New PRC Foreign Direct Investment Law

On 15th of March 2019, the New PRC Foreign Investment Law has been approved which will have a big influence on foreign direct investment (“FDI”) in China. The previous vice minister of Ministry of Commerce of the People’s Republic of China (“MOFCOM”) predicted that with the approval of this new Law, the second spring for foreign enterprises to invest in China is coming soon.

Taking effect on January 1st 2020, the new Foreign Investment Law shall replace the following three original laws on foreign direct investment (“FDI”): ‘The law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures’, ‘The law of the People’s Republic of China on Sino-Foreign Contractual Joint Ventures’ and ‘The law of the People’s Republic of China on Foreign Capital Enterprises’.

Prior to the approval of the new FDI law, there already has been a lot of discussion on the mere 41 clauses, as people regard this new legislation more as a policy or guideline. The new FDI law is somewhat vague and lacking detailed clauses. No doubt, it will trigger several related legislations and interpretations in order to implement this new PRC FDI Law.

In essence, the new law is meant to facilitate the further opening up of the Chinese market for foreign investment – especially now it is engaged in a trade war with the United States and increasing tensions with Europe as well. It aims at encouraging foreign investments and protecting interests of foreign investors for it has clear protection provisions on issues such as expropriation (the state depriving real estate property from the owner) including financial compensation by the authorities and their justification of the need to expropriate, strengthening intellectual property protection against infringements, and explicitly prohibiting mandatory technology transfer by the foreign investor to their domestic Chinese partner (although this was never a straight formal obligation under the law but demanded in practice by the Chinese partner instigated by the under FDI authorities).

To conclude, this new law provides a stronger legal land economic environment for foreign investors but there is still a lot to be detailed in the new FDI law – as it just took less than three months from first discussion about the law until the last vote through China’s Standing Committee of the National People’s Congress. We believe a major reason behind this radically new legislation is to respond to the complaints from the US government on mandatory technology transfer, thus easing the economic tensions with the US.

For foreign investors, it is best to focus on the actual details of the new FDI law before making final investment decisions. Our Wintertaling China Desk will keep following the implementation of this crucial new law. Should you have any questions, please do reach out to us.

This publication was written by Hanren Xiao

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