Crucial Moment for Reforms

China can’t risk indecision on foreign investment draft law

International companies have a lot to gain from cleaned-up laws on foreign investment in China. So when on Jan. 19, China’s Ministry of Commerce released a draft of China’s Foreign Investment Law for public comment, the news attracted worldwide attention. Foreign investors questioned whether or not this draft law, if adopted, would truly streamline foreign investment regulations and better facilitate the foreign investor’s access to China. To answer this question, let’s look into the following major changes that this draft law introduces:

Œ1) The draft law proposes a more uniform legal system in which both foreign-invested enterprises and domestic-invested enterprises have unified corporate form and governance. Previously, they’ve been regulated under separate laws.

2) It abandons the current comprehensive approval system of foreign investment, instead adopting an approval system only for foreign investment in specific industries included on a negative list.

3)Ž For the first time in China’s legislation, the national security review of foreign investment will be codified in this draft law. The enforcement of the national security review in specified industries and the anti-monopoly review is expected to tighten after the enactment of this law.

Doubt remains as to whether the strengthening of the national security review and anti-monopoly review could counteract efforts to smooth out foreign investment laws. However, a majority of experts agree that this draft law, as a whole, is more in line with the international regulatory practices of foreign investment. It still has a long way to go before it becomes effective, including both ratifications of the State Council and the National People’s Congress. How far it can go depends on a few factors.

First is the political will of top leaders. Like anywhere in the world, without a strong political will, no legislative initiative can succeed. Fortunately, the Chinese Government and its leaders demonstrate a strong desire for institutional reforms and policies that support economic growth.

Another factor is the economy, both at home and globally. China’s economic growth hit a 24-year low last year. To prevent this lackluster growth from turning into social unease, the Chinese government is being forced to simplify the foreign investment regime in a bid to secure moderate growth.

One more important element that will affect this draft law is the ongoing negotiations of free-trade and bilateral investment agreements. These talks with major players such as the US and the European Union have the potential to push the Chinese legislative process forward.

Though this draft law is far from perfect, it reveals China’s ambition to streamline its complicated foreign investment regime in an attempt to prevent a looming crisis. If adopted without material amendment, it will facilitate foreign investment and redefine the regulatory landscape. Thus, international companies should keep a close eye on any further developments to this draft law.