Three Months Into China’s New Investment Law: What To Know
In March 2019 China passed its first unified Foreign Investment Law. The law was intended to address American government and business concerns over Chinese business practices. Legislative changes included ending the use of forced technology transfers, strengthening IP protections, and giving equal status to foreign and domestic firms in government procurement. The law officially went into effect on January 1, 2020. The full text of the law can be found here in English.
The American Chamber of Commerce remains uncertain. In their response to the passing of the law, Lester Ross, who heads the policy committee at AMCHAM, said the organization’s expectations are “quite modest”. He further elaborated saying, “The longest-standing issues in China do not concern an absence of legislation, but rather the lack of enforcement and the breadth of government discretion resulting in selective enforcement”.
“The longest-standing issues in China do not concern an absence of legislation, but rather the lack of enforcement and the breadth of government discretion resulting in selective enforcement." - Lester Ross, AMCHAM Policy Committee Head
For example, when China ascended to the World Trade Organization (WTO) in 2001, their ascension agreement prohibited government regulations from forcibly requiring technology transfers in exchange for market access. Yet, China’s 2007 Catalogue for the Guidance of Foreign Investment Industries still encouraged the use of technology transfers. As a result, ACHAM is concerned that despite new legislation, the Chinese government will still use “non-administrative measures” to “coerce” foreign investors into handing over their technology.
Shi Guangshen, Minister of Foreign Trade and Economic Cooperation of China, signing China's ascension to the WTO in November 2001. Photo courtesy of the WTO.
At the same time, some American businesses have seen real changes as a part of China’s opening up policies. Recently Goldman Sachs and Morgan Stanley received permission from the Chinese government to increase percent ownership in their business joint ventures. Goldman Sachs Gao Hua and Morgan Stanley Huaxin Securities raised their stake from 33% to 51% and 49% to 51%, respectively.
In 2018 China raised the cap on foreign ownership of securities operations to 51%. Previously, foreign banks were only allowed a minority stake in their Chinese joint ventures. As a part of the interim Sino-US trade deal signed in January, the Chinese government committed to eliminating caps on securities firms and mutual funds for foreign investors beginning on April 1, 2020.
Reuters reports that obtaining a majority ownership has been a long-term goal for Goldman. The same report states that other top financial institutions including JPMorgan and BlackRock are increasing their investments in Shanghai despite uncertainties caused by the virus.
Night time view of downtown Shanghai, China
It’s likely many of the same concerns American businesses hold over Chinese business practices will remain until foreign investors experience real systematic change. China’s new law on foreign investment points in the right direction, but is unlikely to satisfy international investors.
About the author:
Alexander graduated with his bachelor's degree in political science from Portland State University. He is a master's student studying international relations at Peking University. He is currently based out of Saigon, Vietnam.
His LinkedIn profile is available here.