In January, China issued a comprehensive draft of the Foreign Investment Law for public comment. The new law is expected to replace the existing three acts related to foreign investment. After it takes effect, the Sino-Foreign Equity Joint Venture Law, the Sino-Foreign Cooperative Joint Venture Law and the Wholly Foreign-Owned Enterprise Law will be abolished.
Under the new law, Taiwanese investors in China will be perceived as quasi-foreign investors and will have to abide by the new legislation and be treated the same as foreign investors from other countries.
After the implementation of the new law, China will change the way in which it supervises and handles foreign investment. For example, apart from a list that will specify the businesses in which foreign investors are not allowed to engage without restrictions, foreign firms will not need to seek approval in advance to do business under a new market access mechanism. In the case of businesses covered by the list, foreign investors will still need to secure approval following a review process by the Chinese authorities.
Currently, the four pilot free trade zones in China have implemented such a new market access mechanism.
The new foreign investment rules are a positive move for China’s economy in the long term, although foreign investors will face higher operating costs in the short term despite higher flexibility in the new law.
In the future, foreign investors will have to follow the Company Law and Partnership Law when forming their corporations or adjusting their business structures.
After three years of the implementation of the new law, foreign investors will face a license revocation if they have failed to make the necessary adjustments in their business structures. Under such circumstances, foreign investors, including Taiwanese firms, will shoulder a heavier financial burden.
The new law will be focused on how to monitor foreign investment after the businesses are established in China instead of reviewing applications and approving new projects.
In addition, foreign investors will be required to issue annual reports on their operations. Those engaging in certain businesses will have to issue reports every quarter, while if any changes in their investments are made, they will have to issue additional reports.
In some grey areas, the new law will use the variable interest entity (VIE) structure. Under the VIE structure, contractual control is recognized as a form of foreign investment. However, the law still lack details about the VIE structure.
The pace of implementation of the new law will depend on the country’s negotiations on an investment agreement between Beijing and Washington and on the timing of China’s inclusion in the proposed Trans-Pacific Partnership (TPP) trade bloc.
The Taiwan government should provide assistance to Taiwanese investors to give them a better understanding of the law so that Taiwanese firms can prepare for the legal changes.
(Yen Hui-hsin is an Associate Research Fellow of the Chung-Hua Institution for Economic Research. Translated by Want China Times.)
