In Stratfor's 2019 Annual Forecast, we noted that China will maintain a trade dialogue with the United States and Beijing will attempt to reform its domestic agenda amid mounting external pressure. The recent passage of new foreign investment law is one such step. Whether such a law will sufficiently appease foreign investors and the United States' concerns remains is another question, however.
On March 15, China's legislature passed a highly anticipated foreign investment law that will replace the existing three laws that govern foreign investment in the country. The law — which will go into effect on Jan. 1, 2020 — includes provisions to bar forced technological transfers, and emphasizes equal treatment for foreign investment and intellectual property protections. It also provides a mechanism to settle disputes by foreign investors. Furthermore, the legislation includes a measure that prohibits administrative staff from leaking "confidential information" — presumably an effort to address foreign investors' concerns over China's espionage practices. The new law does, however, leave ambiguity around the national security review process, which stipulates that the acquisition of Chinese companies by foreign investors are subject to Beijing's anti-monopoly law.
Why It Matters
As China searches for trade-related concessions to offer the United States, Beijing's lawmakers have worked to expedite the new foreign investment law — compressing the legislative review period into just three short months. The accelerated passage of the new legislation — coupled with the fact that it specifically addresses key issues including forced tech transfers, intellectual property rights and corporate espionage — reflects (on paper) Beijing's intent to express its commitment to meeting U.S. demands and quelling foreign stakeholders' concerns with the country's business environment. Despite its intent, ambiguities within the law leave room for controversy. Given Beijing's vague jurisdiction of national security and weak judicial independence, Chinese authorities have ample ability to restrict foreign investments.
Despite its intent, the ambiguity of China's new law — namely, on issues related to national security review on foreign investment — leaves room for controversy.
But the biggest challenge will be actually implementing and enforcing the law — especially at the subnational level. Although the law emphasizes local responsibilities and stipulates broad punitive mechanisms, the provisions outlining regulatory jurisdictions, authorities and supervisory mechanisms for local governments' remain either vague or absent. Legal experts believe that local-level regulations and guidance for application will be followed, but significant loopholes remain. And then there is the questions of supervision, enforcement and judicial mechanisms to regulate local compliance on key issues. And because many of the obstacles to foreign investment go beyond the judicial aspect, the actual power of the law itself is limited.
First introduced in 2014, the investment law has been repeatedly delayed and has gone through multiple drafts over the years. The first reading of the latest draft (and now current law) began in December 2018, shortly followed by the second review in less than one month. This fast-track process successfully pushed the law through China's National People's Congress in March, though it has raised concerns within the foreign business community that many issues are unresolved.