This article by Ken Davies appeared in the China Daily Global Edition on 3 April 2019.
China's new Foreign Investment Law is a major step forward in the country's investment legislation. The task now is to develop appropriate regulations to implement the law and to ensure that these are put into practice.
My work at the Organisation for Co-operation and Development (OECD) from 2002 to 2010 was largely to work with China's Ministry of Commerce and other government departments to improve China's investment environment so as to promote more and better investment for China's overall economic and social development.
From 1978 onward, the reform and opening-up of China's economy had already resulted in immense progress. Before then, China had been an economic closed book. Trade had been a negligible proportion of GDP; by the 1990s, China had become one of the most open economies in the world. Foreign direct investment, starting from nothing, expanded impressively, contributing more than proportionately to China's economic expansion. But while FDI was often the big story in foreign media, domestic capital investment has always been a far bigger component of GDP.
While documenting this tremendous progress and the positive policies that produced it, my job was also to research the challenges that still needed to be faced and to offer policy options to the Chinese government on how to address them.
In my first report (in 2003) I suggested that China did not need a plethora of different and confusing laws on foreign investment. On March 15, 2019, the National People's Congress adopted a single Foreign Investment Law of the People's Republic of China and abolished the Chinese-Foreign Equity Joint Venture Law, the Chinese-Foreign Contractual Joint Venture Law, and the Wholly Foreign-Owned Enterprises Law. These laws will be repealed on Jan 1, 2020, when the National Investment Law comes into force.
Also in 2003, I suggested the abolition of the Catalogs for Guiding Foreign Invested Enterprises, which involved four lists (prohibited, discouraged, permitted, and encouraged) of investments that discriminated unnecessarily against foreign investment - to the detriment of China as much as to foreign investors. Instead, I proposed, China should, in accordance with international best practice, adopt a negative list, clearly spelling out those sectors closed to foreign investors.
Article 4 of the new law does precisely this. it actually goes further than this by establishing the very advanced principle of pre-entry national treatment - to which the Ministry of Commerce was for a long time opposed.
For those who are not familiar with international investment jargon, I will briefly explain. "National treatment" means treating companies the same, whichever country they come from, so that rights of management, use, enjoyment or disposal given to domestic (in this case, Chinese) companies are given equally to foreign companies. "Post-establishment national treatment," which occurs in some bilateral investment treaties (BITs), provides equal treatment only after a company has been allowed to invest in a country (an example is the Hungary-Ukraine BIT). "Pre-entry national treatment" means that foreign companies have equal rights with domestic companies also in establishing or expanding a company.
The importance of this is that it gives foreign companies an automatic right to invest in a country, except in areas that are declared closed to foreign investment. Pre-entry national treatment is therefore a major step forward in China's policy toward FDI, one that puts it ahead of many other countries.
One of the initial policies to attract foreign investors to China in the 1980s was the offer of fiscal incentives such as tax holidays and a lower tax rate for foreign-invested enterprises in Special Economic Zones. In my 2003 report, I explained why these were no longer necessary and should be phased out. This happened on Jan 1, 2008, when the Enterprise Income Tax Law came into force. The National Investment Law is constructed on the basis of that essential building block of equal treatment.
One of the first sectors in which this increased openness is likely to be tested is government procurement. Article 16 of the new law explicitly states, "government procurement is to give equal treatment to products manufactured by, or services provided by, foreign-invested enterprises on the Chinese mainland". This has been a bone of contention between governments (for example, in Europe) that continue to complain that while they allow Chinese companies to bid for government projects in their countries, their country's companies are shut out from government procurement in China.
Another area in which I am happy to see my vision realized (at least on paper, so far) is that of transparency. Article 10 of the Foreign Investment Law states that "In the formulation of laws, regulations, or rules relating to foreign investment, appropriate means shall be taken to solicit the opinions and suggestions of foreign-invested enterprises." The Chinese authorities already did this in the very open consultation that preceded the adoption of the Labor Contract Law passed in 2007 - so much so that labor lawyers complained the government had yielded too much ground to foreign companies in weakening its provisions.
There are several provisions in the law that are essential components of a national foreign investment law. For example, Article 20 protects the investments of foreign investors against expropriation, except where this is done according to the law and appropriate compensation is paid. This is standard wording in investment laws, also in international investment treaties and trade agreements, and it really is important to potential investors.
China deserves applause for passing this landmark law. Over the coming months and years we will see the implementation of regulations and experience how the law works in practice. The proof of the pudding will be in the eating.
The author was the head of global relations, senior economist, and principal administrator in charge of policy cooperation with China in the OECD's Investment Division from 2002 to 2010. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.
