COMMENTARY: Hopes for Western Businesses in China Getting Boost from New Laws

China's Foreign Investment Law is likely to gain passage at upcoming National People’s Congress meetings as trade talks take center stage, but history suggests caution.

Mark Melnicoe
    Feb 23, 2019 4:25 AM  PT
COMMENTARY: Hopes for Western Businesses in China Getting Boost from New Laws
author: Mark Melnicoe   

The recent release of two major foreign investment laws is sparking hope in the West that Beijing is making real strides toward leveling the playing field for foreign companies.

The central authorities have been moving in this direction for years, but the glacial pace has frustrated American and European businesses that want quicker and deeper access to China's massive consumer and labor markets. Two of the biggest gripes have centered on opaque regulations that protect Chinese domestic companies and joint venture deals that force Western firms to transfer technology and intellectual property to China. Those are also two of the key items up for negotiation as U.S.-China trade talks move into what may be a climactic phase.

Perhaps not coincidentally, these are also among the issues being dealt with in the pending Foreign Investment Law. While this seems like good news, foreign companies have been stymied after getting their hopes up many times before and probably shouldn't be holding their breath now.

A second draft of the Foreign Investment Law was leaked this week by the NPC Observer, a comprehensive website devoted to covering the National People's Congress, China's parliament. Among the draft law's provisions of most interest to American business:

·         The treatment of foreign companies will be "no less favorable than that afforded to Chinese domestic investors and their investments, during the establishment, acquisition, expansion, and such other stages of an enterprise."

·         The law "protects the intellectual property rights of foreign investors" and encourages negotiations between private parties. It says that the authorities "must not force the transfer of technology through administrative measures."

·         Regional and local governments are banned from restricting or prohibiting access to foreign companies or "interfering with their normal business activities."

The fledgling law states that it aims "to further expand the scope of opening-up" and to "protect the lawful rights and interests of foreign investment" while promoting the socialist market economy.

Questions Remain

While all this seems pleasing on its surface, most companies operating in China will tell you they've heard it before – many times. China has become infamous for passing reform laws, only to see spotty enforcement and endless vague regulations attached to them.

These companies will be watching very closely to see what happens next. It's not even certain that the NPC, which holds its annual two-week session in March, will pass the new law. But, given the timing of trade negotiations with the U.S., it seems likely that it will. Beyond that, questions center on how long it will take to enact implementing regulations and how strong they will be.  

U.S. trade negotiators are said to be insisting on enforcement and verification measures in any trade deal.

The law pertains to all industries not on the so-called negative list or restricted list, which was updated in July 2018. Western businesses lobbied hard to get to a negative list, which specifies which sectors are prohibited or restricted. Any industries not on the list are open to foreign investment.

Another draft law emerging this week goes beyond those lists. Known as the 2019 Draft Encouraged Catalogue, it specifies industries that will get favored treatment because China continues to seek Western expertise in those sectors. It remains open for public comment until March 2.

Negative List in Play

Released by the National Development and Reform Commission and the Ministry of Commerce, the list includes – not surprisingly – advanced technology for artificial intelligence, pharmaceuticals, environmental protection, and modern agriculture.

"The encouraged list will increase the number of sectors open to foreign investment," said an online note this week from the consulting firm Dezan Shira & Associates. "Those investing in these sectors will be eligible for preferential treatment, such as tax incentives, streamlined approval procedures, and discounted land prices."

Dezan also notes that the list aims to encourage specific regional investments. It says the list "is divided into a separate list for the central, western and northeastern regions, and Hainan province and a separate national list, which apply to the remaining regions in China."

Western business leaders have negotiated the negative list with the Chinese for years, and it has been whittled down, effectively opening up more sectors.

If I were placing a bet, it would be that the shrinking negative list and the new encouraged catalogue will do more - at least in the short term - than the Foreign Investment Law to allow foreign companies better access into Chinese markets.