China's New Foreign Investment Law and Implementation Challenges

China's New Foreign Investment Law and Implementation Challenges Presented by: Prof. Yuwen Li (Erasmus School of Law Erasmus University Rotterdam) Date: February 27, 2022 The Key Features Of The 2019 FIL Face-to-face meetings: conferences, seminars, symposia, trainings 1. Market access: pre-establishment national treatment with a negative list 2. Foreign investment protection 3. Information reporting system 4. National security review 5. Implementation challenges Pre-Establishment National Treatment With A Negative List (Art. 4) - One of the most striking breakthroughs of the FIL is the introduction of preestablishment national treatment with a negative list approach. - Meaning: foreign investors and their investment are accorded treatment no less favorable than that accorded to domestic investors in the market access phase, except that investment is either prohibited or restricted in the Negative List for Foreign Investment - Case-by-case approval regime at the market entry stage is finally abolished The Negative List: Special Administrative Measures Of Foreign Investment Access  A foreign investor cannot invest in a field that is banned in the negative list and to invest in a restricted field a foreign investor must comply with the conditions set out in the negative list (At. 28)  Negative List for Foreign Investment Access: 31 items in 2021 and 33 in 2020  Negative List for Foreign Investment Access in Pilot FTZ: 27 items 2021 editions compared to 139 items in 2014  Negative List for Market Access: permitted and prohibited categories (BITs provisions should follow)  Case by case approval (multiple) apply Investment Protection 1. No expropriation of foreign investment; under special circumstances, expropriation can take place for the public interests in accordance with legal procedures, an compensation should be fair, reasonable and prompt. (Art. 20) (in a nondiscriminatory manner, timely, market value) 2. Take profit abroad: 'A foreign investor may, according to the law, freely remit into or out of China, in RMB or foreign exchange, its contributions made, profits, capital gains... in accordance with law...' (Art. 21) 3. An administrative agency and its employee must not force TOT by administrative means. (Art. 22) 4. An administrative agency and its employee should keep confidentiality of commercial secrets of FLS and FIEs, no disclosure to others. (Art. 23) 5. Restrict local rule-making power: no derogation of legal rights and increasing obligations (Art. 24) 6. The complainant system Foreign Investment Information Reporting System  Art. 34: A foreign investor or FIE shall submit investment information to the commerce department through the enterprise registration system and the enterprise credit information publicity system  The Online Enterprise Registration System was reformed in 2017 by the State Administration of Industry and Commerce (SAIC - predecessor of SAMR), to digitize and streamline the registration process for both domestic and foreign businesses under one unified online platform. (fewer documents were requested than before)  The National Enterprise Credit Information Publicity System was launched in 2014 by the SAIC to mandate the submission of annual reports, also applicable to bot domestic and foreign enterprises, in order to render certain corporate information publicly accessible and transparent. (to inform rather than to get approval) National Security Review System - Art. 3: 'The state shall establish national security review of foreign investment that impacts or may impact national security'. This stipulation apparently is not enforceable in practice without a further workable framework. - In December 2020, MOFCOM and NDRC adopted the Measures for the National Security Review of Foreign Investment - substantive and procedural provisions (29 articles) - Concerns: 1. NS is not defined which raises concerns in the market entry phase; 2. General wording and broad sector coverage could lead all FI subject to review. Challenging Time For Implementation - Domestic Level 1. The FIL and its implementation regulations remain general and vague, further enforcement measures (2015 draft FIL) 2. The transforming role of government agencies/fragmented enforcement 3. M&A remains a sensitive issue 4. China needs to show improved market access opportunities as a reality 5. Dispute settlement systems need to be further advanced: litigation, arbitration, mediation 6. The new laws and rules which can complicate the implementation - The Export Control Law, promulgated in Dec. 2020 - Anti-Foreign Sanction Law, promulgated in June 2021 - Provisions on the Unreliable Entity List, adopted in Sept. 2020 - The Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Measures, adopted in January 2021 - International Context 1. Lack of trust is growing rather than shrinking (government intervention; discriminatory behaviour; SOEs...) 2. Increasing demand and expectation on reciprocity, level playing field and fair competition 3. Protection of IPRs 4. Lack of sustainable development provision