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China's new foreign investment law key to drawing fresh capital

posted onJanuary 30, 2019

Major changes in the regulation of foreign investment in China are underway, as the world's second largest economy aims to further open its market.

Xinhua news agency reported on Wednesday (Jan. 30) that the Chinese parliament will vote in March on a new foreign investment law, as Beijing follows through on earlier promises to raise caps on foreign investment mainly in the vehicle and financial sectors. 

The new law, the first of its kind, was first reviewed by the Standing Committee of the National People's Congress, a powerful body of lawmakers, in December with the first draft made available to the public for comment until February 24. 

Once adopted, the law will replace existing legislation governing Chinese-foreign equity joint ventures, non-equity joint ventures (or contractual joint ventures) and wholly foreign-owned enterprises. 

"There is an urgent need for such a unified law to provide stronger legal protection for further expanding opening up and better using foreign investment," Justice Minister Fu Zhenghua was quoted by Xinhua as saying. 

Key points from the draft Foreign Investment Law 

The unified law prohibits government officials from using administrative means to force foreign-invested enterprises to transfer their technology.

It also stipulates that foreign-invested enterprises enjoy equal treatment and market access with domestic counterparts in China (except in excluded sectors specified in the government’s negative list) and includes regulations regarding antitrust examination on mergers and acquisitions by foreign businesses.

Other key points from the draft Foreign Investment Law include:

  • China shall not expropriate or requisition foreign investment, except under particular circumstances and in the public interest. If the state expropriates or requisitions foreign investment, "due legal procedures must be followed while prompt, fair and reasonable compensation should be made," it notes.
  • China reserves the right to penalise foreign businesses on failure to report their investment information to related authorities.

Soliciting opinions
In late December, the original draft of the new foreign investment law was submitted to the NPC Standing Committee for its first reading. After the first reading, the draft was discussed with central and local government agencies, institutions of higher learning, research organisations, foreign business chambers and foreign companies. 

According to the Xinhua report, Li Fei, chairman of the NPC Constitution and Law Committee said that all parties agreed to the enactment of the law, saying it is an important step to improve the legal system concerning foreign affairs and will help China attract more foreign investment, open wider to the world and enhance its ease of doing business. 

It is unclear if the second draft of the law would be made available to the public for comment. 
By the end of October 2018, there were almost 950,000 foreign-funded companies registered in China,  accounting for investments exceeding $2.1 trillion and performing as major driving forces in China's economic and social development, according to the state news agency.

China FDI 2018

Averting an escalation in the two countries’ trade war?

The report came just hours before Chinese vice premier Liu He and US Trade Representative Robert Lighthizer were due to sit down in Washington for highly anticipated two-days talks on resolving their trade dispute.

The latest round of talks comes one month before the 90-day tariff truce agreed on December 1 by Chinese President Xi Jinping and US President Donald Trump expires. 

If negotiations will not a reach a deal by the March 1 deadline, Trump has said he will more than double the punitive tariff rate currently assessed on about half of all Chinese exports to the US. 
China has retaliated with tariffs of its own, but has suspended some.China ran a $344 billion trade surplus with the US last year.

People familiar with the talks told Reuters manufactured goods, a key priority for the Trump administration, were among the largest components of Chinese purchase pledges aimed at significantly reducing the U.S. trade deficit with China.  

Experts say that China, despite trade friction with the US, remains attractive to foreign capital due to the huge size of its market and the measures aimed at the improvement of its business and investment environment. The near future will show. 

UPDATE 02/02/2019

The two-day high-level U.S.-China trade talks ended without anything concrete results, although both negotiating teams have said they made "important progress."

U.S. President Donald Trump told reporters in the Oval Office on Thursday that he hoped to strike a deal with China before the March 1 deadline. He also said Chinese President Xi Jinping told him in a letter that he hopes both sides will be able to meet each other halfway on a trade agreement before the deadline. 

Trump also said he would soon meet with Chinese President Xi Jinping to try to reach a comprehensive trade deal. The White House insisted it sees March 1 as a hard deadline for a deal. 

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