With the rather unfortunate news coming out of Hong Kong, and the current uncertainty around trade between the US and China, many investors are left wondering what the impact will be on direct investment in China. Before assessing the possibilities a short recap is in order. On March 15, 2019 China’s National People’s Congress passed the Foreign Investment Law of the People’s Republic of China. When this goes into effect on January 1, 2020, it will cause three major changes to the regulations governing foreign investment enterprises (FIE) in China:
- First, three existing laws that govern foreign investment enterprises in China will be abolished and replaced by 42 articles of the new law. Existing FIEs created when the old laws were in effect will have a grace period of 5 years during which they may retain their original organizational form; after that they will be required to conform to the rules outlined in the new law.
- Next, market access for foreign investors in Chinese enterprises is guaranteed to be no less favorable than that given to their domestic investors. A negative list system will be retained that prohibits or restricts access by foreign investors to enterprises that do business in certain markets.
- Finally, there is a major change in the way intellectual property is treated. The new Foreign Investment Law specifically prohibits the government and its officials from forcing transfer of technology to Chinese corporations with which they do business, while technology cooperation on the basis of free will and business rules is encouraged by the state. Government officials must now keep confidential and are forbidden to disclose any trade secret of foreign investors or of any enterprise they invest in.
Lawyers practicing in China have commented that nearly all the stipulations of the new Foreign Investment Law are an improvement over the existing three FIE laws. However, the provisions of the new law are relatively general and vague. Implementation rules and refining regulations expected in the future will determine whether the new law will bring major improvements for foreign investors in China