The law was passed last week by the National People's Congress, and will come into effect on 1 January 2020.
The law is part of a long-term trend toward the unification of the legal treatment of foreign and domestic enterprises. But the law has been delayed for several years already and is now also being seen as a step towards a new trade deal with the US and an attempt to de-escalate the trade war that has developed between the countries since Donald Trump became president of the US.
The law is more general and less detailed than previous drafts, leading to some concerns that restrictions on foreign investment and ownership might be added later in more detailed regulations and procedures.
It will transform the way in which foreign companies operate in China by replacing the current regime of foreign invested enterprises (FIEs), which requires the use of specific corporate vehicles for foreign investment such as wholly foreign-owned enterprises (WFOEs) and equity or cooperative joint ventures. The existing laws regulating those forms of FIE will be repealed when the Foreign Investment Law becomes effective next January. Instead, the existing Company Law and Partnership Law will apply to foreign entities.
William Soileau of Pinsent Masons, the law firm behind Out-Law said: "The repeal of these long-standing FIE laws is a huge change. It's not yet clear what will replace them. We expect to see a good deal of confusion over the next year or so, both in forming new entities and in terms of compliance for existing entities.Confusion may be particularly acute for legacy JVs, which don't fit well within the Company Law regime."
The negative list approach is not new, having been pioneered in China's free trade zones and extended nationwide over the past few years. The negative list outlines areas of business where foreign investment is prohibited or restricted. Anything not on the list is permitted.
"Foreign investors have long complained that foreign investments not included on the restricted or prohibited lists were nevertheless, in practice, routinely denied by local officials. We'll have to see if the new law changes that situation," said Soileau.
The current negative list prohibits foreign investment in areas such as television production; rare earth exploration and mining; compulsory education publishing; Chinese medicine; gene research fishing, and legal practice. Restrictions exist, and joint ventures with Chinese companies are required, in numerous other areas on the negative list, including internet and other value-added telecommunications; hospitals; oil and gas exploration; life insurance; securities, and domestic shipping. Such restrictions have been an important element of Donald Trump's claims that China has manipulated the WTO regime to stifle free trade.