Capitalising on China’s 14th Five-Year Plan Via the New Foreign Investment Law

Indeed, the mainland has over the years actively sought to reform its commercial regulatory systems, which were previously characterised by approvals and oversight of registered capital. The reforms’ objective has been to substantially streamline and delegate authority. The major turning point was a 2013 State Council decision to reform the registration requirement for registered capital and set up a modern company registration system featuring unified regulation, high efficiency and transparency to create a favourable business environment. The related reforms include the relaxation of the registration requirement for capital where, unless otherwise provided for by law or regulation, the minimum registered capital requirements for limited liability companies, single-member limited liability companies and joint stock limited liability companies were completely removed. Restrictions on promoters’ initial capital contribution ratio and full payment deadline at incorporation were also eliminated.

The paid-up capital of a company is no longer regarded as a required registration item for industrial and commercial undertakings. In compliance with the principle of national treatment, the registration reform measures related to registered capital also apply to foreign-invested enterprises.

Subsequently, the Standing Committee of the 12 ^th National People’s Congress endorsed the decision to revise the Company Law after deliberation at its 6 ^th session. This drastically lowered the threshold for company formation, including revision of the registration system for registered capital from paid-up registration to subscription, the relaxation of the registration requirement for registered capital, and the streamlining of corporate registration items and related documentation requirements.

These changes play a positive role in stimulating market vitality and promoting the growth of small and micro-enterprises, especially innovation-driven organisations. In response to these changes, the former State Administration for Industry and Commerce revised the related regulations and promulgated the Provisions on the Administration of Registration of the Registered Capital of Companies, where the minimum registered capital requirement for corporate entities was formally abolished with effect from March 2014.

On the other hand, the Foreign Investment Law also features the complete removal of the approval and filing requirements related to the establishment and subsequent changes of foreign-invested commercial enterprises, which are to be replaced by an information reporting system. Since then, the former case-by-case approval system and the subsequent filing system are no longer applicable to foreign-invested enterprises.

The new law provides for the establishment of a foreign investment information reporting system, where foreign investors and foreign-invested enterprises should report their investment information to the commerce authorities through the enterprise registration system and enterprise credit information disclosure system. This requirement is to tie in with the enterprise annual report and disclosure system formally set up by the State Council in October 2014. It also promotes the formation of the enterprise credit information disclosure system to replace the annual review requirement and takes forward the reforms on the registration systems for industrial and commercial undertakings [8].

From now on, mainland authorities will continue to streamline necessary procedures for enterprises. For the establishment and subsequent changes of general foreign-invested enterprises, approval by or filing with the commerce authorities is no longer required.

Any initial or subsequent change reports are to be submitted online directly through the provincial or municipal “all-in-one network” platform, whereas annual reports are to be submitted online through the national enterprise credit information disclosure system. Such a reform is the realisation of a simplified flow that “integrates multiple reports into one” annual report for market regulation, commercial operation and foreign exchange, which in turn greatly facilitates and promotes the commercial operation of foreign investment in mainland China. Recently, government departments concerned have taken measures to further optimise corporate establishment services, with a view to shortening the time required for corporate establishment across the country to a maximum of four days by the end of 2020 [9].

Negative List Administration System ​​​​​​​

The Foreign Investment Law also provides that if there are project approval and filing procedures requirements for foreign investments in certain fields, compliance with the related state requirements must continue. Nevertheless, a pre-establishment national treatment plus negative list administration system are now applied to foreign investments across the board: foreign investments outside the negative list will be entitled to national treatment that the treatment provided for foreign investors and their investments during the investment establishment stage will not be less favourable than that of domestic investors.

As early as October 2015, the State Council promulgated a guideline (Guo Fa No. 55 [2015]), specifying that the negative list system for market access would be gradually implemented, first on a trial basis in certain regions to build up experience, then introduce gradual improvements, and set up a national unified negative list with related mechanisms. The purpose is to implement a unified negative list system across the nation so that the scope of government approval can be significantly reduced, trade and investment can be further facilitated, and the administrative efficiency enhanced with a view to promoting a fundamental change to government functions.

According to the current provisions of the Foreign Investment Law and the Regulation for Implementing the Foreign Investment Law, the negative list for foreign investment access (the Negative List) covers both prohibited categories and restricted categories, namely:

• No foreign investment is allowed in prohibited fields covered by the Negative List.

• Foreign investment for restricted fields covered by the Negative List should comply with the requirements specified in the List.

Fields not covered by the Negative List are administered under the principle of equal treatment for domestic and foreign investments. Foreign investors and foreign-invested enterprises should abide by Chinese law and regulation, and must not jeopardise China’s national security or bring harm to public interests. The Chinese government has also set up a security review system for foreign investments that pose immediate or possible threats to national security.

