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Analysis on China’s Foreign Investment Law

With the sustained, stable and rapid development of China’s economy and the gradual opening up of its foreign policy, the domestic foreign investment industry has become increasingly large-scale and competitive. However, the current Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures, Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures and Law of the People’s Republic of China on Foreign Investment Enterprises (the “Three Laws on Foreign Investment”) no longer seem to adapt to the current economic situation in our country.  In order to further promote the opening to the outside world, speed up the construction and development of a socialist market economy, increase the opening of China’s market to foreign investment, and promote the formation of a new pattern of full opening, on 15 March 2019, the second session of the 13th National People’s Congress voted to pass the Foreign Investment Law of the People’s Republic of China. This law will come into force on 1 January 2020 and become the basic law in the field of foreign investment in China. At that time, the Law on Foreign-funded Enterprises, the Law on Sino-foreign Equity Joint Ventures and the Law on Sino-foreign Cooperative Ventures will become invalid simultaneously.

The provisions of the Foreign Investment Law have the characteristics of commanding, forward-looking and framing. The Foreign Investment Law has 42 articles in six chapters, covering the definition and situation of foreign investment promotion, investment protection and investment management. While abolishing the “Three Laws on Foreign Investment”, these articles establish the basic institutional framework for the utilization of foreign investment in our country in the new era and stipulate a number of systems including a negative list management system, an information reporting system and a security review system. The provisions of the Foreign Investment Law only provide the most basic and abstract provisions for these systems and are not practical at all. However, under the guidance of the Foreign Investment Law, the following detailed implementation rules must follow the basic framework defined by it, standardize government administration according to law, and fully encourage and attract foreign investment by clarifying various specific problems existing in practice. Some specific issues concerning foreign investment will be reviewed one by one below.

1. The mode of “Pre-admission National Treatment + Negative List”

Article 4 of the Foreign Investment Law clearly states: “The State implements a pre-admission national treatment plus negative list management system for foreign investment.” Since the establishment of Shanghai Free Trade Zone in 2013, China has been continuously exploring the policy mode to attract foreign investment. After testing the good practices of foreign investment in 12 free trade zones, the negative list management system implemented in the free trade zones is considered to be more open and encouraging to foreign investment than the previous nationwide implemented “Catalogue of Foreign Investment Guidance”. On 28 July 2018, the Special Administrative Measures for Foreign Investment Access (Negative List) (2018 Edition) was formally implemented, which contains a total of 48 restrictive measures and further expands the opening up in the fields of culture, resources, telecommunications, etc. On December 26 of the same year, the National Development and Reform Commission and the Ministry of Commerce issued Negative List of Market Access (2018 Edition), stipulating two categories of “prohibited access” and “permitted access”, with 151 items and 581 specific management measures. In short, foreign investment is permitted as long as it is not included in these two negative lists. Article 4 of the Foreign Investment Law clearly stipulates the negative list system, which is consistent with the previous policy direction of the Chinese government to encourage foreign investment and increase opening to the outside world. It also indicates that the Chinese government will continue to adopt an encouraging and supportive attitude towards foreign investment in the future.

On the other hand, the Foreign Investment Law stipulates the principle of pre-admission national treatment. National treatment refers to the kind of treatment given by the country to foreigners (investors) entering the country, which is no less favorable than that given to its nationals. National treatment is common in various fields such as international trade and investment. It can be divided into pre-admission national treatment and post-admission national treatment according to the different time periods targeted. Different from the post-admission national treatment, which mainly solves the problem of whether foreign investment can be treated fairly “after entering the threshold”, the pre-admission national treatment is to solve the problem of foreign capital being treated at the “before entering the threshold” stage of establishment, acquisition and expansion, which is more extensive and complete in application than the former.  The Foreign Investment Law adopts the principle of pre-admission national treatment, which also means that the establishment of foreign-invested enterprises no longer need to be subject to special approval for foreign investment as before. As long as it is not included in the negative list, foreign investors will be treated no less favorably than domestic investors by registering enterprises, going through the formalities of approval and filing, obtaining industry permits, etc. In the future, the investment process will be more convenient and flexible, and foreign investors do not need to consider special restrictions on foreign investment because they can enjoy the same rights and autonomy as domestic investors.

