The current negative list is the Special Administrative Measures on Foreign Investment Entry (Negative List) (2018 edition) published by the National Development and Reform Commission and the Ministry of Commerce, which came into effect on July 30, 2018 (the 2018 Negative List). The negative list administration system mainly provides that:

• Foreign investors cannot invest in those sectors on the negative list in which foreign investment is prohibited (e.g., according to the 2018 Negative List, foreign investors are prohibited from investing industries such as social surveys, compulsory education institutions, news agencies, and movie production companies).
• Foreign investors investing in sectors on the negative list in which foreign investment is restricted must satisfy the requirements provided in the negative list (e.g., according to the 2018 Negative List, foreign investment in industries such as basic telecommunications, domestic waterway transportation, and publication printing are subject to the restriction of the Chinese party being the controlling shareholder).
• Foreign investments in sectors not on the negative list must be administered on the basis that domestic and foreign investments should be treated alike.

(2) Foreign investment information reporting system

The state is to establish a system for reporting details of foreign investments. Foreign investors or foreign-invested enterprises shall, through the enterprise registration system and the enterprise credit information disclosure system, report details of investments to the authority responsible for commerce matters.

(3) Foreign investment security review system

The Foreign Investment Law reiterates the requirement to establish a security review system, which was initially provided under the Notice on Establishing a Security Review System for Foreign Investors to Acquire Domestic Enterprises issued by the General Office of the State Council of China in 2011 (known as Circular 6). Circular 6 provides specific requirements on the scope, content, work mechanism, and procedures regarding the security review, while only one single article under the Foreign Investment Law says that foreign investments that affect or might affect national security shall be subject to a security review and the decision made in accordance with the law is final. It remains to be seen if the detailed provisions under Circular 6 will be replaced by the Foreign Investment Law’s implementation rules, still to be formulated and issued in the future.

(4) Incentives of foreign investment

Foreign-invested enterprises will be treated the same as domestic enterprises, in accordance with the law, in relation to the various state policies supporting the development of enterprises, participation in standard-setting, the application of mandatory standards, and the state procurement of products and services provided by foreign-invested enterprises within China.

The Foreign Investment Law also confirmed that foreign-invested enterprises may raise financing in China through the public offering of shares or issuance of corporate bonds. Furthermore, foreign investors may, in accordance with law, freely remit profits, capital gains, royalties from intellectual property rights, lawfully obtained compensation and the proceeds of liquidation, out of China.

Reed Smith Observations 

The Foreign Investment Law is expected to bring about significant changes in future foreign investment transactions, and its promulgation marks the beginning of a long-term reform of China’s system for administering foreign investment. However, compared with the current FIE Laws, the Foreign Investment Law only outlines principles and contains somewhat vague provisions. Many features, such as the detailed registration, filing, and reporting procedures for foreign-invested enterprises, remain to be further specified in implementation rules and other ancillary regulations, which have yet to be formulated and issued by relevant authorities. Foreign investors doing business in China are encouraged to participate when the Chinese government seeks public comments on the draft implementation rules and to keep abreast of the new developments in laws and regulations.

Although many details of the implementation of the Foreign Investment Law are yet to be specified in the future ancillary regulations, it is certain that the special corporate governance rules regulating foreign-invested  enterprises, and which are provided in the current FIE Laws, will be replaced by general rules in the Company Law and the Partnership Enterprise Law. For instance, the highest authority in a Sino-foreign joint venture will be the shareholders’ meeting, rather than the board of directors. As such, existing Sino-foreign joint ventures in China should consider amending their articles of association or other organizational documents as soon as possible after the Foreign Investment Law comes into effect (e.g., joint venture agreements and the articles of associations of Sino-foreign joint ventures may need to be adjusted to make the shareholders’ meeting the highest authority within the company), in order to comply fully with the requirements under the Foreign Investment Law.

Client Alert 2019-095