Draft law on foreign firms to ensure fair competition

With the ongoing second session of the 13th National People's Congress reviewing the draft law on foreign investment over the weekend-the third review in three months-the draft is highly likely to sail through legislative scrutiny and be signed into law after being submitted to the top legislature for review on Friday.

Once approved, which seems most likely because most of the controversial issues have been addressed, the draft foreign investment law will become what many believe to be the most important legislation in China since it entered the World Trade Organization in 2001. It will replace the three existing laws regulating foreign-invested entities now-the Chinese-foreign equity joint ventures law, Chinese-foreign cooperative joint ventures law, and wholly foreign-owned enterprises law.

More importantly, the draft law represents the "fundamental change" in the country's approach to foreign investment administration, which will greatly increase "openness, transparency and predictability".

But despite the fact that the draft law is, first and foremost, part of the measures to deepen reform and opening-up in order to improve China's overall business environment, some assume Beijing is rushing the draft through the NPC to help trade negotiations with Washington. Such assumptions are groundless, to say the least, because discussions on adjusting the existing regulatory statutes had begun around 2013. Plus, a 170-article draft foreign investment law was published for public review way back in January 2015.

Moreover, the much streamlined 39-article draft in 2018 is nothing short of revolutionary, as it is aimed at a strategic turn in the country's approach to foreign investment. Beijing's concept of openness is no longer limited to offering favorable treatments to businesses, including foreign businesses. It focuses more on providing an environment conducive to rules-based fair competition.

Since the 1980s, "access examination and approval plus preferential treatments" has been the standard formula for overseas investment administration. Article 4 of the draft foreign investment law stipulates: "The State adopts a regulatory regime of pre-access national treatments plus negative list for foreign-invested enterprises." Which means the case-by-case examination and approval for setting up a foreign-invested enterprise in China will be abandoned.

Under the draft law, "all State policies supporting enterprise development apply equally to foreign-invested enterprises", "the State guarantees foreign-invested enterprises fairly participate in government procurement activities", and foreign companies will be eligible to conduct fundraising by openly issuing stocks and bonds in accordance with the law.

With the legal hedges between domestic and overseas companies gone, the longstanding contradictions between the three existing statutes and the country's Company Law are also likely to be a thing of the past.

The draft law also addresses such concerns as expropriation and compensation, intellectual property rights protection and technology transfer. But it is its embrace of the principle of competitive neutrality that sits at the core of the revolutionary changes.

The new law, therefore, is expected to not only help attract more foreign investment, but also facilitate structural reforms necessary for the country's economic upgrading. So foreign enterprises and investors should rest assured that it will usher in a new era when foreign and Chinese companies can compete on a truly equal footing in the Chinese market.