China lawyer Mark Schaub tells why in most cases foreign companies are better off in Shanghai, compared to other cities in the mainland, in a wide-ranging discussion on myths many have on China, in his vlog.
Mark Schaub is a speaker at the China Speakers Bureau. Do you need him at your (online) meeting or conference? Do get in touch or fill in our speakers’ request form.
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| Harry Broadman |
Some key principles highlighted by the new law are: intellectual property rights of foreign businesses are deemed to be protected in the same way as the local firms; foreign investors can freely remit profits, capital gains and liquidation proceeds to their overseas entities, in renminbi or in foreign currency; and foreign investors should be equivalently treated as the Chinese companies (that is, they will enjoy the “national treatment”).
“One of the key objectives of countries putting in place policies to encourage foreign investment is to lower barriers to business entry in order to stimulate domestic competition, provide local consumers with new products or services, expand employment opportunities and foster innovation－all of which are engines of growth,” said Harry Broadman, managing director and chair of the emerging markets practice at the Berkeley Research Group and a member of the Johns Hopkins Faculty.
This new Foreign Investment Law, and its corresponding regulations that are implemented, mark one of the most significant developments in China’s treatment of foreign investment, experts said.
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| Mark Schaub |
For many years, MOFCOM or its local divisions have been the approval authority for green field investment and merger and acquisition projects, and the State Administration of Industry and Commerce (now the State Administration of Market Regulation (SAMR) ) or its local divisions have been the registration authority for the FIEs.
Starting from the pilot scheme in 2013 at the Shanghai Free Trade Zone, the Chinese government has been implementing a different approach towards foreign investors. Namely moving from a catalogue which sets out comprehensively how foreign investment is treated in specific sectors to a “pre-establishment national treatment with negative list”. Basically the negative list sets out only sectors that are restricted or off limits.
The negative list approach was introduced nationally by the publication of Provisional Measures on Administration of Filing for Establishment and Change of Foreign Investment Enterprises[4] (the “Provisional Measures”) by the MOFCOM on October 8, 2016. According to the Provisional Measures foreign investment not falling within the scope of the negative list would only require a filing and not an approval.
It seems the Draft Regulations provides that the SAMR will take over all “approval” and “filing” roles for foreign investment including the incorporation or changes in registration (whether included on the negative list or not). This approach seems to have been confirmed in the draft Guidelines on Better Handling Foreign Investment Enterprises Registration that was issued by SAMR on 6 November 2019. [5]
VIE remain largely safe – One of the breakthroughs under the Draft Regulations is that a VIE structure may not be needed for Chinese investors’ round-trip investment arrangement in the circumstance where a Chinese investor (i.e. a Chinese individual, company or other organization) uses its wholly-owned enterprise established outside China to facilitate round-trip investments into China and approval is obtained from the State Council for the exemption of application of negative list. In other words, the Draft Regulations treat such round-trip investment (not all round-trip investment) as domestic investment and therefore restrictions or prohibitions set out in the negative list for foreign investment will not apply.
Notably, and consistent with the terms of the FIL, the Draft Regulations do not question the legality of VIE structures established in China by foreign investors which wish to circumvent restrictions on their investments. More details with regard to the necessity and application of VIE arrangement can be referred to our previous article at China: VIEs Alive and Well.
More at the weblog of his law firm, including investment protection, Sino-foreign JV with Chinese natural persons, investment management, and many unresolved issues.More at the weblog.
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| Ben Cavender |
Growth in the stickier foreign direct investment (FDI), however, has been trending lower. Net FDI, as per Nomura estimates, will more than halve this year to $40.3 billion.
Ben Cavender, Managing Director of consultancy China Market Research Group (CMR), said that although it would take time for big global firms to diversify part of their capacity out of China if the trade war drags on, smaller players will more likely shut their China business.
“Any time you have government policy frictions like this, it tends to slow down FDI and so I think that’s the reality. The other reality is that the Chinese economy is slowing down, and so is the return on investment,” he said.More at Reuters. Ben Cavender is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.
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| Mark Schaub |
It has been more than two months since China’s new Foreign Investment Law (FIL) was passed at the second session of the 13th National People’s Congress (NPC) of China on 15 March 2019. Some thought the FIL was an indication that the US-China trade talks would soon be wrapped up. This is unlikely. Despite this the FIL has shown China reiterating a willingness to deepen reform and open up its economy.
The FIL, to be effective on 1 January 2020, is largely welcomed globally. It shows the Chinese government’s addressing concerns voiced by international companies such as forced technology transfers; level playing field for foreign invested companies; protection of intellectual property rights and access to public procurement projects.
In respect of improving the protection of IP rights China has emphasized – as much for its internal development as to placate overseas rights holders – on improving the rights of IP holders as well as the enforcement of such rights. Problems still exist but the situation is far better than it was even 5 years ago. China’s government also moved to remove requirements that forced technology transfers (i.e. time limits; continued use after expiration; ownership of improvements; etc.).Much more at the China Law Insight.
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| Victor Shih |
Beijing says the act offers foreigners equal treatment, greater market access and better legal protection. It will eliminate the requirement for foreign businesses to transfer proprietary technology to Chinese joint-venture partners and protect against "illegal government interference" — major irritants for Western firms and governments.
