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Ready for More
After the Foreign Investment Law's adoption, investors anticipate more rules and policies to level the playing field
By Zhang Shasha  ·  2019-03-22  ·   Source: NO. 13 MARCH 28, 2019

A worker assembles engines in a workshop of Tianjin FAW Toyota Motor Co. Ltd. in Tianjin on December 3, 2018 (XINHUA)

If you thought vegetable oil was only for cooking, think again. With the hunt on for more eco-friendly materials in the asphalt industry, waste oil, especially from fast food industries, is being used to reinforce the blacktop on roads. Soybean oil is going into car seat foam and industrial starch is being used to make paper for newspapers and magazines.

In China, U.S. agricultural commodities trader Cargill is a textbook example of innovations from the fields. Since its entry to China in 1971, the company has been innovating, ranging from producing new food flavors to improving farming standards. It opened an innovation center in Shanghai in 2016 to create new nutrients and its farmland schools are training farmers to plant and raise livestock with greater efficiency. With continuous investment, Cargill has become an important contributor to modern agriculture in China.

Cargill now has a strong presence in China with more than 50 sites and 10,000 staff. Its investment in China doubled in the past seven years and will continue in the coming year. According to Cargill's 2018 annual report, the Asia-Pacific region accounted for 29 percent of its total sales and other revenues, with China playing a major role.

Cargill has seen China's business environment for foreign investment undergo profound changes with the government taking measures to make improvement and attract foreign capital as part of the resolution to deepen reform and opening up.

The latest measure, the Foreign Investment Law that was adopted at the Second Session of the 13th National People's Congress (NPC), the national legislature, on March 15 and will become effective on January 1, 2020, aims to improve the transparency of foreign investment policies. It also unifies rules for both domestic and foreign enterprises to level the playing field.

At a news conference after this year's NPC session concluded, Premier Li Keqiang said the new legislation will better protect the legitimate rights and interests of foreign investors. It will also better regulate government behavior.

Foreign entrepreneurs exchange ideas in the Huaqiangbei International Maker Center in Shenzhen, south China's Guangdong Province, on November 20, 2018 (XINHUA)

The world responds

The new law has been garnering positive feedback from around the world.

"It changes the old impression," Hisham AbuBakr Metwally, First Economy Researcher at Egypt's Ministry of Industry and Foreign Trade, told China Focus, an online magazine published by the China International Publishing Group. "The new law is a good step forward for China's greater opening up. This is a very good time to invest. I expect that China will open more economic sectors for foreign investment and continue allowing foreign investment to play a more active role in the economy."

Nick Coyle, CEO and Executive Director of the China-Australia Chamber of Commerce, likened it to the free trade agreement (FTA) between China and Australia. "The FTA has been a boost over recent years to foreign firms' investment, particularly in the service sector. The new law is potentially another positive step in the same direction," Coyle said.

Last year, more than 60,000 foreign-invested companies established themselves in China, a 69.8-percent growth year on year. The total paid-in foreign capital was $135 billion, up 3 percent. It was no mean feat, especially as it was achieved amid a 19-percent drop in global cross-border direct investment flows, according to the National Bureau of Statistics and the UN Conference on Trade and Development.

This can be attributed to an array of measures taken in 2018. They include broadening market access; shortening the negative list for foreign investment, which now has just 48 items, slashed from 63 in 2017; and opening more sectors to full foreign equity operation. A negative list lays down the sectors where investment is limited for foreign investors, with all other areas presumed open.

Matthias Müller, a correspondent with Swiss daily Neue Zürcher Zeitung, said it's in China's interest to open more sectors to foreign investors and stimulate competition. Abolishing hurdles like the pre-condition to have a Chinese partner is very important, he said, adding that a new negative list would also be helpful.

An irresistible trend

In the early stage of reform and opening up, China attracted foreign investment by offering favorable policies. But in recent years, it is seeking to offer a sound legal system instead, according to Sang Baichuan, Dean of the Institute of International Economy, University of International Business and Economics in Beijing. A law-based and internationalized business environment is an "irresistible trend" today, Sang said, and the new law is a response to the prevailing times and conditions.

"With unified provisions for the entry, promotion, protection and management of foreign investment, it is a new and fundamental law for China's foreign investment and an innovative improvement of China's foreign investment-related legal system," Wang Chen, Vice Chairman of the Standing Committee of the 13th NPC, said.

The new law replaces three earlier laws on Chinese-foreign equity joint ventures (JVs), wholly foreign-owned enterprises and Chinese-foreign contractual JVs.