2. Feasibility of VIE mode

In recent years, the “VIE (Variable Interest Entity) + Protocol Control” mode, which has attracted wide attention in practice, seems still practical under the new legislative environment.  In 2006, the Ministry of Commerce and other six ministries jointly issued the Regulations on Enterprises in Mergers and acquisitions by Foreign Investors, which sets strict restrictions mergers and acquisitions of foreign investment, especially making it difficult to operate foreign mergers and acquisitions of equity and capital in some special industries. As a result of evading domestic restrictions on investment in special industries, VIE mode came into being. Generally speaking, this evasion needs to be carried out according to the following steps: ①the actual controller of the domestic-funded business entity establish an offshore company; ② the offshore company and foreign companies jointly set up an offshore company (listed company); ③ establish a Hong Kong subsidiary (for tax, restructuring and other convenience); ④ Hong Kong subsidiary set up an WFOE (wholly foreign-owned enterprise) in China; ⑤ WFOE sign a series of agreements with domestic operating entities to control them; ⑥ Demolition of VIE (acquisition of WFOE by domestic capital, repurchase of foreign shares, dissolution of control agreement, cancellation of overseas companies). This complicated procedure has helped Sina, Sohu and other telecom value-added service operators to successfully circumvent the restrictions on the Internet industry imposed by the 1993 Circular of the State Council on Forwarding the Opinions of the Ministry of Posts and Telecommunications on Further Strengthening the Market Management of Telecom Services, and finally achieved the goal of indirectly investing in areas that were originally restricted or prohibited. On the surface, VIE mode takes a series of technical operations and adopts “agreement control” instead of “equity control” and “asset control” prohibited, thus it does not seem illegal. But in fact, the legal compliance of the VIE mode has always been questioned because many operations are in the “grey area” of the law and many relevant government departments have not commented on the VIE mode.

As to whether the VIE mode is legal and feasible, the first question is whether the operating entity will be recognized as foreign investment and restricted or prohibited.  Different from the previous definition of “foreign investment” in the 2015 draft of the Foreign Investment Law, which says “domestic enterprises controlled by foreign investors shall be regarded as foreign investors”, the Foreign Investment Law adopts a relatively loose definition of foreign investment: “the direct or indirect business activities of foreign natural persons, enterprises and other organizations in China”. Foreign invested enterprises are defined as “enterprises wholly or partly invested by foreign investors, registered and established within the territory of China in accordance with Chinese laws”. Leaving aside the substantive connection, the VIE mode adopts “agreement control” which is at least different from the general investment in form. In other words, the business entities are not “wholly or partly invested by foreign investors”, so they should not be defined as foreign-invested enterprises. However, since the VIE mode has never been officially approved by government departments and there is no court ruling on related cases, the attitude of government departments remains to be further observed.

In addition, the Foreign Investment Law and the Negative List of Market Access both adopt a management system of “national treatment before admission plus negative list” for foreign investment, which greatly reduced the restrictions on the scope of foreign investment in China.  According to this system, all foreign investors whose business scope is not listed in 2018 “Negative List of Foreign Investment” shall enjoy national treatment and all Chinese laws including “Negative List of Market Access” shall apply. In addition, the 2018 edition of the “Negative List of Foreign Investment” will reduce the number of industries prohibited from investment from 63 to 48 and has drawn up a future opening plan for 22 industries that have not yet been opened for investment. Obviously, with China’s gradual opening-up to foreign investment, the restrictions and prohibitions on foreign investment will be gradually lifted, the policy environment for foreign investment will be continuously optimized, relevant regulatory measures will be further improved, and the areas requiring VIE mode will be continuously narrowed.

3. Protection of the legitimate rights and interests of foreign-funded enterprises

The Foreign Investment Law attaches great importance to the protection of the legitimate rights and interests of foreign investors. For example, the Foreign Investment Law clearly stipulates the problem of difficult profits expatriation for foreign-funded enterprises that have all along encountered various obstacles in practice. According to the previous relevant laws, the profit expatriation of foreign-funded enterprises only needs to meet the 4 pre-conditions of “making up for past losses”; the board of directors passed a resolution on profit distribution; provide financial statements audited by auditors; provide tax payment certificate”. However, the problem is that in practice, relevant departments often interfere with a certain limit of profit transfer and add additional approval procedures, hindering the transfer of profits from foreign companies. Article 21 of the Foreign Investment Law stipulates that foreign investors can freely transfer their capital contribution, profits, capital gains, intellectual property rights usage fees, compensation or compensation obtained according to law within the territory of China in Renminbi or foreign exchange according to law. Compared with the previous policy situation of lacking clear regulations and setting obstacles for profit transfer, the Foreign Investment Law has clearly defined the issue of profit transfer for foreign-invested enterprises, which reflects the general trend of our government’s relaxation of policies for foreign-invested enterprises.

