On the 15 March 2019, the National People’s Congress, China’s top legislative body, passed Foreign Investment Law (FIL), which came into effect on the 1st of January 2020. Effective from the same day is the Implementing Regulations of the FIL (Implementing Regulations) promulgated on the 26th of December 2019 by the State Council.
These two landmark pieces of legislation are accompanied by various supporting legislations, inter alia, the Interpretations of the Supreme People’s Court on Several Issues Concerning the Application of the Foreign Investment Law promulgated on the 26th of December 2019, the Measures for the Reporting of Foreign Investment Information promulgated by the Ministry of Commerce (MOFCOM) and the State Administration for Market Regulation (SAMR) four days later, and the Notice of the SAMR on Effective Work on Registration of Foreign-Invested Enterprises for the Implementation of the Foreign Investment Law published on 31 December 2019. Altogether these newly promulgated laws and regulations have fundamentally altered the status quo, and signaled a new era in China’s foreign investment governance.
The positive significance of the FIL and the Implementing Regulations is evidenced by their assurance to investment liberalization on market access, a level playing field to foreign investors vis-à-vis domestic ones, and emphasis on the overall protection of investors’ rights and equal treatment on multiple regards.
First, since 1979, China has adopted an ex-ante case-by-case approval system on foreign investment projects, regardless of the size of investment or the sectors involved. To provide better market access to foreign investors, China has experimented on an ex-post registration in combination with a negative list approach in the Pilot Free Trade Zones since 2013 and nationwide since 2016. The FIL formally grants pre-establishment national treatment to foreign investment in combination with a negative list approach: foreign investors, in principle, enjoy the same treatment on market access as domestic ones, except those sectors that remain prohibited or restricted to foreign investors, enumerated and complied in a list separately promulgated by the State Council (art. 4 FIL). This negative list is updated and substantially shortened at regular intervals, including at the moment 40 prohibited and restricted areas.
Second, as one of the pillars for investment protection in the FIL, national treatment is not only granted to foreign investors in the pre-establishment phase but also post-establishment. A most significant case is equal treatment to foreign investors vis-à-vis domestic ones in corporate governance. Prior to the FIL, a foreign-invested-enterprise (FIE) was subject to the regulation of the ‘three primary foreign investment laws’: the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Cooperative Joint Ventures, and the Law on Wholly Foreign-owned Enterprises. Accordingly, an FIE would have had to be established as one of the three above corporate forms. The FIL repeals the above three laws, and within a 5-year transitioning period, subjects the corporate governance of FIEs to China’s Company Law, which includes corporate forms of either a limited liability company or a company limited by shares, thus unifying the corporate governance of FIEs and domestic enterprises in China.
Third, the FIL and the Implementing Regulations make explicit commitments to equal treatment and protecting investors’ rights in various regards. The FIL stipulates that FIEs enjoy the same preferential industrial policies granted to domestic enterprises (art. 9), equal participation as domestic enterprises in the industrial standardization formulation (art. 15), equal participation in government procurement (art. 16), access to public financing on the Chinese securities market (art. 17), the protection of foreign investor’s intellectual property (IP) rights and no compulsory transfer of technology (art. 22), and no undue administrative interference of activities of FIEs (art. 24), to name a few. The Implementing Regulations make further commitments such as allowing natural persons of Chinese nationality to invest in an FIE, whereas only Chinese enterprises were allowed to jointly establish cooperative joint venture or equity joint venture companies with foreign investors in the past (art. 3); further guarantees on equal treatment between domestic and foreign-invested enterprises in areas such as government funding arrangements, land supply, tax/fee reductions and exemptions, qualification licensing, project declarations and human resources policies (art. 6). In addition, the Implementing Regulations reiterate the protection of foreign investors rights, for example, regarding the prohibition of expropriation except for a public interest purpose as prescribed by law in exceptional cases (art. 21), free transfer of cross-border remittances (art. 22), and the protection of foreign investors’ IP rights and trade secrets (arts. 23-25).
Despite these laudable and affirmative assurances made in the FIL and the Implementing Regulations, many have questioned the general and ambiguous nature of the law, and see the new law as ‘a kind of sweeping set of intentions rather than a specific, enforceable set of rules’. As a result, the lack of details of the law and the vagueness in the wording might, in practice, give rise to more loopholes than clarifications. It is not clear whether these ambiguities are an unintended consequence of the lack of meticulous draftsmanship and an expedited legislative turnout, or instead a result of ‘creative ambiguity’: purposeful stipulation of legal terms and provisions in a vague manner so as to leave room for arbitrary maneuver in the implementing process of the law. Some of the most pressing concerns related to the law include the following:
First, the law fails to stipulate a workable framework for the national security review regime. Art. 35 of the FIL stipulates that ‘China conducts national security review to foreign investment that impacts or may impact national security.’ This means that the government has the legal standing to reject market entry of a foreign investment, or otherwise unwind a foreign investment project after it has been made, as long as national security is deemed to be involved. Based on such elusive terms, art. 35 is to be criticized for its potential to give rise to arbitrary interpretation and its lack of legal certainty. Many have hoped that the implementing regulations would clarify art. 35 of FIL and establish a more workable and predictable legal framework for China’s national security review system. However, the implementing regulations reiterate the exact wording of art. 35 of FIL in its art. 40 and make absolutely no further clarification on how the system should work. As a result, there is much concern over the ambiguity and secrecy of China’s national security review of foreign investment. The recent case of Yonghui’s failed acquisition of Zhongbai group, which involved an FIE as the acquirer and both the acquirer and the target company in supermarket retail business, ended up being rejected by the National Development and Reform Commission (NDRC) as an outcome of a national security review with no further details disclosed. The case perplexed the public regarding the logic, or lack thereof, behind the NDRC’s rejection of a takeover of supermarkets based on the seemingly rather irrelevant national security ground.
