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Jan 17, 2019 | 23:53 GMT

4 mins read

China: Beijing Looks at Modifying Its Foreign Investment Laws

(Stratfor)
Big Picture

The underlying competition and significant differences between China and the United States make an enduring deal between the two countries unlikely. However, the effects of the trade war between them gives Chinese authorities an opening to brave the risk of domestic pushback and move forward with long-delayed reforms.

What Happened

As Beijing searches for concessions to offer the United States in their ongoing trade talks, Chinese lawmakers have announced that they will convene on Jan. 29-30 for a previously unscheduled legislative session that will allow them to speed the review process for a long-awaited law on foreign investment. The bill, initially introduced in 2014, has faced repeated delays and has undergone multiple drafts. In its latest draft, published in 2018 amid an escalating trade war with the United States and growing grievances from foreign businesses, the bill aims to take a stronger line on protecting foreign investment and intellectual property rights. Specifically, the 39-article draft contains provisions to prevent the forcible transfer of intellectual property — addressing a core U.S. concern. What's more, the current draft as written would create a level playing field between foreign and domestic companies through equal-support policies and participation in government procurement, as well as provisions that would prevent local governments from restricting market access.

If the new law is adopted, it will replace three existing laws governing foreign or joint venture investment, streamlining the bureaucratic process and reducing the potential for conflicting provisions. The new legislative session and accelerated timeline could allow the draft to become law as soon as the next National People's Congress in March, far faster than the completion in 2020 that it could have achieved under normal legislative procedures.

Why It Matters

In part, China is hurrying to put the law into place as a goodwill gesture to the United States. As trade negotiations continue, Beijing hopes to persuade Washington to lift its tariffs, which have accelerated a slowdown in the Chinese economy. In part, it is doing this by addressing some of Washington's concerns over its economic regulations. For instance, in the bill under consideration, Beijing is walking back its previous position — in which it denied that it forces companies doing business in the country to share technology — by explicitly prohibiting forced technology transfers. Instead, the language in the new law encourages voluntary cooperation, but it leaves a significant amount of vagueness that will likely make it difficult to enforce the law in practice. In addition, the bill's 2018 draft includes assurances that the Chinese government will provide equal treatment and support to both foreign and domestic companies and improve the mechanisms by which complaints made by foreign companies are handled.

Chinese officials have praised these provisions for exemplifying the principle of "competitive neutrality" — a recent catchphrase in Chinese politics — but they are unlikely to go very far in reassuring foreign businesses. While the new provisions represent a marked change from current law, their vagueness in their current form, coupled with various restrictive measures already in place, will likely prevent the new law from leading to significant changes in the short term. Moreover, the draft bill includes prohibitions on foreign investment that could endanger China's political and social interests or its national security. Depending on how the ambiguous language of these provisions is interpreted, they could be used to restrict foreign business activity on national security grounds. To remedy these issues, Chinese lawmakers have called for more specific language to be inserted in the draft bill, including further clarification on forced technology transfers and clear language enshrining the principle of competitive neutrality.

Background

The United States and China have entered into a 90-day negotiation process in an effort to resolve their trade differences, prompting Beijing to take steps to answer U.S. criticisms and concerns. In an effort to appease Washington, Beijing has moved to resume imports of U.S. soybeans, lift tariffs on auto imports and moderate its Made in China 2025 initiative. As Chinese Vice Premier Liu He prepares to visit Washington on Jan. 30-31 for a new round of trade talks, Beijing is working to provide its negotiating partner with enough concessions for an enduring trade truce to move forward.

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