The New World of Foreign Direct Investment
1 . After more than a half century of increasingly liberalized world trade, there are signs of change. Do you see world trade patterns evolving in new and different directions? What does this mean for your country and your clients?
According to the WTO Goods Trade Barometer (August 2022), the global trade volume plateaued, and year‐on‐year trade growth slowed to 3.2% in Q1, down from 5.7% in Q4 of 2021. The impact of COVID-19, which introduced extraordinary epidemic control measures such as lockdowns and quarantines as well as travel restrictions, along with the conflict in Ukraine, had dramatic effects on world trade.
It is against this background that some new trends and directions of world trade have emerged in recent years:
- Supply chain reconfiguration. The war in Ukraine and affected energy supply issues have drawn attention to balancing the efficiency, security, and resilience of supply chains, especially in key energy and resource supply chains for all jurisdictions, as well as in all areas of business.
- Trade decarbonization. The climate crisis, resource crisis, pollution, and other environmental issues should be tackled urgently for sustainable development. China has also committed to strive to achieve a carbon peak by 2030 and carbon neutrality by 2060.
- Digital service trade transformation. According to the report issued by the China Academy of Information and Communications Technology, from 2011 to 2020, the compound growth rates of global digital service trade, service trade, and goods trade are 5.4%, 2.3%, and 1.4% respectively, and the growth rate of digital service trade is significantly higher. By the end of 2020, the proportion of global digital trade in services trade increased to more than 60%.
For those intending to do business in China, it is advisable to pay attention to such trends as well as related local laws, regulations, and policies. An investor might be encouraged to invest in certain sectors, such as environment-friendly businesses and digital service trade. An investor should also prepare for the challenges of the supply chain due to the uncertainty of the global environment and it might be wise to build a backup supply chain in advance.
2 . Historically, foreign direct investment was embraced by governments as a way to strengthen domestic economies. Has your country’s government adopted an aggressive posture in regulating foreign investors?
China takes a friendly attitude towards foreign investment. The PRC Foreign Investment Law (FIL) stipulates a “pre-establishment national treatment rule” plus a “negative list system” for foreign investment. Foreign investors enjoy the same treatment in most industries as domestic investors. The negative list system regulates certain sensitive industries which are restricted or prohibited from foreign investment.
To determine if an investment in a specific industry is permitted, it is advisable to check if it involves an industry as prohibited, restricted, or eliminated in the negative lists and laws. The major negative lists include:
- Foreign Investment Negative List (FINL);
- Market Access Negative List; and
- Catalogue for Guiding Industry Restructuring.
The first list is only applicable to foreign investment, while the latter two are applicable to both foreign and domestic investment. Investment in a prohibited or eliminated industry is not permitted. Investment in a restricted industry is permitted, as long as it meets applicable restrictive requirements. Investments outside the above three lists are generally permitted without restrictive measures.
If an investment is permitted, no matter whether there are any restrictive measures, to establish a foreign-invested enterprise (FIE) it is necessary to file an online report with the competent foreign investment authority simultaneously with an application for company registration with the competent company registry.
3 . Are there specific sectors of your country’s economy or industries where foreign direct investment is barred or highly regulated?
According to the 2021 FINL, foreign investment is barred in the following Prohibited Industries:
- R&D, culture, and cultivation of rare or unique valuable fine varieties of living creatures in China, and production of propagation materials.
- Breeding and production of transgenic varieties of seeds/larvae of crops, livestock, poultry, and aquatic living.
- Fishing of aquatic products in the sea area and inland waters under China’s jurisdiction.
- Prospecting, mining, and dressing rare earth, radioactive minerals, and tungsten.
- Application of techniques for the processing of Chinese traditional medicines and the production of secret formulations of proprietary Chinese traditional medicines.
- Wholesale and retail of tobacco products.
- Postal service companies and domestic express mail delivery.
- Internet news information services, online publishing services, network audio and video program services, internet culture business (except music), and internet public information release services.
- China legal affairs consulting (except for providing information on the impact of the legal environment in China).
- Social surveys.
