Does China’s New Investment Law Tackle U.S. Gripes?

(Bloomberg) -- A new Chinese law governing investment by foreign companies in China gives the country’s trade negotiators something to point to when the U.S. raises concerns about intellectual property protection and market access. But critics say it doesn’t go far enough, particularly in explaining how the changes will be implemented. Beijing has also announced an array of punishments that could restrict companies’ access to borrowing and state-funding support over IP theft, but again provided few details.

1. Why a new law?

The new legislation will replace and streamline the three documents currently governing non-Chinese companies. They were the Law of Joint Ventures with Chinese and Foreign Investment, the Law on Foreign-Capital Enterprises and the Law on Chinese-Foreign Contractual Joint Ventures. The more holistic approach will form the basis of all rules regarding foreign investment and “promote modernization of China’s system,” Wang Chen, vice chairman of the National Peoples’ Congress Standing Committee, explained to delegates at the congress.

2. What’s in the new law?

The publicly available version of the law -- released Jan. 29 -- includes sections on protecting, promoting and managing foreign investment, as well as legal liabilities that come with entering the Chinese market. It promises equal government support to foreign and domestic firms, equal treatment when applying for licenses and that foreign companies will be able to take part in setting industry standards and in government procurement. One caveat, though, is that the government can conduct “National Security Reviews” where decisions are final and no appeals are allowed. Recent amendments have included adding a right to appeal non-security related decisions together with a complaints mechanism. A new clause warns of legal repercussions for violating China’s “negative list,” which restricts foreign investment in strategic sectors such as developing new grains. In the past year, such limits in areas including banking have been eased.

3. How’s it been received?

Cautiously, as Beijing has failed to deliver on lofty promises of reform before. “Our member companies no longer take at face value commitments made by the Chinese government on potential economic reforms,” said Jake Parker, the vice president for China operations at the U.S.-China Business Council. The European Chamber of Commerce in China complained about vague wording adding to legal uncertainty and took issue with a clause it said could allow for politically motivated retribution against foreign companies and investors. Of particular concern are the lack of detail, the broad scope of the national security review and the possibility of companies being forced to draw up new contracts with their existing joint ventures within five years to comply with the new law. There are over 300,000 foreign-local joint ventures in China, created under the old system that forced foreign capital to find local partners.

4. How does it go into effect?

The law passed March 15 is set to take effect on Jan. 1, 2020. Until then, different ministries and government agencies will work on issuing guidelines for implementation. These rules will be what really matters.

5. How will this affect trade talks?

It probably won’t have any tangible impact on the trade talks, which have been stuck over U.S. demands to end what it says have been decades of state-coordinated Chinese theft of American intellectual property. Any deal will hinge on enforcement, which isn’t explicitly explained in the new foreign investment law. Vice Commerce Minister Wang Shouwen, a member of the Chinese trade delegation, said on March 9 any mechanism in a final U.S.-China trade deal should be “two-way, fair and equal.”

The Reference Shelf

  • A QuickTake on intellectual property and opening up China’s financial sector.
  • Timeline and unofficial English translations of publicly available drafts of the law compiled by blog NPC Observer.
  • WeChat link of the draft distributed to NPC delegates on March 8, which hasn’t been officially released (in Chinese).
  • A Beijing News article on seven changes discussed by the NPC including banning government officials from leaking trade secrets and confidential information of foreign companies (in Chinese).
  • An explanation of the law delivered to delegates by Wang Chen, vice chairman of the National Peoples’ Congress Standing Committee (in Chinese).
  • A look back at reaction to China’s 2015 effort of toughen the national security review, and an English translation of the draft.

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