China expert cautious on investment reforms

Q: What is your overall impression of this new Chinese foreign investment law?

A: It’s a small step forward. There are a few good things, but there is also space for criticism.

Q: What are the good things?

A: First, it simplifies the existing legislative framework for foreign investors. So far, there have been three different pieces of law regulating foreign investment. They are all going to be replaced by the new law. It’s a first attempt to simplify foreign investment regulation in China.

A second good thing is the timing. Politically, China is showing some goodwill to the US and also the EU to reform its business environment. Foreign investors in the country still face many restrictions and conditions, particularly in the form of requests of technological transfers. The country has been heavily criticised in the US and the EU for the way it treats foreign investors. There are many examples of investors complaining about the way they have been treated in China. This new law sends the message that Beijing has acknowledged the problem, and is trying to reform its business environment.

Q: What does it specifically change in terms of technological transfers?

A: Article 22 of the new law says that China should not oblige foreign investors to transfer technology. That has been a problem for many years and the new law says this should become illegal, including a prohibition for local authorities to ask foreign investors for transfers of technology. If this still happens, it can result in criminal prosecution. It’s a step in the right direction, although when you look at that provision you think of enforcement. Is it really going to be enforced? The new law is not very clear on how such a provision should be enforced, so we won’t know until it gets implemented. After January 2020, when the law comes into effect, we will see how they will enforce it. I would still be sceptical on this, though. Look at rules on intellectual property. They are perfect, but not fully enforced.

So overall I’m not buying into the idea that this new investment law is a great reform. And it’s very brief, only 40, vague articles, which don’t look sufficient.

Q: Was it just a way for Beijing to ease the ongoing trade talks with the US?

A: The reform has been in the works since 2011, a first draft was prepared in 2015. The only reason why they approved it now is politics and the trade talks with the US, but also the changes happening in the EU, where they approved new principles for the screening of foreign investment. China is thus slowly responding to all this. We will now wait for more directives and regulation that can clarify article 22 and others. The directive will be adopted by the State Council, not the Congress, and the former can decide to implement specific rules on any particular article.

Julien Chaisse is a professor of law at the Chinese University of Hong Kong and editor of the book China’s International Investment Strategy – Bilateral, Regional, and Global Law and Policy.