- Development and application of human stem cell and gene diagnostic and treatment technologies.
- Humanities and social sciences research institutions.
- Marine, land, aviation, and another industry mapping; map preparation; regional geological and geological survey operations; and other types of maps and related survey work (except for mining rights holders within the scope of the relevant mapping work).
- Mandatory education institutions and religious education institutions.
- News agencies.
- Editing, publication, and production of books, newspapers, periodicals, audio and video products, and electronic publications.
- Radio and television stations/channels/on-demand services and installation of satellite television broadcasting ground receiving facilities.
- Production and operation of radio or television programs.
- Film production, distribution, and release.
- Cultural relics trading and state-owned cultural relics museums.
- Artistic performance groups.
According to the 2021 FINL, foreign investment is restricted in the following industries:
- Selecting and breeding new varieties of wheat and the production of seeds: Chinese shareholding should be no less than 34%.
- Selecting and breeding new varieties of corn and the production of seeds: Chinese shareholding should be the majority.
- Publication printing: Chinese shareholding should be the majority.
- Construction and operation of nuclear power plants: Chinese shareholding should be the majority.
- Public air transportation companies: (a) Chinese shareholding should be the majority; (b) the investment proportion of a foreign enterprise and its affiliates must not exceed 25%; and (c) the legal representative must be Chinese.
- General aviation companies: (a) the legal representative must be Chinese; (b) for general aviation companies in agriculture, forestry, and fisheries industries, the investment must be in the form of equity joint ventures; and (c) for general aviation companies in other industries, Chinese shareholding should be the majority.
- Construction and operation of civil airports: (a) Chinese shareholding should be relatively major; and (b) foreign investors are not allowed to participate in the construction and operation of airport towers.
- Domestic water transportation companies: Chinese shareholding should be the majority.
- Telecommunication services: (a) should be limited only to WTO commitments; (b) for value-added telecommunication services (excluding e-commerce, domestic multi-party communication, storage and forwarding, and call centers), the foreign shareholding should not exceed 50%; and (c) for basic telecommunication services, the Chinese shareholding should be the majority.
- Market surveys: (a) should be limited only to equity joint ventures; and (b) for surveys of radio and television audiences, the Chinese shareholding should be the majority.
- Institutes for pre-school, high school, and higher education: (a) should be limited only to contractual joint ventures; and (b) should be led by Chinese partners.
- Medical institutions: should be limited only to equity joint ventures.
Further, if a domestic Chinese enterprise engages in a business that is prohibited from foreign investment, the overseas listing of the enterprise shall get the prior approval of the Chinese authority. The foreign investor shall not participate in the operation of the enterprise. The foreign shareholding ratio is also subject to Chinese laws.
4 . The global supply chain has been collapsing worldwide since 2020. How has this impacted businesses in your country and what steps has your country’s government taken to respond?
The supply chain crisis impedes production, increases the costs for materials, and logistics, and slows down the development of the economy.
To tackle these issues, China has adopted targeted domestic policies. For instance, China encourages banks to strengthen financial support to “stabilize foreign trade”. The banks shall postpone loan repayment requests for foreign trade enterprises. The authority also provides relief funds to qualified promising enterprises facing temporary difficulties. Further, the authority lowers the tax burden and expenses for small enterprises.
China is also building up a cross-border supply chain system. It focuses on cooperation with neighbouring countries and regions along the “Belt and Road Initiative”. China has been setting up overseas warehouses and overseas settlements. Further, to expedite customs clearance, China has implemented a pilot program of “direct pick-up beside ship” for imported goods and “direct loading” for exported goods in eligible ports. Additionally, China offers tariff benefits for exports to RCEP members.
5 . In M&A transactions as well as joint ventures in your country, what are the most critical issues foreign investors must evaluate prior to contemplating a transaction?
In a similar way to approaching green-field investment, it is critical that an investor assesses if the law permits the business after M&A. If the law prohibits such business, the investor has to abandon the M&A. If the law restricts foreign investment, the investor will need to consider whether to accept it, for example, a cap for foreign shareholding ratio. To get a rough idea of this issue, the investor may check the Negative Lists and Catalogue (see Question 2). For more accurate and detailed analyses, it is advisable to consult with an attorney.
