Pundits Posit China’s New Foreign Direct Investment Law Progresses!

Dr. Jean-Marc F. Blanchard's picture

In May, China passed a new law relating to Foreign Direct Investment (FDI) that comes into effect at the beginning of 2020. This law replaces three laws relating to wholly-owned foreign enterprises, contractual joint ventures (JVs), and equity JVs that previously constituted China’s formal FDI regime. Many were encouraged by the new law given it promised, among other things, better intellectual property rights (IPR) protections, an end to forced technology transfers, and limits on bureaucratic discretion. Still, as many stressed, it contained numerous vague provisions relating to national security reviews, administrative discretion, trade secrets, and so on. Thus, many wanted to see the implementing regulations for the new FDI law before passing “final” judgement. The United States (US) government, US-China Business Council, and European Union Chamber of Commerce in China have proffered positive comments about these regulations which were just released. They see a more equitable operating environment for foreign firms, opportunities for foreign companies to compete for government contracts, and new rights to participate in standards-setting. Still, the regulations fail to offer detailed specifics on many areas such as which units actually are prohibited from forcing technology transfers and the definition of “‘national interests.’” Several factors have driven China’s reform of its FDI regime. These include countering competition from other investment destinations like Vietnam that are more cost competitive and perceived to have a more friendly disposition to FDI. As well, some argue China needed clearer laws to attract investors in higher value-added sectors. Most important perhaps is the fact China is experiencing slower growth and faces intense pressure from the US across the entire economic relationship. China’s new direction is a positive, but the fact it is circumstance rather than values motivating China’s new stance raises questions about the way the law will be practiced and its durability.