The regulatory regime for foreign investment in China is set for the most significant change since 1979 when China first implemented its transformative economic reforms. This is heralded by the long-awaited foreign investment law (the “FIL”) which the Ministry of Commerce (“MOFCOM”) finally released for comments on 19 January 2015.

Since the promulgation of the Sino-foreign Equity Joint Venture Law (“EJV Law”) in 1979, foreign investment in China has been governed by specific legislation which does not apply to purely domestic investment. The Sino-foreign Cooperative Joint Venture Law (“CJV Law”) and the Wholly Foreign-owned Enterprise Law (“WFOE Law”) followed the EJV Law in the late 80s. These three laws (“FDI Laws”) laid the foundation for the foreign investment regime in China. However, that regime has failed to keep pace with China’s evolving demands on foreign capital.

The hoops and hurdles in the existing process significantly increase the cost of foreign investment in China making it a less attractive destination for foreign capital in an increasingly competitive global market. Previously foreign capital was incentivised to jump through the various hoops by the promise of tax and other preferential treatment, but those benefits have now largely been abolished. The Company Law, which came into effect in 2006, was the last major piece of reform and was in many ways inconsistent with the FDI Laws. These inconsistencies have contributed to making foreign investment in China unnecessarily costly and uncertain. When the most recent changes to the Company Law were implemented in 2014 the spotlight again fell on this issue and the call for a more unified and simplified law could no longer go unheard. So is the FIL the response that everyone has been waiting for?

We think the answer is – an inevitably qualified – yes. The draft FIL, if adopted, will bring fundamental and far-reaching reform to the way that foreign investment in China is structured including a relaxation of the approval and regulatory regime, enhanced corporate governance and greater efficiency. However, such large scale reform cannot be swept in without significant uncertainties and challenges. Every foreign investor needs to ready itself to adapt and comply with this new regime. This note will flag the five biggest changes and their implications.

The highlights of 5 key changes introduced by the FIL can be found here

What’s Next

  • The draft FIL closed for comments on 17 February 2015.
  • Promulgation of the FIL was actually under the “preliminary study projects” according to the State Council’s 2014 legislation plan. The publication of the draft FIL at the beginning of the 2015 shows how eager the government is to sign the bill into law as soon as possible. As the Chinese Companies Law was passed by the Standing Committee of the National People’s Congress (“NPC”), we would also expect the FIL to be passed by the Standing Committee, rather than by the NPC.
  • The new FIL should be understood in the context of the Shanghai Free Trade Zone (“FTZ”) and other FTZs in Guangzhou, Fujian and Tianjin where pilot schemes are being implemented. A unified Negative List applicable to foreign investments in these FTZs was published on 8 April 2015. It has been significantly shortened compared to the 2013 list published for Shanghai FTZ. We expect the much predicted success of these FTZs to facilitate and hasten the smooth passing of the FIL.
  • Foreign exchange is key to the administration of foreign investment in China, but the FIL makes no mention of it. Whilst the government retains relatively tight controls over foreign exchange in China, it is conceivable that, with the spread of FTZs and a less rigid foreign investment regime in China, we may also see relaxation of China’s foreign exchange controls.