If the law permits the business, the investor needs to further check if the M&A requires special approvals. The typical approvals are concentration review and national security scrutiny. An M&A requires approval by the Antitrust Bureau if the turnover of the controlled businesses after the M&A reaches certain thresholds. If a foreign-related M&A involves military areas, key resources, key infrastructures, etc., it is very likely to trigger such scrutiny.
If there is no significant legal obstacle to the M&A, the investor must conduct a due diligence investigation on the target company/assets. During the investigation, the investor will identify the risks/issues. Based on the due diligence results, the investor may require the seller/target company to rectify issues to mitigate the risks and better bargain on the price and contractual terms of M&A.
6 . What is the best strategy for acquiring interests in real estate or other tangible property in your country? Is this more difficult for foreign investors?
China restricts a foreign company or individual from directly buying and holding real estate in China. For instance, a foreigner is permitted to buy only one property after working or studying in China for more than one year. Such a property must be used for themselves and the maximum size of the property is limited. Therefore, it is advisable to buy real estate or a similar via a domestic business vehicle. A popular vehicle is a foreign-invested company. The law offers almost equal treatment of foreign-invested companies and domestic ones.
In China, common real estate refers to land use rights and property ownership. An individual or entity may not get ownership of the land. Instead, governmental authorities own the land on behalf of the people except in certain rural areas where the communities own the land. The authority may grant a land use right of certain years to an individual or entity. Property ownership belongs to the one who can use the land legally and builds the property.
To own property by building it, a company needs to get the correct land use from the authority first. The company must ensure that the land purpose, the area planning, and the support of local authorities permit future business. For the grant of land use rights, the authority will focus on the company’s tax revenue commitment, business influence, etc.
To own a built property, a company may buy the property ownership and the remaining land use right from the seller. However, such transactions may still be subject to the review of the local authority on land use. So, it is advisable to consult with the authority before contracting with the seller. And the company must undertake due diligence on the real estate before the transaction. This is to mitigate potential flaws or risks such as mortgage, seizure, or other third-party claims.
However, to progress real estate development and sales in China, a company must get a special business permit. To apply for such a permit, the company should meet certain requirements, such as minimum registered capital, and professional personnel.
7 . What laws or regulations exist in your country to protect data exchange and privacy, and is the protection of intellectual property challenging for foreign investors?
In recent years, China has paid more and more attention to protecting data exchange and personal information. Cyber Security Law (CSL) took effect in 2017. Personal Information Protection Law (PIPL) and Data Security Law took effect in 2021. Currently, they are the most important laws on this topic. The authority has also enacted regulations and standards on data protection. More legislation is on the way.
Like personal data in GDPR, personal information in PIPL is a very broad definition. It refers to all kinds of information related to identified or identifiable individuals. And PIPL governs every aspect to process personal information, from the collection and storage to all kinds of use and processing. Any entities or individuals that can determine the purpose and method of processing are referred to as “processors” under PIPL. The processor is like the “controller” under GDPR. When processing personal information, processors must follow the principles of lawfulness, justification, and necessity.
China has also established a legal system to protect intellectual property rights. The system consists of international treaties and domestic IP laws and regulations. The law provides the same level of protection for both foreign investors and local entities. Domestic IP laws include Patent Law, Trademark Law, Copyright Law, Anti-Unfair Competition Law, etc. Further, FIL stresses: (1) the protection of IP rights of foreign-invested enterprises and investors; and (2) the prohibition of forced technology transfers.
8 . Describe the most common legal structures used by foreign investors when doing business in your country.
The most popular legal structure selected by foreign investors is a wholly foreign-owned enterprise (WFOE). In such a structure, the foreign investor gets full control of the WFOE.
In addition to a WFOE, a foreign investor may select a Sino-foreign Joint Venture if: (1) the intended business is restricted from foreign investment where foreign ownership is subject to a cap; or (2) a Chinese partner has the capability and resources to facilitate the business.
