China's Foreign Investment Legal Regime

Progress and Limitations

Yuwen Li, Cheng Bian

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000551686
• Edition: 1
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

China has developed a piecemeal pattern of regulating foreign investment since the end of 1970s. The latest law is the Foreign Investment Law (FIL), which became effective on 1 January 2020. The groundbreaking new FIL is well acknowledged for its promises and affirmations pledged to investors, signalling China's eagerness to improve its investment environment and regain momentum for investment growth.

This book provides an updated and holistic understanding of the key features of the regulatory regime on foreign investment in China with critical analysis of laws and their implementation. It also examines sensitive and complex legal issues relevant to foreign investment beyond the 2020 FIL and new developments on foreign-related dispute settlement.

The book uses cases of success and failure to illustrate the nuances and differences between law and practice regarding foreign investment. Considering China's magnitude in the global economy and the weighty role of the regulatory system on foreign investment in China, this book is of great interest to a wide range of audience including academics in the field of investment law, legal practitioners, policymakers, and master's students in law and in management.

1 The evolving characteristics of the foreign investment legal regime in China

DOI: 10.4324/9781003168805-2

1.1 The five periods of development

1.1.1 The initial stage from 1979 to 1991

China’s journey of economic development began in 1978, when the ‘reform and opening-up’ policy was initiated at the Third Plenary Session of the 11th Central Committee of the Communist Party of China (CPC).¹ Attracting foreign direct investment (FDI) was one of the pivotal decisions made at the time that was ‘ideologically inconsistent with the accepted communist ideas’, which had rejected the notion of private property rights and foreign involvement in the domestic economy from 1949 to 1978.² In 1979 China promulgated the first foreign investment law, namely the Law on Sino-Foreign Equity Joint Ventures (EJV Law).³ This was followed by the promulgation of the Implementing Regulation of the EJV Law in 1983.⁴ In 1986, the Law on Wholly Foreign-Owned Enterprises (WFOE Law) was adopted,⁵ accompanied by its Implementing Regulation adopted in 1990.⁶ And in 1988, the Law on Sino-Foreign Contractual Joint Ventures (CJV Law) was promulgated.⁷ In the same vein, its Implementing Regulation was promulgated in 1995.⁸ The aforementioned laws constituted China’s ‘three primary foreign investment laws’, which established the rudimentary legal framework for foreign-invested enterprises (FIEs) in China. The most significant feature of these laws was case-by-case approval for the establishment and termination of an FIE, which existed for nearly four decades until 2017. It is notable that the three foreign investment laws were adopted even before China’s first Company Law was formally introduced in 1993.⁹ This suggests that China at the time regarded the regulation and protection of FIEs as a top priority and was able to first establish a legal framework for FIEs akin to the modern corporate governance and pursuant to prevailing international practice, and only after that did China consider a Company Law for the governance of domestic enterprises.¹⁰

1 It is commonly acknowledged in literature that China’s foreign investment legal regime began in 1979, but it can be divided into different stages prior to the FIL. For example, Mahony divides the regime into the first period (1979–1991), the second period (1992–2000), the third period (2001–2008) and the fourth period (2008 onwards). Tarrant Mahony, Foreign Investment Law in China: Regulation, Practice and Context (Beijing: Tsinghua University Press, 2015), pp. 1–94. Zhang and Corrie divide the regime into stage one (1979–1982), stage two (1983–1991), stage three (1992–2000) and stage four (2001 onwards). Xiuping Zhang and Bruce P. Corrie, Investing in China and Chinese Investment Abroad (Singapore: Springer, 2018), pp. 3–5. Gallagher and Shan divide the system into the nationalization and exclusion stage (1949–1978), the gradual resumption stage (1979–1991), the first surge stage (1992–2000), and the second surge stage (2001 onwards). Norah Gallagher and Wenhua Shan, Chinese Investment Treaties: Policies and Practice (Oxford: OUP, 2009), pp. 4–10. In this book, we divide the system into five periods: the initial period (1979–1991), the rapid development period (1992–2000), the post-WTO period (2001–2012), the transitional period (2013–2019) and the post-FIL period (2020–present). 2 Norah Gallagher and Wenhua Shan, supra note 1, p. 6. 3 中华人民共和国中外合资经营企业法 (Law on Sino-Foreign Equity Joint Ventures) (Promulgated by the National People’s Congress (NPC) on 8 July 1979, 1st revision on 4 April 1990, 2nd revision on 15 March 2001, 3rd revision on 3 September 2016). 4 中华人民共和国中外合资经营企业法实施条例 (Implementing Regulation for Law on Sino-Foreign Equity Joint Ventures) (Promulgated on 20 September 1983, 1st revision on 22 July 2001, 2nd revision on 8 January 2011, 3rd revision on 19 February 2014). 5 中华人民共和国外资企业法 (Law on Wholly Foreign-Owned Enterprises) (Promulgated by the NPC on 12 April 1986, 1st revision on 31 October 2000, 2nd revision on 3 September 2016). 6 中华人民共和国外资企业法实施细则 (Implementing Regulation for Law on Wholly Foreign-Owned Enterprises) (Promulgated on 12 December 1990, 1st revision on 12 April 2001, 2nd revision on 19 February 2014). 7 中华人民共和国中外合作经营企业法 (The Law on Sino-Foreign Contractual Joint Ventures) (Promulgated by the NPC on 13 April 1988, 1st revision on 31 October 2000, 2nd revision on 3 September 2016, 3rd (partial) revision on 7 November 2016, 4th revision on 4 November 2017). 8 中华人民共和国中外合作经营企业法实施细则 (Implementing Regulation for Law on Sino-Foreign Contractual Joint Ventures) (Promulgated on 4 September 1995, 1st revision on 19 February 2014, 2nd revision on 1 March 2017, 3rd revision on 17 November 2017). 9 公司法 (Company Law) (Promulgated by the Standing Committee of the NPC on 29 December 1993, 1st revision on 25 December 1999, 2nd revision on 28 August 2004, 3rd revision on 27 October 2005, 4th revision on 28 December 2013, 5th revision on 26 October 2018). 10 Tarrant Mahony, supra note 1, pp. 4–5.

