European Chamber’s Stance on the (Draft) Foreign Investment Law Go back »

2019-02-25 | All chapters

European Chamber’s Stance on the (Draft) Foreign Investment Law

Background

The National People’s Congress (NPC) issued a call for comments on the Draft Foreign Investment Law (Draft) on 27th December 2018, with a deadline of 24th February 2019. Ordinarily, laws issued by the NPC undergo three reviews, with public consultations taking place after the first and second reviews. However, in this case, rather than waiting to collect feedback on the first draft from stakeholders, the NPC carried out the second reading on 29th January, nearly a month before the deadline for the first call for comments. This raises concerns that foreign companies’ comments will not be taken into consideration in the final draft. Such a deviation from normal practices, without justification for increased urgency, also raises questions over China’s overall progress in implementing the rule of law.  

Stance

The European Chamber appreciates the Draft’s aim of streamlining existing legislation by unifying into a single law the three current legal foundations that govern foreign investment. It also recognises the Draft’s attempt to address some of the biggest challenges faced by foreign businesses, such as unfair technology transfers, intellectual property rights (IPR) protection and equal opportunities in public procurement. However, the Chamber fundamentally disagrees that a legal distinction should be maintained between foreign and local companies, unless it is to provide exceptions for legitimate reasons such as specific national security concerns. Furthermore, the broad terms and vague language used throughout the Draft require clarification, as many of its articles read more like policy commitments than binding legal clauses, which leaves room for discretionary implementation of the law.

The European Chamber provides the following points and recommendations to supplement the detailed remarks already submitted to the NPC in response to their call for comments on the Draft:     

  • The European Chamber cannot find any compelling reasons to legally differentiate between companies by their ownership structure or the nationality of the investors, beyond the most basic distinctions drawn for legitimate purposes such as specific national security concerns. The Draft should provide clear definitions for such exceptions and establish equal treatment in all other circumstances.
  • There are some requirements in the Draft that foreign-invested companies already comply with in accordance with existing laws and regulations. These include Article 15's stipulation that mandatory standards apply to foreign-invested businesses and Article 8's requirement for establishing labour unions. The European Chamber therefore recommends the removal of any duplicate provisions that are already compulsory under Chinese law.
  • When the Draft is published, the three main laws currently governing foreign investment—the Chinese-Foreign Equity Joint Ventures Law, the Wholly Foreign-Owned Enterprises Law and the Chinese-Foreign Contractual Joint Ventures Law—will be simultaneously abolished according to Article 39 in the Draft, and there will be a period of time without necessary implementing rules and regulations to follow. It is therefore necessary for relevant government departments to introduce more detailed supporting regulations as soon as possible to ensure a smooth transition and avoid any negative impact on existing FIEs.
  • Article 22 explicitly prohibits administrative organs and their staff from using administrative means to force the transfer of technology, which echoes the language used in other high-profile policies that have been released in recent years, most notably State Council Document No. 19 (2018). However, this leaves open the possibility for any non-administrative body to use any other means to compel technology transfers. Instead, the Foreign Investment Law should simply prohibit forced technology transfer by any means.
  • Article 31, which creates a new investment information reporting system, is unnecessary as the current Enterprise Information Disclosure System works well and applies to all enterprises regardless of national origin. Furthermore, Article 31 does not provide sufficient detail as to how investor information privacy will be protected. If a new investment information reporting system must be created, it should also include options for investors to protect sensitive information from extensive disclosure.
  • Article 37 is of particular concern as it allows for unilateral action against trading and investment partners based on a principle of negative reciprocity. Conflicts and disagreements that emerge should be handled through existing multilateral institutions like the WTO, or under the conditions of previously-arranged agreements between China and any specific partner. This article should be removed to keep the Draft in line with the original spirit of the document.

“We are concerned that the drafting of the Foreign Investment Law is being squeezed between the normal legislative process and the negotiation table with the US, in part to address the trade conflict,” said Mats Harborn, president of the European Union Chamber of Commerce in China. “This law will have major ramifications for all foreign companies in China for the foreseeable future, so the drafting process must be given the time and attention due to such an important piece of legislation, and proper consultation periods should be respected.” 

 

Update: the Chamber's stance on the Foreign Invest Law (15th March 2019)

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June Yu