Proposed Profound Changes on Foreign Investment Regime

On January 19, MOFCOM released a draft of a new foreign investment law, setting off a buzz in the investment community. The new law, if enacted along the lines of the January 19 draft, would revolutionize foreign direct investment in China, and create more rational regulatory regime that is fully integrated with basic corporate laws and regulations which apply without regard to nationality.
The January 19 draft covers a wide range of matters. Among other things, it would do away with the alphabet soup approach to foreign invested enterprises, and bring companies with foreign ownership fully into the laws which now apply to companies generally. In other words, there would no longer be WFOEs, EJVs, CJVs, FICLS, FICEs or other separately regulated corporate vehicles that have sprung up over the last several decades. This step alone would be a warmly welcomed development. Companies should be regulated uniformly, and without regard to nationality. Leaving the piecemeal approach behind, and undoing the alphabet soup of entities should streamline foreign investment and increase transparency and predictability. Of course, a host of other regulatory changes - covering mergers and acquisitions, foreign exchange controls, taxation and other matters -- would be needed to harmonize the rules across the board.
The January 19 draft makes it clear that foreign invested entities will be subject to the generally applicable governance rules that are found in the Company Law and the Partnership Enterprise Law, etc. This approach to governance should level the playing field by eliminating rules that apply only to foreign invested companies. Existing foreign invested enterprises would have three years to transition to generally applicable governance requirements.
If the law is enacted as set out in the January 19 draft, initial approval from MOFCOM will no longer be required for most investments. Only investments in restricted sectors will need advance approval from MOFCOM, and of course, certain sectors will remain closed to foreign investment entirely. Larger investments will also trigger some level of advance approval from MOFCOM. The January 19 draft, however, envisages a fundamental change, and one that has been foreshadowed by local experimentation, notably in the Shanghai FTZ. Specifically, proactive administrative oversight and control would be relaxed for many foreign investments. Rather than advance approval, the investor would only need report and register the investment.
The January 19 draft also appears to aim toward rationalizing national security review. Process and procedures for national security review build on the existing framework set out in rules dating back to 2011. The draft law, however, does not set forth which sectors will be subject to national security review.
Information reporting obligations seem to replace proactive administrative oversight. The January 19 draft contemplates annual and quarterly reporting to MOFCOM by all foreign invested enterprises, regardless of whether advance MOFCOM approval was required. The draft law specifies three types of reports -- an investment report, a report on changes to the investment and a regular report -- each with different requirements and contents. Specifically, the regular reports include an annual report and quarterly reports. The annual report calls for information regarding the foreign investor, the investment itself and the company and its operations, financial condition and investments in companies publicly traded in China (if any). The quarterly report is less extensive, and is required only if the relevant foreign invested enterprise is controlled by foreign investors whose assets or incomes exceed RMB10.0 billion, or if the enterprise has ten or more subsidiaries.
Summary
The changes suggested by the January 19 draft are significant. However, the public comment period and input from various governmental agencies may affect the shape and direction of the foreign investment law generally. The process of revising the draft, and finalizing the law, could take some time. We will provide updates as significant developments arise.