Second, the law does not clarify how cross-border mergers and acquisitions (M&As) are to be regulated at the moment. According to the FIL, foreign investment is defined as a term inclusive of greenfield investment, M&As, as well as indirect investment (art. 2). This means pre- and post-establishment national treatment would extend to cross-border M&As as well. However, according to the still effective Provisions of the Ministry of Commerce on Mergers and Acquisitions of a Domestic Enterprise by Foreign Investors promulgated in 2009, cross-border M&As in China, regardless of the size and sectors involved, are still subject to an ex-ante case-by-case approval procedure, along with other provisions that contradict national treatment. This means contradictory rules are currently in place regarding the governance on cross-border M&As in China. According to the Decision of the Ministry of Commerce on Repealing Some Regulations which was promulgated on the 28th of December 2019 and which is effective from the 1st of January 2020, 6 departmental regulations that are in contradiction with the FIL have been abolished. And according to the Announcement of the Ministry of Commerce on the Abolition of Certain Regulatory Documents which was promulgated on the 25th of December 2019 and is also effective from the 1st of January 2020, 56 further regulatory documents have been abolished. These abolished regulations, however, do not include Provisions of the Ministry of Commerce on Mergers and acquisitions of a Domestic Enterprise by Foreign Investors. In consequence, the discrepancy between the provisions not yet announced repealed and the FIL with regard to the regulation of cross-border M&As in China remains just as present.
Third, the legitimacy of Variable Interest Entities (VIEs) remains unclear due to the absence of regulation in law. A VIE structure refers to an investment structure in China that relies on contractual arrangements to enable an FIE in China to control a Chinese domestic company, instead of directly owning the Chinese company by shares. VIEs are commonly used by foreign investors who wish to invest in the restricted or prohibited areas in China, or by Chinese companies operating in the restricted or prohibited areas in China seeking overseas financing or listing. When a Chinese company operating in the prohibited sector to foreign investment, for example, an e-commerce Chinese Company A, wishes to seek overseas listing, the actual controllers of the Company A would first establish an off-shore Company B abroad; the off-shore Company B, through a complex and multilayered holding structure, establishes a wholly-foreign-owned enterprise C in China that does not actually conduct substantial business but controls the operating Company A by a series of contractual control arrangements. In this way, Company A remains a Chinese domestic company; the actual controllers of Company A still retain control of Company A but at the same time can list the off-shore Company B on a foreign securities market seeking overseas financing. As a matter of fact, China’s leading Internet and e-commerce companies, such as Alibaba, Tecent, Baidu, and JD have all used VIEs to seek listings abroad. It is reported that, until 2019, Chinese companies have nearly 1.3 trillion USD of market value in overseas listings using the VIE structure. The original draft of the FIL published by MOFCOM in 2015 included contractual control arrangements into the scope of foreign investment, which, as many have speculated then, would have resulted in the end of VIEs in China. However, both the promulgated FIL and the Implementing Regulations remain silent on such a concept, leaving Chinese regulators’ view on the legitimacy of VIEs in China unclear.
 最高人民法院关于适用〈中华人民共和国外商投资法〉若干问题的解释; 商务部、市场监管总局令2019年第2号外商投资信息报告办法; 市场监管总局关于贯彻落实《外商投资法》做好外商投资企业登记注册工作的通知.
 外商投资准入特别管理措施(负面清单)(2019年版) (Special Administrative Measures (Negative List) for the Access of Foreign Investment) (Promulgated by the National Development and Reform Commission (NDRC) and MOFCOM on 30 June 2019, effective on 30 July 2019).
 Qian Zhou, ‘China’s New Foreign Investment Law: A Backgrounder’, China Briefing, 17 October 2019, <https://www.china-briefing.com/news/china-new-foreign-investment-law-backgrounder/>, last accessed on 13 January 2020.
 Ding Yi, ‘Yonghui Drops Plans to Increase Stake in Chinese Retailer After National Security Probe’, Caixin, 17 December 2019, <https://www.caixinglobal.com/2019-12-17/yonghui-drops-plans-to-increase-stake-in-chinese-retailer-after-national-security-probe-101495178.html>, last accessed on 13 January 2020.
 商务部关于外国投资者并购境内企业的规定 (2009) (Promulgated by MOFCOM on 22 June 2009, effective on promulgation).
 Tim Culpan, ‘Wanna Bet $1.3 Trillion on Chinese Regulators?’ Bloomberg, 22 July 2019, <https://www.bloomberg.com/opinion/articles/2019-07-21/variable-interest-entities-are-vulnerable-to-china-s-whims>, last accessed on 13 January 2020.