Sang said while the three earlier laws were based on different corporate types, the new law focuses on investment behavior, which includes the experiences accumulated during the four decades of opening up.

"With the new law, China is truly showing the world that it stands for fairness, honesty, cooperation and development," Ali Farmandeh, Chairman of the China-Sweden Business Council, said. "The integration of the three main subjects—JVs, direct investment and intellectual property (IP)—will really speed up cooperation. A true win-win situation can be created for enterprises."

In addition, a management system of pre-establishment national treatment plus a negative list will be adopted.

Addressing concerns

For years, foreign companies have worried about IP rights protection and competition through inappropriate means in China. The new law contains specific provisions to allay these fears.

"The law explicitly prohibits forced technology transfer by administrative measures and encourages technological cooperation based on voluntary agreement between the parties involved and business rules," Liu Zhao, a professor at the Intellectual Property Right School, University of the Chinese Academy of Sciences, told Beijing Review. "Also, its implementation will mark an end to the three original laws, the source of foreign concerns about technology transfer."

A noteworthy development is that the new law ousts the rules that violate the World Trade Organization's Agreement on Trade-Related Aspects of Intellectual Property Rights, which is a boon for foreign investors, Liu added.

Erkin Öncan, a journalist with Sputnik Turkey, said the ban on forced tech transfer and government intervention in the operation of foreign companies is a new phase and an important decision.

"With the institutional assurance, companies with the most advanced technologies will feel assured to introduce them into China," Toshihiro Ueda, the China chief representative of the AGC Group, a Japanese glass producer, told People's China, a Beijing-based Japanese-language monthly.

He said as China's consumption upgrades with the development of the economy, it is not enough to merely introduce Japanese technologies. It is imperative to enhance enterprises' research and development (R&D) capacity for new products and technologies. AGC is discussing conducting R&D activities in Shanghai.

As for ensuring fair competition, Huang Jin, Deputy Director of the Department of International Law, Chinese Academy of Social Sciences, told Beijing Review that the gap between foreign-funded and domestic enterprises in terms of enjoying supportive policies and participating in standard-setting process and government procurement will be eliminated with the implementation of the new law.

The law stipulates that the measures announced by the government to support development of enterprises will be equally applied to foreign-invested enterprises in accordance with law. In addition, the principle of competitive neutrality—means that government businesses in competition with the private sector should not have a competitive advantage or disadvantage because of their state ownership and control—will be followed in standardization, government procurement, financing, land use, supervision as well as bidding and tendering, Huang said.

According to him, as the market opens wider, both domestic and foreign enterprises will compete in a fairer arena. This may pose challenges for domestic players who had been depending on protective policies for survival. They should build up their muscles to adapt to the new requirement for opening up, Huang stressed.

Sang said in a fairly competitive environment, more foreign capital is expected to flow in. While stimulating competition, the entry of foreign investment will also increase opportunities for cooperation between domestic and foreign enterprises. This will lead to technological advancement, upgraded economic structures and high-quality economic development.

Workers produce lipstick tubes on a production line of a foreign-funded enterprise in Shaoxing, east China's Zhejiang Province, on February 20 (XINHUA)

More in the pipeline

The next step is to ensure that the law is implemented smoothly, Premier Li said at the press conference. He added that a series of regulations and policies will be introduced in accordance with the law to protect the legitimate rights and interests of foreign investors.

However, some aspects still need to be improved. The investment information reporting system, security review system and the system for approval and filing of foreign investment projects are still insufficient, hampering transparency and predictability, Huang said. Also, the transition between the new law and other industrial regulations and policies is yet to be clarified. Moreover, it doesn't address the issue of variable interest entities (VIEs). VIEs are legal businesses that may not have enough resources to cover operations or where an investor has a controlling interest but not majority of voting rights.

Nevertheless, investors' confidence started to grow since the Foreign Investment Law began to be anticipated. Cargill, for instance, established another Asia-Pacific research and application laboratory in Shanghai in February, a step toward its 2020 plan for developing in China. Now with the adoption of the law, there has been a strong response.

"I would say to Thai business people, 'Please do come to China'," Vithit Powattanasuk, Thai Consul General in Chengdu, southwest China's Sichuan Province, told China-ASEAN Report, a Beijing-based English-language magazine. "This new law is definitely a big step for China's commitment to the world economic communities. It will bring more benefits not only to foreign investors, but also to China, gaining the world communities' trust."

Copyedited by Sudeshna Sarkar

Comments to zhangshsh@bjreview.com

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