The Foreign Investment Law (FIL) stands to redefine the terms and technical requirements for foreign enterprises investing in China. It serves as the policymakers’ vision for further market opening and streamlined bureaucratic procedures, clarifying standards for foreign investment while maintaining unified government control. This legislation aims to level the playing field for domestic and foreign firms. A range of concerns remain – leaving foreign firms apprehensive that state aims could be prioritized over safeguarded market access.
 
China’s Ministry of Justice published draft implementation guidelines for the Foreign Investment Law last Friday, November 1. The document offered further details on technology transfer requirements, investment approval processes and inspection procedures. The Law will come into effect on January 1, 2020.
 
This draft clarifies some elements of implementation, including:

  • Forced technology transfer: the guidelines suggest that forced tech transfer will be banned when foreign businesses enter the Chinese market as well as during regular supervision processes. The last draft banned forced tech transfers via “administrative tools.” This draft, in contrast, includes not only administrative tools, but also includes other elements of regulation and market access.
  • Redefining foreign investment: the FIL cuts down on jargon differentiating foreign investment. The Chinese legal system traditionally grouped foreign investors into different categories based on their ownership structure, including wholly foreign-owned enterprises (WFOEs), Sino-foreign contractual joint ventures (CJVs) and Sino-foreign equity joint ventures (EJVs). The FIL replaces the WFOE, CJV, and EJC regulations with unified laws for direct and indirect foreign investment. However, it remains unclear how a more unified definition of foreign investment would be implemented in practice. For example, how companies established overseas but owned by Chinese nationals will be regulated remains unclear.

 
Despite these improvements, the business community has noted some ambiguous areas. Some key points of note include:

  • It remains unclear on what grounds a firm would be subject to the “safety review system”. This system would allow Chinese regulators to review technology and IP umbrellaing the name of protecting national security.
  • Detailed reporting structures: the implementation guidelines do not fully clarify reporting standards, an issue left unresolved during the consultation period. It does not clarify the timeline, categories or scope of mandatory reporting.
  • Treatment of foreign and domestic firms: while the law promises equal treatment for foreign and domestic firms, concerns remain that unclear standards for implementation across government levels and departments will leave foreign firms vulnerable to unfair terms,especially as it relates to government tenders and access to communication channels with regulators.
  • In addition to the safety review system, regulators have unrestricted access to foreign IP and can force tech transfers in the name of trade secrets, and ‘social public interest’.

As the implementation date of the Foreign Investment Law approaches, details on the grounds for trade secret disclosures and the administrative powers of relevant government ministries are expected. Given the comprehensive consultation process with foreign firms and industry chambers, the Ministry of Justice may well make adjustments to mitigate international companies’ concerns. The FIL’s primary challenge will be uniform and consistent enforcement, particularly given changing political priorities and geopolitical sentiment.

For further information on the Foreign Investment Law or to learn more about North Head’s tailored analysis, please contact hfeldshuh@northheadcomms.com.