Q: What basic principles does the Foreign Investment Law set out? A: The PRC Foreign Investment Law was adopted on 15 March 2019 and will enter into effect on 1 January 2020. The Law reflects the philosophy of government “delegation of authority, management and service” and expressly sets forth the following basic principles:
- National treatment plus negative list: the Law expressly provides, in the form of law, for the implementation by the state of a system of national treatment of foreign investment prior to entry plus administration by way of a negative list, and accords national treatment to foreign investments not included on the negative list.
- Equality and fairness principles: foreign investors are eligible on an equal footing for the various state policies supporting enterprise development, can participate in the formulation of standards as equals and can participate in government procurement activities on a fair basis.
- Protection of investments: the Law expressly provides that requisitioning is not to be practiced, but if requisitioning is to be carried out in the public interest, the same must be done by the statutory procedure and fair and reasonable compensation is to be paid; that the capital contributions, profits, capital returns, liquidation proceeds, etc. in China of foreign investors can be freely transferred abroad; and that governments are required to perform the policy undertakings lawfully given by them to foreign investors and the various contracts that they have entered into in accordance with the law.
- Investment administration: the Law simplifies handling procedures, and enhances handling efficiency; and it establishes a foreign investment information reporting system and foreign investment security review system.
Q: The forms and scope of foreign investment defined by the Foreign Investment Law include what? A: The Law expressly defines the scope of foreign investment as investment activities directly or indirectly carried out in China by foreign natural persons, enterprises and other organizations (hereafter “foreign investors”). Foreign investment is no longer restricted solely to the establishment of an enterprise, also including other similar types of interests as well as other methods specified in laws and regulations. In a sense, the Law delicately sidesteps the past hotly debated issue of variable interest entities (VIE) control by agreement, but also leaves room for incorporating control by agreement into the legal and regulatory regime.
Q: Currently, what restrictions exist on investment in the finance industry by foreign investors? A: In recent years, the Chinese government has successively issued a series of policies, gradually opening up the finance industry. The Special Administrative Measures for Access by Foreign Investors (Negative List) (2018 Edition) (the 2018 Negative List) published on 28 June 2018 sets out a clear timetable for liberalizing the finance industry. At present, the banking industry has become restriction free, whereas the equity percentage of foreign investors in securities companies, fund management companies, futures companies and life insurance companies may not exceed 51%, but these restrictions will be abolished in 2021.
Q: What complementary measures need to be put in place before the finance industry is further opened up to foreign investors? A: The Law, as a top tier law, regulates foreign investment, promoting opening up to foreign investors, and the various financial regulators will certainly cause more complementary regulations and policies to come into being. Taking the opening up of the bond market as an example, through recordal with the central bank at the end of January 2019, a wholly owned subsidiary of S&P Global formally entered China to engage in credit rating business. This year the persons in charge of the central bank and the SAFE stated that the next step will be the continued steady opening up of the bond market and that bond market related complementary regulatory measures will be successively issued.
Q: Will the regional pilot trial of financial innovations continue? A: Regional pilot trials are a distinctive feature of China’s opening up to the outside world. The Law expressly acknowledges this point and specifies that the state may, as required, establish special economic zones or, in certain regions, implement experimental foreign investment related policy measures.
Taking the China (Shanghai) Pilot Free Trade Zone as an example, since its establishment in 2015, it has implemented on an experimental basis various finance policy measures or plans, and the negative list has been reduced from the 190 items at the time of its initial establishment to the 45 items in 2018, providing numerous mature experiences for the state’s policy of opening up to the outside world. Currently, the Guangdong-Hong Kong-Macau Greater Bay Area being promoted by the state proposes the vigorous development of a distinctive finance industry and the orderly promotion of the interconnection of finance markets, e.g., supporting the establishment by Guangzhou of a pilot green financial reform and innovation zone, supporting the establishment by Shenzhen of a pilot insurance innovative development zone, exploring the establishment of an account management system consistent with the development of the Guangdong-Hong Kong-Macau Greater Bay Area, etc. Through these regional pilot trials, the opening up of China’s finance industry to the outside world is being provided extensive practical experience.
Q: Will more foreign investment enter China’s finance industry in future? A: Since the issuance of the 2018 Negative List, numerous foreign financial institutions, presented with the opportunities offered by China’s strategic policies, have applied to enter the Chinese market. For example, Germany’s Allianz SE has received approval to establish Allianz (China) Insurance Holding Limited which, after its establishment, will become the first wholly foreign-owned insurance holding company in China.
Since the issuance of the Law, the Chinese government has expressly indicated that it will further relax market entry and reduce the size of the negative list for entry by foreign investors; permit more sectors to implement wholly foreign-owned operations, accelerate the convergence with generally accepted international trading rules and foster a market environment within which Chinese and foreign-invested enterprises are treated and compete equally.
Based on past market laws, it can be anticipated that with China’s opening up to the outside world and the continual improvements in its laws, foreign investors’ confidence in the Chinese market will be greatly boosted and more foreign investment will actively flow into China.
Ren Gulong and Hu Bo are partners at AnJie Law Firm
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