China liberalises foreign investment climate

China’s new Foreign Investment Law (FIL) addresses numerous issues facing international investors, such as creating a level playing field with domestic companies, forced technology transfers, protection of intellectual property rights and access to public procurement projects.

The FIL stipulates that any infringements of intellectual property rights will be investigated, and prohibits forced technology transfers. This change has been warmly welcomed by the international community, given that China’s record for not recognising intellectual property ownership has concerned many foreign companies for decades, and contributed to the US’s ongoing trade war with China. 

The FIL also places foreign investors on equal footing with their domestic counterparts. Lawfully obtained profits such as capital gains and royalties from intellectual property can now be freely transferred inwards or outwards within China, regardless of the currency. This will affect foreign investors who acquire property shares, equities, as well as foreign funded enterprises.

Moreover, the new legislation will abolish the current Sino-foreign joint venture (JV) regulations that were designed to protect Chinese minority interests through such mechanisms as unanimous voting requirements in certain situations, even where the foreign shareholder controlled 90% of the equity, according to global law firm Squire Patton Boggs.

This means that, from January 1, 2020, China’s Company Law will apply uniformly to all companies in China, domestic or foreign-owned, which means that every business with a JV in China needs to be considering how to revise its existing JV governance in line with the FIL, says Squire Patton Boggs. One concern for foreign companies would be failing to seize the initiative, as Chinese partners are likely to be well aware of the changes and determining how to restructure.

One possible viewpoint is that the US’s trade war on China has prompted the Chinese government to liberalise its legal environment, hence the FIL. The new legislation specifically states that China intends to establish multilateral and bilateral treaties and will establish mechanisms that further the promotion of investments with other countries and international organisations.