China’s New Foreign Investment Law

China foreign investment lawyers

MEH.

For weeks now, our China foreign investment lawyers have been getting a steady stream of emails regarding China’s now approved new law on foreign investments. Those emails can very roughly be divided into the following two camps:

1. Those (mostly from our own clients) asking us what it will mean.

2. Those (mostly from China Law Blog readers) using this law as proof that we “exaggerate how unfair China treats foreign companies” or we “have become way too cynical about China.”

This post strives to answer both email strains.

The new law sounds good but the devil will be in the details and like everything else related to China laws the details will be in its enforcement. But right off the bat, color me highly skeptical.

China has never treated foreign companies even close to how it treats domestic companies. China’s entire economic system is based on this and, if anything, things have gotten worse for foreign companies in the last 5-10 years. Why should things all of a sudden change now? Because China is under tremendous pressure from both the United States and its own declining economy to stimulate foreign investment.

But China — like pretty much every country in the world — does not like being told what to do by a foreign power or even by a declining economy. This, coupled with China’s long history of failed promises to open up more to foreign businesses, makes me doubt it is serious this time either. And reading between the lines of how this law got approved and even when it will actually become law make me doubt China’s enthusiasm even more.

In China approves new foreign investment law designed to level domestic playing field for overseas investors, The South China Morning Post highlights the following red flags:

  • “Beijing rushed the legislation through the country’s largely ceremonial legislature in an effort to fend off complaints from the United States and Europe about unfair trade practices. The new law was first introduced as a draft in 2015, but its progress picked up markedly from the middle of last year to address issues identified by Washington as part of the US-China trade war.”
  • “At the same time, the wording of the law, which will replace three foreign capital laws – the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on Foreign-Capital Enterprises – passed between 1979 and 1990 in the early years of China’s process of reform and opening up, is quite general, leaving many details to be addressed in other regulations and implementation procedures.”

In other words, this is an effort China started in 2015, but now all of a sudden — under the pressures mentioned above — it has decided to embrace this change. Enthusiasm matters because without enthusiasm there will be no enforcement. Heck, this law is not even set to go into force until 2020 and it needs all sorts of supporting rules and regulations in the meantime. Enthusiasm matters because without enactment of the supporting rules and regulations there will be little to enforce.

The SCMP article ends with an amazing quote from “He Weifang, an outspoken law professor at Peking University” who questions whether China’s existing government structure will adequately enforce the new law:

“We need democratic supervision and justice to ensure enforcement if there are any regulations issued later. Enforcement really relies on structural changes and an independent judicial system. So, I cannot say that I will be more optimistic when more regulations come out,” he said.

“It would be even worse if we lack the implementation mechanism after we enact a law, because the outside world will not trust you no matter what law you enact in the future. We need checks and balances to ensure enforcement, otherwise, all well-intentioned enactment of laws will end in vain.”

He is 100% right.

Addressing the cynicism question, all I can do is quote what an audience member once said at a China event I attended: “For those of us who have been dealing with China for more than a decade and have therefore been involuntarily trained to ignore the smoke and just wait for the fire, can you please just tell me what you have seen that has actually changed with . . . .” This proposed law is smoke that may not ever become fire and even if it does become fire, it may be nothing more than a match that soon blows out.

Is this new law an effort to improve the chances of a China trade deal? How strong will this law be if there is no trade deal? How strong will it be if there is a trade deal?

At this point, the best strategy is probably just to wait and see.

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