Recently, the National Development and Reform Commission and the Ministry of Commerce jointly released the latest versions of the Special Administrative Measures (Negative List) for the Access of Foreign Investment (2020) and the Special Administrative Measures (Negative List) for the Access of Foreign Investment in Pilot Free Trade Zones (2020), both of which took effect on 23 July 2020 [10]. As with the 2019 versions, the two 2020 Negative Lists further reduce the number of investment fields that are prohibited or require prior approval, thereby expanding the scope of opening in the service, manufacturing and agricultural industries. In particular, the national Negative List is shortened by 17.5% from 40 items to 33, with two additional items partially open for investment, whereas the Negative List for pilot free trade zones is cut by 18.9% from 37 items to 30, with one additional item partially open. Details are as follows:

• The opening up of key service sectors has been expedited. For the financial sector, the restrictions on foreign shareholding ratios for companies engaged in securities, securities investment fund management, futures and life insurance operations have been lifted. In infrastructure, the requirement for the Chinese party to hold a dominant share in the construction and operation of water supply and drainage networks for cities over 500,000 population has been revoked. In traffic and transportation, the requirement prohibiting foreign investment in air transport control has been abolished, and a number of civilian airport requirements have also been revised.

• Access to both the manufacturing and agricultural industries is now relaxed. For the manufacturing sector, the restriction on the foreign investment shareholding ratio in commercial vehicle production has been lifted; and the prohibition of foreign investment in the smelting and processing of radioactive minerals and in the production of nuclear fuel has also been repealed. In agriculture, the original requirement for the Chinese party to hold a dominant share in the selective cultivation of new wheat varieties and production of seeds has been relaxed to a minimum Chinese shareholding of 34%.

• Trial practices for opening up continue to be conducted in pilot free trade zones. In respect of nationwide opening measures, pilot free trade zones continue to embark on early implementation and early trials. In pharmaceuticals, the prohibition of foreign investment in Chinese medicine decoction pieces has been removed, while in education, wholly-foreign owned vocational education institutes can now be set up.

The Negative List for foreign investment access is the basic reference for the pre-establishment national treatment cum negative list administration system. As the new negative list version to support the Foreign Investment Law and its implementation regulation, the 2020 Negative List not only expands the scope of opening up further, but also increases the exemption to the List where “the requirements on certain fields under the Negative List for foreign investment access may not be applied to specific foreign investment upon approval by the State Council based on the referral from the related review authorities under the State Council.” That is to say, foreign investment is allowed to apply for exemption on a need basis, so as to provide more room for foreign investment.

Good Governance Safeguarding Investors’ Interests

Another feature of the Foreign Investment Law allows foreign investors to manage their mainland China companies along the lines of widely accepted international governance models. For example, Chinese-foreign equity joint ventures and Chinese-foreign contractual joint ventures set up under the old laws had to act on the decisions of their respective boards of directors on major issues or the appointment of management executives for day-to-day operation, in accordance with the original contract or joint venture articles of association.

Since the repeal of the “three laws on foreign investment”, foreign investors can refer to the requirement under the new law and set up an enterprise through incorporation on the mainland according to the relevant provisions of the Company Law instead. By the same token, the past requirements for the board of directors to serve as the company’s highest authority with control of its organisation and structure have also become obsolete [11].

For limited liability companies set up by foreign investors under the new law, shareholders’ meetings or shareholders’ general meetings become the corporate authority. Resolutions on revising the articles of association or on increasing and decreasing registered capital, and major issues on merger, division, dissolution or change of corporate form are no longer subject to a unanimous board of directors decision, but instead now require endorsement with a two-thirds vote by the shareholder general meeting [12]. The shareholder meetings and the board of directors responsible for the actual operation under these meetings should work according to the provisions of the Company Law. The overall governance model will gradually become on par with prevailing international practice.

The new law also ensures that foreign investment will receive fair treatment, with investors’ legal interests well protected in mainland China. The Regulation for Implementing the Foreign Investment Law spells out that the government and the departments concerned will provide equal treatment for foreign-invested and domestic enterprises according to the law. This includes government funding arrangements, land supply, tax and levy concessions and exemptions, qualification licensing, standard setting, project application and human resource policies.

Where foreign investment in a specific trade or field requires licensing under the law, the licensing authorities should assess foreign investors’ applications by applying the same terms and procedures as for domestic investments, unless otherwise provided for by law or administrative regulation. No discriminatory requirements on the licensing conditions, application materials, assessment procedures and time frame should be applied to foreign investors. Moreover, the new law enhances the protection of foreign investment in various aspects, such as:

• The State is not to expropriate any investment made by foreign investors
  
  Under exceptional circumstances, the State may expropriate an investment made by foreign investors for public interests in accordance with the law. Such expropriation shall be made pursuant to statutory procedures and fair and reasonable compensation will be given in a timely manner. Foreign investors objecting to the decision of expropriation may apply for administrative review or initiate administrative proceeding under the law.