In addition, the Law on Foreign Investment also provides for the protection of intellectual property rights of foreign-funded enterprises and encourages investors to carry out technical cooperation on the basis of voluntary principles and commercial principles. The government and relevant departments shall formulate and implement foreign capital-related normative documents in strict accordance with laws and regulations and shall not unduly interfere with or impair rights or increase obligations of foreign-funded enterprises. At the same time, establish and improve the complaint mechanism, coordinate and improve major policies and measures in the complaint work of foreign-funded enterprises, and solve the problems reflected by foreign-funded enterprises in a timely manner. Although the detailed implementation rules still need to be improved, these regulations can at least reflect the basic tendency of the government to continue opening to the outside world and safeguarding the property rights of foreign investors, which is conducive to the construction of a market competition environment suitable for fair participation of foreign-funded enterprises.

4. Domestic financing of foreign-funded enterprises

Our government policy has always been encouraging foreign-funded enterprises to publicly issue shares and list for financing in China. It supports foreign-funded enterprises to list on China’s main board, small and medium-sized enterprise board, Growth Enterprise Market and New Third Board, as well as to issue corporate bonds, convertible bonds and use non-financial enterprise debt financing instruments. On June 15, 2018, Chinese Government Network issued the Circular of the State Council on Several Measures to Actively and Effectively Utilize Foreign Capital to Promote High-quality Economic Development, which proposes to actively and effectively develop and utilize foreign capital, encourage and guide foreign capital to invest in domestic mergers and acquisitions, and allow qualified foreign natural person investors to invest in domestic listed companies according to law. Taking the relevant regulations of listed companies as reference, allow foreign investors to invest in listed companies in National Equities Exchange and Quotations, improve the supervision and management system of state-owned shares of listed companies, further improve the transparency of state-controlled listed companies and their circulation of state-owned shares, and provide fair opportunities for qualified domestic and foreign investors to participate in the reform of state-owned enterprises.

However, in practice, few foreign-funded enterprises choose to list in China. According to incomplete statistics, from 2004 to 2017, a number of foreign-funded enterprises listed on the stock market in succession. However, compared with the vast over-review volume of the huge domestic capital market every year, the proportion of successful foreign-funded enterprises listed on the stock market is rather small, especially the cases of foreign-funded holding are fewer, and most of them are concentrated in small and medium-sized boards. Even those star foreign-funded enterprises (Hong Kong, Macao and Taiwan enterprises are regarded as foreign capital) such as the “Industrial Rich Union” which has direct links with Foxconn, are also following the “unicorn” fast track, instead of the traditional listing process for foreign-funded enterprises. The emergence of this phenomenon should not be attributed to the government’s failure in giving appropriate policy support or guidance, but to the fact that there have been many obstacles to the listing of foreign-funded enterprises in China. On the one hand, the participation of foreign shareholders in secondary market transactions is limited, which is difficult for foreign investors accustomed to a relaxed regulatory environment outside China to adapt to. On the other hand, the provisions of some existing systems have caused great inconvenience to foreign capital listing. For example, major sectors require enterprises to meet higher capital, scale and financial conditions; the Corporation Law stipulates that more than half of the shareholders should have residence in China and etc.

Article 17 of the Foreign Investment Law clearly points out that foreign-invested enterprises can raise funds through public issuance of stocks, corporate bonds and other means. According to this regulation, we can imagine that the attraction of our country’s market to foreign capital will gradually increase in the future, the policy control of relevant departments will be relaxed, more specific implementation details will be made clear, and foreign-funded enterprises’ domestic financing will be normalized.


It is not difficult to find that the provisions of the Foreign Investment Law on foreign investment follow China’s basic policy of gradually expanding its opening up to the outside world. In combination with the current situation and needs of foreign investment in China, it clarifies the rights and obligations of relevant subjects, puts forward new requirements for the exercise of the functions and powers of the government and relevant departments, and delimits a wider scope of protection for the legitimate rights of foreign investors. The inclusion of these elements in the Foreign Investment Law fully reflects China’s responsibility for the protection of foreign investment rights and interests, is conducive to China’s better participation in the formulation of international investment rules, and further demonstrates its firm stand in support of economic globalization. Taking the “Foreign Investment Law” as an opportunity, the supporting policies and regulations in the future may further relax the listing, issuance and financing of foreign-invested enterprises and wholly foreign-owned enterprises in China, thus stimulating the market vitality to a greater extent.

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