Lawyer & Partner
China’s New Foreign Investment Law: what forms of foreign investment are regulated? (1)
On January 1, 2020 a new Foreign Investment Law ("FIL") came into force as the new framework to govern foreign investment in China, which has replaced the three foreign investment-related laws (collectively as “FIE Laws”) enacted in the earlier years of China's economic reform. Meantime, the Implementation Regulations on the Foreign Investment Law ("Implementation Regulations") was also released, aiming at clarifying and facilitating the FIL.
The first question we are going to figure out is that what kind of forms of foreign investment are regulated by the FIL. This first article in a series will summarize a few highlights and uncertainties regarding this topic.
Highlights: the jurisdiction of FIL has been broadened
The old FIE Laws regulated only greenfield investments. The other foreign investment activities like M & A were regulated by other regulations. Under the FIL, more forms of foreign investment will be governed.
The FIL provides a broad definition of foreign investment in article 2. "Foreign investment " means investing activities within China directly or indirectly conducted by foreign natural persons, enterprises, and other organizations. Such as, FIEs that are independently or jointly established with other investors in China (greenfield investment), acquisition of shares, property, etc., and new construction projects launched through investment independently or jointly with other investors (new project investment), which have not been regulated in the previous FIE laws. So, the jurisdiction of FIL has been broadened.
Uncertainties: important concepts remain unclarified
1.the scope of “indirect investment"
As mentioned above, the definition of foreign investment includes both "direct investment" and "indirect investment", but it contains no further explanation of what constitutes “indirect investment”. So, some questions remain unclear, such as whether FIE’s reinvestment in China will be deemed as indirect investment, which determines whether the reinvestment is subject to the Negative list (we will publish an article about the Negative list soon). And, whether Variable Interest Entities (“VIEs”), an investment form by which investors wish to circumvent restrictions on operating in China in restricted or prohibited sectors, will be defined as indirect investment in the FIL, is also still unknown.
2.the definition of "other investors"
Under the FIE laws, Chinese natural persons were not allowed to establish Equity JVs and Contract JVs with foreign investors. The FIL refers to “other investors” in article 2, but it neither sets out the scope of “other investors”, nor does it exclude Chinese natural persons from the scope of “other investors”. So, it was not clear whether Chinese natural persons are allowed to set up foreign enterprises with foreign investors or not. However, the Implementation Regulations solved this by clearly stipulating that "other investor" includes natural persons from China (art 3). It should be noted that Chinese natural persons are only allowed to join the foreign investment in two ways, set up a foreign enterprise jointly with foreign investors, or invest in new project jointly with foreign investors.
The definition of "new project investment"
No laws or guidance has defined "new project investment" yet. The initial draft of the Implementation Regulations tried to define it as "foreign investors investing in specific construction projects, with no foreign investment enterprise established, and no shares, equities, portion of property, or other similar interest in an enterprise within China acquired". However, the official version does not include this definition. So, issues like how to regulate the market access of a new project are still left for further clarification.
Those vague provisions and lack of details might result in less certainty in practice. The effectiveness of the FIL relies heavily on the implementing rules.