China will also amend its intellectual property law and "introduce a punitive damages mechanism to ensure that all infringements will be seriously dealt with," Chinese Premier Li Keqiang told reporters at the end of the parliament's two-week session. Furthermore, Li said China will soon announce shorter "negative lists" of sectors where foreign investment is either prohibited or requires special approval.
But Western observers remain skeptical. "No, the foreign investment law will not lead to a level playing field for foreign firms and investors," Victor Shih, an associate professor of political economy at the University of California in San Diego, told DW.
"It doesn't matter what the Chinese government puts on paper. China has a good track record of changing low-level regulations to protect domestic industries," he added. ..
Victor Shih said Beijing could come up with regulations that make life difficult for foreign companies operating in the country. "There's a lot of stuff that China can do" to protect domestic firms, he argued.More at the DW.
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| Mark Schaub |
In the latest draft, Beijing dropped language that would have invalidated the so-called “variable-interest entity” structures employed by Chinese tech giants from Alibaba Group Holding Ltd. to Tencent Holdings Ltd. But it’s also proposing to scrap special laws governing Sino-foreign tie-ups -- a move that could force them to re-examine longstanding contracts, lawyers say.
Those twin strands emerged from China’s Foreign Investment Law, intended to govern every aspect of the world’s No. 2 economy for global investors. This particular edict has gained newfound significance as tensions flare between Beijing and Washington; the revisions to VIEs and JVs were little-noticed amid an array of other moves that span curbs on forced technology transfers to leveling the playing field for foreign firms.
In the case of VIEs, the missing language assuages concerns about a corporate structure that circumvented foreign-ownership restrictions. The model has never been formally endorsed by Beijing but has been used by tech titans such as Alibaba to list their shares overseas.
Pioneered by Sina Corp. and its investment bankers during its 2000 initial public offering, the VIE framework rests on shaky legal ground and foreign investors were thus nervous their bets would unwind overnight.
The original version of the legislation was dubbed by a number of “hysterical commentators as ‘the VIE killer,’” said Mark Schaub, a partner at King & Wood Mallesons.
“However, as its successor has dropped any reference to VIEs, we believe it should be business as usual. China’s regulatory position on VIEs may still evolve, but we do not believe there will be a U-turn, ” Schaub said...
Foreign firms that control their ventures may take advantage of the new regime to eradicate “inflexibility,” King & Wood Mallesons’s Schaub said. He cited the need to secure directors’ unanimous consent to amend company articles, adjust capital, or even just to dissolve the venture. “Likely, the Chinese partners may also seek to adopt the new law if they are in a controlling position.”
Companies are still studying the potential effects and aren’t yet sure how it would impact existing ventures, said Xu Heyi, chairman of Daimler AG’spartner Beijing Automotive Group Co. Changan Auto, which is allied with Ford Motor Co., said a half-decade should be more than enough time to avert disruption.More in Bloomberg.
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| Paul Gillis |
The new law does not discuss VIEs, and I do not think that portends a coming crackdown. I think it just continues the status quo, where the government turns a blind eye towards the structure. I would also observe that there have been statements that companies with VIEs and control structures will be allowed to issue Chinese Drawing Rights (CDRs) on the new Shanghai Technology Board. That is about as close to official acceptance of VIEs that we are likely to see.
I think Chinese regulators would like to fix the VIE problem, since it makes a mockery of the rule of law, but a workaround has proven elusive. These companies are now a big part of China’s economy, and I find it inconceivable that the government is going to shut them down.
Seven years ago I wrote a summary of VIEs for Forensic Asia that became the most cited work on VIEs. I just updated that article together with Fredrik Oqvist, and GMT Research, successor to Forensic Asia, has distributed it to their subscribers. I will make it available here in a month or two. Our key point is that as VIEs mature they are becoming increasingly unworkable because of the difficulty in moving cash into and out of the VIE.More at the Chinaacountingblog.
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| Mark Schaub |
The key issues addressed in the draft law include prohibition against forcing technology transfers; providing equal treatment and market access to foreign companies (except for certain sectors specified on a negative list) but also reserving China’s right to retaliate against companies from countries which discriminate against Chinese investors.
However, it is instructive that the very first article of this draft law articulates its intended purpose to further open up the Chinese economy and actively boost foreign investment...
Two other interesting provisions in this new draft include granting foreign companies equal treatment and participation in government procurement activities and also specifically reiterating that foreign invested companies are allowed to conduct onshore China financing via IPOs or other securities offerings. Foreign companies have often faced discrimination in terms of government procurement as various state owned entities and institutions issue guidelines that limited suppliers to selected companies or requirements to fulfill which almost inevitably meant only a domestic enterprise could be selected.More at the China Law Insight.
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| Mark Schaub |
GM has chosen Alibaba-owned AutoNavi for its Super Cruise driver-assistance system on Cadillacs it plans to sell in China. SAIC Motor Corp., the country’s biggest carmaker, bought shares in license holder Wuhan Kotei Informatics Co. and formed a joint venture to develop driver-less mapping. Didi Chuxing, the country’s largest ride hailing startup, obtained a license in 2017 and has a team working on maps and driver-less technology. Even online retailer JD.com has applied for a HD mapping license as it works on driver-less delivery trucks.
The lure of the Chinese market is likely to keep foreign carmakers lining up for local partners and give the domestic players an edge, said Mark Schaub, a partner at King & Wood Mallesons in Shanghai who specializes in foreign investment in China.
“It’s true these guys do have an advantage already,” he said.More in Bloomberg.
