on Special rectification Plan for Building Business Environment in Bidding and Tendering for Engineering/Construction Projects, with one of the objectives being to eliminate various unjustifiable restraints and barriers in bidding and tendering for enterprises of different types of ownership, especially for privately owned enterprises and foreign invested enterprises.
• According to Economy Daily on September 4, China’s Ministry of Justice has held a meeting to further full implementing legitimacy review system of administrative rules. Currently judicial functions in most areas have developed detailed implementation plans based upon their actual situation.
• China’s State Administration of Foreign Exchange just announced on September 10, 2019 that it decides to abolish limits of investment quota for qualified foreign institutional investors (QFII) and Renminbi qualified foreign institutional investors (RQFII), to further expand opening -up in Chinese financial markets.
• On October 15 the State Council released a circular of decision to amend Administrative Rules on Foreign Invested Insurance Companies in PRC and Administrative Rules on Foreign Invested Banks in PRC, effective as of the day of release.
It is really a long, positively and promisingly running list. And more is expected to come.
What is further expected from the local government
With the Law enacted and rules out there, it comes to the point for the government to implement it. There could be some ambiguities to clarify, while the local governments are also expected to play their roles accordingly.
To be noticeable, earlier in 2015, the State Council issued a circular requiring that the SOEs and the government agencies shall put in place their legal counsels as well as a system for them to play their roles, so as to manage legal risks.
Furthermore, given the sweeping move to fight corruption in China these years, a lot of rules have been developed, especially those which apply to Chinese Communist Party members, and those issued by the Supreme People’s Court of China, will heavily tighten the government -business relationships for a clean and transparent business environment and have to be observed with great prudence by the government officials as well as corporate managers.
Advisably government’s response is to be called upon as follows:
1. To establish government’s boundaries in developing local rules and implementing applicable rules
• To sort out and define applicable rules, like the Law on Legislation in PRC
• Especially in terms of preferential treatments and other aspects concerning government’s role-play
2. To look into the relevant rules and do compliance check
• To abolish or amend those rules in contradiction with the Law, and other applicable laws and regulations
• To develop rules as called forth in the FIL
3. To map out and perform its rights and duties
• To map out the current rights and duties, in terms of tax incentives, preferential treatments, land use, etc.
• To develop an action plan in term of content, time lines, phase, etc.
4. To develop internal rules for risk management
International and Domestic Dynamism
While some actions are being taken by the central government and government authorities, it is noticed that there are few release from or reports about local governments, which hopefully does not mean local governments are doing nothing, rendering the legislation empty as well as uncertainties to foreign investors, not intended by the legislation. Although how the Law will be implemented to a large extent dictates whether the Law will live up to its missions, it does take time and efforts for the governments of each level to implement the Law.
China is continuing to open up and doing more to attract foreign investment, however given the China-US trade frictions, or even a larger picture of changing landscape and anti-globalization across the world, as well as some domestic economic and political dynamism, of which some influence could be unexpected in some areas, calling for sufficient risk management by the government and foreign investors.
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