BOFIT Viikkokatsaus / BOFIT Weekly 2020/02

In March 2019, the National People’s Congress approved a new law on foreign investment. The law entered into force at the start of this year and is intended to assure that foreign firms receive equal treatment as domestic firms. The law and its enabling clauses, however, have been criticised for vagueness and openness to interpretations.

The new investment law was hastily prepared about a year ago in an effort to stave off the emerging trade tensions with the US. The legislation streamlines previous legislation by replacing the three main laws governing foreign investments enacted during the 1970s and 1980s. The new law aims to conform international practices, following the principle of “national treatment”, whereby foreign companies operate on a level playing field with domestic firms. The law protects intellectual property, guarantees access of foreign companies to Chinese public procurement processes and bans forced technology transfers. The law also affirms earlier rules on repatriation of profits and other company assets, as well as payment of fair compensation for government takings of property. The law prohibits public officials under threat of sanctions from providing to outsiders information they have obtained on foreign companies in the course of their official duties.

Foreign investment will continue to be prohibited in certain branches (negative list) and special permits will still be required to operate in some other branches. The negative list had been gradually shortened, however. Last summer, the number of branches forbidden to foreign investors was reduced to 40, down from 190 six years ago.

Although the new investment law is considered an improvement, many observers are cautious about what the new law will actually deliver. The law and its implementing regulations are not precise and leave much to interpretation. For example, eyebrows have already been raised over the exact meaning of the domestic content requirement for products supplied in public procurement contracts and the possibility for provincial authorities to provide their own interpretations of the national treatment principle. Once again, the biggest concerns relate to implementation of the new law.