Feb 19, 2019 11:43 AM

Editorial: The Foreign Investment Law China Needs

China is picking up the pace on its new foreign investment law, which has been many years in the making. The Standing Committee of the National People’s Congress held a meeting from Jan. 29 to Jan. 30 to deliberate once more on a draft foreign investment law, weeks after conducting an initial review. The draft is due to be considered by the National People’s Congress at this year’s “Two Sessions” meetings early next month. Although there are short-term reasons for speeding up legislation, the recent progress also shows China’s sense of urgency regarding the deepening of reform and opening-up.

There can be no openness without sound rule of law, and foreign investment laws are indispensable to an open economic system. China’s new foreign investment law is intended to replace three older statutes passed by the National People’s Congress between 1979 and 1988, which govern joint ventures between Chinese and foreign enterprises, as well as foreign-funded enterprises. These laws were enormously important during the early period of reform and opening-up. However, they are ultimately products of their time. Despite revisions, the old laws have been unable to adapt to the needs of an open economy. After repeated efforts to update the old laws, the Ministry of Commerce finally unveiled in January 2015 the draft of a new foreign investment law for public comment. The current draft foreign investment law is succinct and does not attempt to be all-encompassing. However, it is clearer and more thorough when it comes to addressing pre-admission national treatment and the negative list management system, indicating the government’s intention to liberalize and facilitate high-quality investment.

Nevertheless, there remain some misunderstandings about foreign investment within Chinese society. In the early days of reform and opening-up, due to the shortage of domestic capital, local governments were all hungry for foreign investment. With the rapid development of China’s economy, some high-level officials began arguing at the turn of the century that China no longer faces a capital shortage. According to them, foreign investment has become a competitor to domestic investment. These days, as Chinese capital seeks expand internationally, some people think it doesn’t matter whether foreign investors enter China. But this attitude will only hurt the cause of openness. No country can close the gates of investment from the tide of global integration. To understand if foreign capital is needed, we must not only look at volume, but also at structure and function. China is in the process of transitioning between development models and restructuring its economy. These are processes that require foreign capital, technology and management experience. China’s consideration of foreign investment also requires it to consider modernization, the rest of the world and the future.

Although some believe China is “nearly there” when it comes to opening-up, the country’s levels of openness in trade and investment are still low by global standards. Currently, China is often passive when it comes to issues related to trade and investment, because it has not reformed and opened enough. When China significantly relaxes restrictions on access to markets, through measures like removing limits on foreign stock ownership, it isn’t just fulfilling conditions for reciprocity, but also expressing its endorsement and acceptance of internationally accepted trade norms.

It should be noted that recent years have seen a rise in protectionism, the abuse of national security reviews, and the increasing politicization of economic and trade issues. What should China do in the face of aggressive moves by competitors? Retaliation can certainly make the other party suffer, but isn’t necessarily the best option. The draft foreign investment law includes a security review system, which is necessary. But if it is used, it should always focus on China’s long-term interests, and on what is conducive to the stable and efficient growth of the domestic economy, and improving China’s market economy system, and the country’s integration into the global economic system.

As the draft law will be the basic legal framework for foreign investment, the goals it sets — promoting, protecting and supervising foreign investment — must be in line with the overall layout of expanding openness. The law should first and foremost promote foreign investment, and avoid deviating from the goals of promotion and protection to become a one-sided law focused only on supervising foreign investment. Simple preferential policies are not enough to attract lasting foreign investment. A stable, open, transparent and predictable investment environment is a far more important factor in attracting foreign money. In the discussion of the draft so far, experts and scholars have put forward views on many issues including a foreign investment information reporting system, fees and capital transfers. However, the strongest opinions so far are those addressing how the current supervision system is not conducive to protecting and promoting foreign investment. Some scholars have proposed setting up a dedicated agency to supervise foreign investment and replace the current multi-agency supervisory structure and remove existing shortcomings once and for all. The supervision system directly affects the implementation of this law, and this proposal obviously deserves serious consideration.

The draft law strengthens the protection of foreign investors’ intellectual property rights and explicitly prohibits forced transfers of technology through administrative means. This is a direct response to current trade disputes between China and other countries. However, China has a long way to go when it comes to intellectual property protections. Although the Chinese government has advocated the strengthening of property rights protection in recent years, the results are far from satisfactory for many sectors of Chinese society. This pressing issue will naturally affect the more complicated task of protecting foreign investors’ intellectual property. In this, the government’s role is crucial. In addition to taking responsibility for protecting property rights, government departments at all levels should not condone or participate in the infringement of foreign intellectual property rights. This should be a red line, and the draft law should include regulations targeting this issue.

According to the draft law, foreign investments will receive national treatment prior to entry, and face a negative list management system. This means that in the stages of establishment, acquisition and expansion, foreign investors and their investments must receive the same treatment as domestic investors and their investments, and that foreign investment in sectors outside the negative list will receive equal treatment. China’s 2018 foreign investment negative list has greatly relaxed market access, a fact worth recognizing. In the future, the list should be further refined, especially in some key areas. The draft law should also resolutely eliminate implicit barriers to entry in a systematic way.

Ever since China’s reform entered deeper and more difficult waters, resistance has increased and progress has been difficult. Not only is “promoting reform through openness” still a relevant idea, openness has also become a reliable major driving force. Investment and trade are two major channels for China to show its openness to the world. We hope that the foreign investment law will keep what is good about the existing system and discard what is not, and that it will be forward-looking and groundbreaking. We hope future generations will not regret the law, and that it will stand the test of time.

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