The Investment Policy team of the World Bank Group’s Trade & Competitiveness (T&C) Global Practice has learned that China is about to adopt a new foreign investment law that would bring about several potentially significant improvements to the current investment regime. Although we have not yet seen an English-language version of the proposed law, and therefore have to rely for the moment on accounts by international law firms and chambers of commerce that have seen (and sometimes commented on) the draft law, I wanted to share the news with the Private Sector Development community because of the new law’s potential impact – not just in China but across East Asia.
China has very significant political and economic clout in the region and across the developing world. Its reforms are closely watched, and they could inspire many other developing and emerging economies to follow suit.
After soliciting comments on the three existing laws, China’s Ministry of Commerce (MOFCOM) issued a draft of the Foreign Investment Law on January 19, also soliciting public comment – a process that, incidentally, should also inspire many countries.
If passed, the new law would abrogate and ‘unify’ the three current laws that regulate foreign investment: namely, the Sino-Foreign Equity Joint Venture Law, the Wholly Foreign-Owned Enterprise Law and the Sino-Foreign Contractual Joint Venture Law. Although going from three laws to one can in itself be a positive thing – simplifying the regulatory environment usually is a good idea – what really matters to the investor community is the substantive or procedural changes that the new law would introduce.
A first change is that the new law would adopt a “negative list” approach, modeled on the system in place in the Shanghai Pilot Free Trade Zone (FTZ). As a reminder: Under a negative-list approach, certain sectors where foreign investment is restricted, capped or prohibited are specifically enumerated on a negative list. And foreign investment in restricted sectors can only proceed through some sort of ex ante screening and approval mechanism by a governmental authority or agency. On the other hand, under such a system, investments in sectors that are not on the negative list can usually proceed without any prior screening and approval, using, for example, the normal company registration process.
The negative-list approach is one that T&C’s Investment Policy Team often recommends to our client countries, because it fosters transparency and predictability and because it reduces government discretion over the admission of investors. Obviously, in this case, we would need to see the actual negative list before we can offer a more definitive assessment. But assuming that the number of sectors on the negative list is not excessive or, better, that sectors previously closed or restricted are now open to Foreign Direct Investment (FDI), the impact of this single change could be very significant.
In the case of China, the reduction in government oversight of FDI entry is apparently complemented by a strengthening of the “National Security Review” process, for foreign investment in strategic activities or industries that raise national-security issues. Again, we would have to review the English-language version of the draft law to better assess the extent of this national-security review. This is a process that exists in many countries, including (for instance) the United States.
Another reported change is that the new law would apparently not seek to regulate the form that enterprises with foreign investment must assume, unlike the current laws. That would mean that these enterprises would follow the “standard” laws governing companies and partnerships, as with any domestic business. This also goes in the direction of extending “national treatment.”
Allow me to emphasize again that it is premature to offer any rigorous assessment of the draft law, let alone to predict its potential reception by the foreign investment community. Yet we are encouraged by what we are reading and hearing about the draft law so far. I will continue to follow this story, with the help of my T&C colleagues, Ronald Wu (who is based in Beijing) and Chan Ki Park (who is based in Washington). I’d like to thank Ron for having checked the Chinese-language version of the MOFCOM website to summarize some of its content. We’ll offer additional information to Private Sector Development practitioners as we review the English-language version of the draft or the final version of the new law.