China's Foreign Investment Law -- Improving the Business Environment

The Foreign Investment Law of the People's Republic of China (PRC) was adopted at the second session of the 13th National People's Congress in March. When it takes effect on January 1，2020，it will replace three separate laws that regulate foreign companies，namely the Law of the PRC on Sino-Foreign Equity Joint Ventures，the Law of the PRC on Sino-Foreign Cooperative Joint Ventures，and the Law of the PRC on Wholly Foreign-Owned Enterprises.

Positioned as the foundational law in the field of foreign investment，the Foreign Investment Law is comprised of 41 articles in six chapters. It lays down some definitions and guiding principles vis-à-vis foreign investment，and sets out a list of policy measures for promoting，protecting and regulating foreign investment.

Here are some of the key aspects of the new Foreign Investment Law.

Foreign Investment Promotion

Chapter II，which is aimed at foreign investment promotion，states that China will treat foreign and domestic investment equally with respect to the application of business development policies，the formulation and application of standards，and government procurement. In addition，foreign-invested enterprises are permitted to raise funds by publicly issuing stock，corporate bonds and other securities.

Standard-setting and government procurement have been areas in which foreign-funded enterprises have often voiced  complaints about unfair treatment. Articles 15 and 16 of the new law respond to those complaints，and guarantee fair participation in government procurement activities and standardization work for foreign companies. The new law embraces the principle of competition neutrality as far as domestic and foreign enterprises are concerned. Additionally，Article 17 provides the legal support for foreign-invested enterprises to raise financing through the capital market. These provisions assure foreign companies of treatment that is fair and equal to that of domestic enterprises. This is expected to significantly improve China's business environment，and thereby make the Chinese market more attractive to investors.

It should also be pointed out that the Variable Interest Entity (VIE) is not specifically mentioned in the new foreign investment law. VIE refers to a legal business structure in which investors take an interest in or control an enterprise by means of a contract or trust. Despite this omission，the law provides a backstop for regulation，as it states that foreign investment means investment activities directly or indirectly conducted by foreign individuals，enterprises or other organizations. It goes on to say this includes foreign investors "who invest within the territory of China in any other way stipulated under laws，administrative regulations or provisions of the State Council." This broad treatment is largely because the VIE framework has not been clearly defined in existing Chinese laws and regulations.

The treatment of VIEs in the Foreign Investment Law – despite the lack of a specific reference – should ease concerns of Chinese enterprises，overseas regulatory authorities and investors. It is reasonable to assume that the VIE framework will remain the preferred model for companies whose main business is in areas where foreign investment is either restricted or prohibited from making offshore listings or equity financings. However，the backstop provision in the new law offers room for future special regulation of VIEs.

Foreign Investment Protection

The Foreign Investment Law also offers improved investment protection. According to Article One of the General Provisions，the law is formulated to protect the legitimate rights and interests of foreign investors，improve the regulation of foreign investment and encourage a wider opening up of the economy. Additionally，there is a special chapter on strengthening  intellectual property rights protection，ensuring local governments fulfill their policy commitments to foreign investors，as well as establishing mechanisms for handling complaints.

The new foreign investment law incorporates IP issues which have received a great deal of attention from foreign investors. Article 22 of the law reads that the state protects the intellectual property rights of foreign investors and enterprises，and protects the legitimate rights and interests of IP holders. The clause makes it clear that "no administrative organ or its working staff shall force the transfer of technologies by administrative means."

China has made significant efforts in dealing with intellectual property rights issues. It promised in the Protocol on China's Accession to the World Trade Organization that China would not make technology transfers as a condition of inbound investment. There were similar pledges in other international agreements，such as the China-Korea Investment Agreement signed in 2007，the China-Japan-Korea Investment Agreement in 2012 and China-Korea Free Trade Agreement in 2015. However，there have been numerous complaints about arbitrary local policies and insufficient IP protection. The inclusion of a specific prohibition of forced technology transfers in the Foreign Investment Law is designed to address those concerns. At the same time，the law encourages