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Foreign Investment Law: A Step Towards “Institutional” Opening Up

Apr 18, 2019
  • Zhang Monan

    Deputy Director of Institute of American and European Studies, CCIEE

On March 15, the Second Session of China’s 13th National People’s Congress adopted the new Foreign Investment Law. By progressing toward the institutional mechanisms of an open economic system, the law marked an important step towards opening up, based on related rules and institutions.

China has been on the path of reform and opening up for 40 years, as its open economic system has evolved from a process of opening up based on policies, to that based on flows of goods and factors of production, and now to that based on rules and related institutions. In this historical process, foreign investments have played an integral role as a force driving China’s socioeconomic development. Since the adoption of reform and opening-up, China has gradually developed a legal system framework for foreign investments featuring the laws on Chinese-foreign equity joint ventures, contractual joint ventures, and wholly foreign-owned enterprises. In recent years, however, amid setbacks for globalization and profound changes in the domestic and international situation, critically important issues have emerged that have a direct bearing on China’s long-term socioeconomic development: how to adapt to the new pattern of globalization, how to eliminate inequity and the phenomenon of distorted resource distribution in the course of opening up based on policies, and how to promote high-quality development through opening-up based on high standards.

In the face of domestic and global challenges, the 2019 Government Work Report stressed the continued promotion of opening up based on flows of goods and factors of production, while giving greater emphasis to opening up based on rules and related institutions, and pushing for an overall deepening of reforms through high-standard opening-up. In essence, “opening up based on rules and related institutions” is aimed at establishing a modern, open market economic system characterized by equity, transparency, and a clear, standardized legal system. The core goal is to be on par with advanced international standards and rules. The enactment of the Foreign Investment Law is another manifestation of China’s efforts to create a sound investment environment guaranteed by the legal system and based on rules, and to promote opening-up based on rules and relevant institutions.

One of the main features of the Foreign Investment Law is to address issues relating to market access and transparency of foreign investment policies. In recent years, provincial-level governments across the country, in examining and approving foreign investment applications, may have applied different standards and factors for consideration. In practice, the lack of transparency in the process of examining and approving foreign investments has made foreign investors puzzled on such issues as market access barriers. Therefore it became an extremely pressing task to urgently modify or eliminate laws and regulations hindering the development of the open economy, and to make an overhaul of the legal system governing foreign investments.

The shorter the negative list, the wider the opening up. The 2018 version of China’s negative list for foreign investments included two lists: one for national application (48 items) and one for applications in pilot free trade zones (45 items), which comprehensively broadened market access to the primary, secondary, and service industries to foreign investors—from finance, to transportation, trade and logistics, professional services, manufacturing, infrastructure, energy, resources and agriculture. In particular, opening the manufacturing industry to foreign investments showed China’s willingness to encourage foreign investments in high-end, smart, and green manufacturing.

The new Foreign Investment Law puts an end to the case-by-case mode of examination and approval, abolishes the old examination and approval procedures for foreign investments, and will help achieve the goal of high-level and high-quality opening up through the application of its model of “national treatment plus negative list.” Foreign investors will be able to make investments on an equal footing with domestic investors and will no longer be subjected to examination and approval processes, or restrictions in some particular industries. This will help make foreign investment management more transparent and predictable and will help bring China’s foreign investment management up to par with international best practices.

Another highlight of the new law is that it includes special chapters on investment promotion and protection, which are aimed at promoting fair competition under the aegis of opening-up based on relevant institutions. With a shift from stressing investment management towards investment promotion and protection, the Foreign Investment Law sets clear stipulations on issues of concern among foreign investors, such as expropriation and compensation, intellectual property protection, and technology transfer. Under the law, foreign and domestic enterprises enjoy the same right to take part in formulating standards, equal footing in competing for government procurements, and the same financing facilities. In accordance with international common practices, China is also setting up a security assessment system for foreign investments, which will help guarantee national security in a more reasonable manner. The stipulations fully reflect the principles of “equity and transparency,” “competitive neutrality,” “equality between domestic and foreign investment,” and “international practice,” helping promote higher localization of foreign investments and deeper integration with the Chinese economy and market.

Opening-up is meant to better promote reforms. The Foreign Investment Law is an important step in promoting opening up based on relevant institutions, and only marks the start of a new process. The Foreign Investment Law is just one piece of legislation and cannot help solve all problems; relevant supporting laws and regulations are also needed. In the long term, China has a long way to go in its commitment to creating an institutional environment in which China can fully take part in global economic competition and cooperation, and which is equitable and transparent to all firms, whether domestic or foreign-owned.

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