Caixin
Dec 24, 2018 07:49 PM

Update: China Proposes Prohibiting Forced Technology Transfers

Workers assemble Honda Fit automobiles on a production line in Guangzhou, Guangdong province, in March 2015. Photo: IC
Workers assemble Honda Fit automobiles on a production line in Guangzhou, Guangdong province, in March 2015. Photo: IC

China is expected to prohibit local governments from forcing foreign businesses to transfer technology and illegally restrict their market access, according to a draft law on foreign investment that the legislature reviewed on Sunday.

The law will also ensure foreign investors enjoy equal treatment and market access with domestic counterparts in China, except in those excluded areas specified in a “negative list.”

The Standing Committee of the National People’s Congress (NPC) started to review the foreign investment law on Sunday during its bimonthly session.

The draft law is seen as sending a strong signal of China’s determination to further open up its markets and protect foreign investors’ interests, addressing major complaints from the Trump administration in its trade war with Beijing.

The new draft is drastically different from the earlier version (link in Chinese) released for public comment by the Ministry of Commerce in January 2015. That version emphasized access management and security assessment of foreign investment. Instead, the new draft has moved the chapters about promoting and protecting foreign investment in China to the very top, following the general introduction to the law.

The draft law also stipulates that foreign businesses’ intellectual property will be protected, and their profits in China can be freely transferred out of the country.

The draft law also makes it clear that foreign companies can have the same opportunities as Chinese companies to participate in the making of industrial standards. They can also have an equal chance to bid for government procurement of their products or services, the draft said.

Shen Yuxin, a partner with law firm Freshfields Bruckhaus Deringer, told Caixin that the law’s requirement to give foreign companies’ equal access to government procurement and standard-making has restricted local governments’ ability to make arbitrary decisions.

The draft law also addresses concerns often expressed by foreign businesses. It said that China encourages technological cooperation based entirely on voluntary decisions and business principles, and forbids forced technology transfers through administrative orders.

Shen said it is a further step by China to protect foreign investors’ rights. Although local governments might not have been forcing technology transfers from foreign companies in the past, the foreign investors could have been at a disadvantage when negotiating business deals with Chinese partners, Shen said.

The law, if adapted, is expected to replace three existing laws on Chinese-foreign equity joint ventures, contractual joint ventures and wholly foreign-owned enterprises, the official Xinhua News Agency said.

A new law will normally go through two or three rounds of hearings by the legislature’s Standing Committee before being approved by the plenary session of the NPC.

Contact reporter Wu Gang (gangwu@caixin.com)

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