• Free outward remittance of after-tax profits and lawful income
  
  Foreign investors are entitled by law to freely remit in or out their paid-up capital, profits, capital income, asset disposal proceeds, licence fee receipts for intellectual property rights, legitimate damages or compensation and liquidation proceeds in renminbi or foreign exchange. No entity or individual can exercise illegal restriction on the type of currency, amount and frequency of such remittance. The wage and salary income and other lawful income of all employees of foreign-invested enterprises from other countries or Hong Kong, Macao and Taiwan can be remitted out freely under the law.

• Enhanced protection of intellectual property rights and trade secrets
  
  In protecting intellectual property rights, the State has increased the punishment for infringement, while stepping up the related law enforcement, promoting the establishment of a quick and concerted protection mechanism, optimising the diversified dispute resolution mechanism and providing equitable protection to foreign investors and foreign-invested enterprises.

• Prohibition of forced transfer of technology
  
  Administrative authorities and their staff must not directly or indirectly force foreign investors and foreign-invested enterprises to transfer technology through the conduct of administrative licensing, inspection, punishment, mandate and other measures.

• Protection of trade secrets
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  When administrative authorities, in the discharge of their duties under the law, have a genuine need to obtain materials or information related to trade secrets from a foreign investor or foreign-invested enterprise, they must be conducted within the scope required by the discharge of duties. Strict control should be exercised on the scope of knowledge where officers not related to the specific duties should not come into contact with the related materials and information. The administrative authorities should set up a sound system of internal control and take effective measures to protect foreign investors’ and foreign-invested enterprises’ trade secrets that they come across in the discharge of duties. Where information sharing with other administrative authorities is required by law, the trade secrets contained in the information must be kept confidential to prevent any disclosure.

To tie in with the implementation of the new law, government departments concerned have introduced corresponding supportive measures. For example, the State Administration for Market Regulation (SAMR) has issued a circular in response to the related provisions of the new law [13], stating that foreign investors or foreign-invested enterprises making investments outside the fields covered by the Negative List will complete their enterprise registration process under the principle of equal treatment for domestic and foreign investments.

To support the commerce departments in their implementation of the foreign investment information reporting system, SAMR had discontinued the filing procedures for the establishment of foreign-invested enterprises with effect from 1 January 2020. The Ministry of Commerce and SAMR have also jointly drawn up the Measures for the Reporting of Foreign Investment Information (Ministry of Commerce Order No. 2 [2019]) to replace the former approval, filing and joint annual reporting system for foreign-invested enterprises [14].

At the end of 2019, the central government issued The Guideline on Strengthening Intellectual Property Rights Protection, asking the departments concerned to step up the punishment for infringement and forgery, draw up rigorous standards for evidence, and strengthen case enforcement measures. It also proposes to speed up the introduction of a punitive damages system for infringement of patents, copyrights and other intellectual property rights. The National Intellectual Property Administration is also striving to co-ordinate and promote various protective measures on intellectual property rights, as well as improve the punitive damages system for infringement through legislation, so as to increase the cost of infringement [15].

It can therefore be seen that China is seeking to implement policies for streamlining the administrative regulation, enhancing administrative efficiency, strengthening protection for foreign investment interests and stepping up related law enforcement, with a view to improving the business environment further and promoting foreign investment.

Looking Ahead

To sum up, implementation of the new law not only facilitates foreign investment in mainland China, but also strengthens protection for investors comprehensively, playing a positive role in promoting the inflow of foreign investment. While the ongoing Covid-19 impact is looming over the future of the global economy in both the short and medium terms, economic development in mainland China has gradually stabilised in recent months, providing not only a positive drive to the global economy, but also further opportunities for foreign investment and development.

In particular, as the external market demand has slowed, China is striving to capitalise on the strengths of its sizable domestic market to gradually adopt a new growth model, based on the complementary relationship between domestic and international markets. New development advantages will be created through the upgrade of industrial chains and supply chains to modern standards, together with the vigorous promotion of technology and innovation. It is expected that such a strategy will become a cornerstone of China’s upcoming 14^th Five-Year Plan, helping to promote further expansion and upgrade in the mainland market and create more investment and development opportunities for the related industry players in the 2021 to 2025 period.

With the implementation of the Foreign Investment Law, China will continue upgrading its commercial systems and the related law and regulation, while controlling government departments’ operations, extend equal treatment to domestic and foreign-invested enterprises, continue to improve the business environment, further reduce the number of investment sectors that require prior approval or are prohibited under the negative list, and expand the scope of opening up.

All these measures will facilitate foreign investors exploring various opportunities in the mainland presented by China’s economic development. Hong Kong investors and foreign-invested enterprises operating in Hong Kong will, as a result, find it easier to access the mainland market. Industry players in the related Hong Kong investment and service sectors will also be presented with extensive business opportunities by virtue of a continuous flow of foreign investment into mainland China, leveraging Hong Kong’s position as the mainland’s key commercial and trading service platform for external co-operation.