In most cases, investors will form a WFOE or a Joint Venture in a form of a limited company. In a limited company, an investor’s liability is limited to the subscribed registered capital. According to the PRC Company Law, a limited company shall have a shareholders’ meeting (in case of two or more shareholders or, just one sole shareholder), a board of directors (or an executive director), a supervisors’ meeting (or, one or two supervisors), and a manager (appointed by the board or executive director). The sole shareholder or the shareholders’ meeting shall be the highest authority of the company. The board shall be accountable to the sole shareholder or the shareholders’ meeting and make resolutions on the basic management matters of the company.
9 . What are the most attractive opportunities for foreign investors in your country at this time?
The Catalogue of Industries to Encourage Foreign Investment (2022 version) (the “Encourage Catalogue”) issued by the Ministry of Commerce (MOC) outlines the attractive investment opportunities and encourages foreign investment in specific industries and regions. Foreign investors in these projects can benefit from preferential policies, such as tariff exemptions, reduced taxes and land supply.
The new Encourage Catalogue reflects several trends that present significant opportunities for foreign investors:
- Continue encouraging foreign investment in advanced manufacturing. Compared to the previous version, in the field of end products, the latest Encourage Catalogue adds or modifies items for aviation ground equipment, glow discharge mass spectrometer, transmission electron microscope, industrial water-saving related equipment, etc. In the field of parts, it adds or modifies items for shield machine bearings, key components related to automatic driving, high-performance light metals, etc. In the field of materials, it adds or modifies items for consumables related to the pharmaceutical manufacturing industry, high-purity electronic chemicals, high-performance coatings and organic polymer materials.
- Continue encouraging foreign investment in modern service industries, particularly in promotion of integration of the service and manufacturing industries. New or modified investment opportunities include environmental protection technology development, professional design services, vocational colleges, human resources services, clean production evaluation certification and review, etc.
- Continue encouraging foreign investment in the central and western regions, also applicable in the Northeast and Hainan. The Encourage Catalogue has significantly increased the number of investment items encouraged in these regions, tailored to each province's unique conditions. For instance, Shanxi, Liaoning, Anhui and Ningxia have added the production of smartphones, tablet PCs and their key components, the research and development and production of functional and environmentally friendly recycled polyester filaments, and the manufacture of liquid crystal display materials and organic electroluminescent display materials. In Tibet, Xinjiang, Yunnan, and Qinghai, investment in commercial chain operations, desert economy industries, cross-border logistics, and ecological tourism resource protection development and operation are encouraged.
Moreover, the National Development and Reform Commission (NDRC) has issued Several Measures for Encouraging Foreign Investment in the Establishment of R&D Centers. These measures offer various policy initiatives to promote scientific and technological innovation, R&D convenience, overseas talents introduction, and IP protection, to create a more favourable environment for foreign investment in R&D centers.
10 . Do specific laws or mechanisms exist in your country to protect foreign direct investors?
As a general principle stipulated by FIL, foreign investors enjoy national treatment and are protected by Chinese laws. The most specific laws to protect foreign investors include:
- FIL and its implementation rules;
- the Measures for Complaint Work of Foreign Invested Enterprises; and
- the Regulations of the Supreme People’s Court on Several Issues Concerning the Hearing of Dispute Cases of Foreign Invested Enterprises.
To summarise the most important elements of the above laws, they offer:
- Equal protection. The laws offer foreign investors and foreign investment a treatment no lower than that of domestic investors and their investment. The law stresses IP protection for foreign investors and foreign-invested enterprises.
- Freedom on fund remittance. Foreign investors may freely remit their capital contributions, profits, capital gains, income from asset disposal, intellectual property licensing fees, legally obtained compensation, and liquidation income in and out of China in Renminbi or foreign exchange according to law.
- Special complaint mechanism. In addition to normal protection for both domestic and foreign enterprises, China has set up a special complaint mechanism for FIEs and foreign investors. If an FIE or a foreign investor believes the conduct of the administrative authority or the officer infringes their legitimate rights and interests, the FIE or the investor may apply to the special complaint working body for coordination and resolution.