In addition to the foundational three foreign investment laws and their implementing regulations, other regulatory means were also devised on contracts, taxation and foreign exchange. All these regulatory regimes adhered to the dual-track system, meaning that FIEs and domestic enterprises were governed under separate sets of rules. For contracts, until China adopted its first unified Contract Law in 1999, domestic contracts and foreign-related contracts were governed, respectively, by the Economic Contract Law promulgated in 1981 and the Foreign-Related Economic Contract Law promulgated in 1985.¹¹ For taxation, FIEs were taxed under the Equity Joint Venture Income Tax Law of 1980¹² or the Foreign Enterprise Income Tax Law of 1982.¹³ These two laws were superseded by the Income Tax Law for Foreign Invested Enterprises and Foreign Enterprises of 1991, which unified taxation for FIEs.¹⁴ Notably, this was even before an enterprise income tax law for domestic enterprises was promulgated in 1993. For foreign exchange, China had a dual currency system where an FIE must maintain a Renminbi (RMB) account and a Foreign Exchange Certificate at the Bank of China; all foreign exchange transactions were required to comply with national plans for its quota and purpose, and all foreign exchange accounts required close monitoring and government approval, inter alia, a case-by-case approval for the remittance of profits to a foreign country.¹⁵

11 中华人民共和国经济合同法 (Economic Contract Law) (Promulgated by the NPC on 13 December 1981, 1st revision on 2 September 1993). 中华人民共和国涉外经济合同法 (Foreign-Related Economic Contract Law) (Promulgated by the Standing Committee of the NPC on 21 March 1985, effective on 1 July 1985). 12 中华人民共和国中外合资经营企业所得税法 (Income Tax Law on Sino-Foreign EJVs) (Promulgated by the Standing Committee of the NPC on 10 September 1980, 1st revision on 2 September 1983). 13 中华人民共和国外国企业所得税法 (Income Tax Law for Foreign Enterprises) (Promulgated by the NPC on 13 December 1981, effective on 1 January 1982). 14 中华人民共和国外商投资企业和外国企业所得税法 (Income Tax Law for Foreign-Invested Enterprises and Foreign Enterprises) (Promulgated by the NPC on 9 April 1991, effective on 1 July 1991). 15 The major governing laws for foreign exchange control were 中华人民共和国外汇管理暂行条例 (Provisional Regulation for Foreign Exchange Control) (Promulgated by the State Council on 18 December 1980, effective on 1 March 1981); 对侨资企业、外资企业、中外合资经营企业外汇管理施行细则 (Implementing Rules on Foreign Exchange Control Relating to Overseas Chinese Enterprises, Foreign Enterprises and Sino-Foreign Equity Joint Ventures) (Promulgated by the State Administration of Foreign Exchange on 1 August 1983, effective on promulgation). For a comprehensive overview of taxation of FIEs in the 1980s, see Jinyan Li, ‘Taxation of Foreign Investment in the People’s Republic of China’, Loyola of Los Angeles International and Comparative Law Journal, Vol. 12 No. 1 (1989), pp. 35–50. Paul D. McKenzie, ‘Foreign Exchange and Joint Ventures with China: Short-Term Strategies and Long-Term Prospects’, Canadian Business Law Journal, Vol. 17 Issue 1 (1990), pp. 114–149.

In 1980, the State Council approved the establishment of the first four special economic zones (SEZs): Shenzhen, for its proximity to Hong Kong; Zhuhai, for its proximity to Macao; Shantou, which was the hometown of many entrepreneurs overseas with a Chinese heritage; and Xiamen, for its proximity to Taiwan. In 1988, Hainan Province also became an SEZ. SEZs enjoy preferential and exclusive trade and investment policies. Preferential treatment, such as special tax incentives and use of lands, is given to attract foreign investments in the SEZs. In the Shenzhen SEZ, for example, foreign corporate income tax was 15% as opposed to 33% in the rest of China, and qualified export-oriented and high-tech foreign enterprises only needed to pay half of the market-price fees for industrial land-use rights in the first five years.¹⁶ SEZs have been testing grounds for China’s reform and opening-up policy and have served as an emblematic example of China’s economic success. They have proven that market mechanisms rather than state planning should be the decisive factor in the course of China’s economic reform, and SEZs ‘contributed significantly to national gross domestic product (GDP), employment, exports, and attraction of foreign investment and new technologies, as well as the adoption of modern management practices, among others’.¹⁷ As a result, FDI inflow in China from 1983 to 1991 witnessed an annual growth rate of 21.5%.¹⁸

16 Yiming Yuan et al., ‘China’s First Special Economic Zone: The Case of Shenzhen’, in Douglas Zhihua Zeng (ed.), Building Engines for Growth and Competitiveness in China: Experience with Special Economic Zo...

Table of contents

• Cover
• Half-Title
• Series
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Abbreviations
• Acknowledgements
• Introduction
• 1 The evolving characteristics of the foreign investment legal regime in China
• 2 Market access and national treatment
• 3 Foreign mergers and acquisitions of Chinese enterprises
• 4 National security review of foreign investment
• 5 Protection of foreign investors’ intellectual property
• 6 Dispute settlement: Foreign-related arbitration
• 7 Dispute settlement: Investor–state arbitration
• Index