China Foreign Investment Law to Treat Foreign and Domestic Companies Equally; Expert Disagrees

December 30, 2019 Updated: December 30, 2019
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News Analysis

China’s first revision of its 2006 New Company Law, which takes effect on Jan. 1, will supposedly treat foreign and private domestic investors the same way. Although the move sounds positive, an American attorney who is an expert on China’s business laws expressed skepticism over the new development.

The Foreign Investment Law (FIL) has been hailed by the Chinese regime as “leveling of the playing field” for multinational companies by granting the same “national treatment” as domestic firms. But the core intent and the reality of the FIL is to “pull down” foreign investors to the status of privately-owned Chinese companies; which means they will be fully under the control of the Chinese Communist Party (CCP) and operate at a permanent economic disadvantage to Chinese state-owned enterprises, according to attorney Steve Dickinson, who assists foreign companies conduct business in China under the U.S.-based international law firm Harris Bricken.

The fifteen-year-old Foreign Invested Enterprise (FIE) legal structure that established the right to form a Wholly Foreign-Owned Enterprise (WFOE) to produce in China, and the Sino-Foreign Equity Joint Venture (SJV) to produce and sell to Chinese individuals will disappear on Jan. 1.

The good news for foreign investors is that the business procedures that are onerous and vary dramatically from jurisdiction to jurisdiction and the process of setting up a business in China, which usually takes over one year, will be radically simplified. The new FIL treatment will be about as simple and inexpensive as forming a company in the United States, Canada, Hong Kong, the EU, Australia, etc. The business formation process in most Chinese cities will now take less than a week.

The old system required foreign investors interested in purchasing a non-controlling interest in a Chinese company to restructure the Chinese entity as a joint venture. The structure was very problematic regarding the legal rights of the foreign investor. The new law permits buying ownership interests in existing Chinese privately-owned companies on the same basis as a Chinese investor.

The new structure also allows Chinese companies to pay for technology or services with their own stock, rather than in cash. This will eliminate the prohibition against awarding incentive stock options to foreigners and expats to work in Chinese-based companies.

Despite what is advertised to be a radical break from decades of sponsoring a closed economy, the Chinese regime on Nov. 22 expanded its “Negative List of Market Access” and its “Free Trade Zone Special Administrative Measures on Access to Foreign Investment.”

The 2019 MA and FTZ negative lists encourage foreign and domestic firms to “enjoy equal access under the law,” save for record-filing requirements, in “modern agriculture, advanced manufacturing, high and new technology, energy conservation, environmental protection.” High-end manufacturing, smart manufacturing, and green manufacturing industry investments are also “encouraged.”

But 77 combined sectors are restricted to Chinese state-owned enterprises including telecommunications, financial technology, high-speed securities trading, all internet products, internet gaming, online e-commerce, energy, utilities, transportation, mining, water conservation, public facilities management, sports and entertainment.

Dickinson argues the level of protection against foreign competition may have been fitting for China’s development through the 1980s and 1990s, “but it is not appropriate for a China that is now the second largest economy in the world.” He believes the Chinese regime has no plans to reduce its “stronghold over China’s economy.”

After disclosure of the final rules and restrictions, Dickinson stated that the new Foreign Investment Law will be little more than “putting lipstick on a pig.