China to overhaul foreign investment law

08 Feb, 2015 - 00:02 0 Views

The Sunday Mail

Yue Wang

China is seeking a legal reform that would fundamentally change the way foreign investment flows into the country.

The central government is proposing an overhaul of the present foreign investment law.

The draft law would unify regulations, reduce restrictions and tackle the variable interest entities structure that investors commonly use to circumvent ownership limits in a number of restricted industries such as education and the internet.

The public is invited to offer feedback before February 17, according to a post on the Ministry of Commerce’s website.

At present, foreign investment in China is regulated by three sets of rules.

But in an online statement, Sun Jiwen, a spokesman for the Ministry of Commerce, says the existing laws have been deemed “inadaptable” because of the case-by-case approval system and conflicting regulations with other sets of laws.

“The biggest change (of the proposal)is that foreign investment in China no longer has to be reviewed on a case-by-case basis,” says Qing Ren, a partner at the law firm Zhong Lun and who previously worked for the Ministry of Commerce.

“This greatly opens up the Chinese market. It is also a restructure of the Chinese law that would eliminate uncertainties and conflicting rules.”

The proposed change is also part of Beijing’s efforts to attract more foreign investment at a time when economic growth has stalled to a quarter-century low.

James Zimmerman, chair of the American Chamber of Commerce in China, says the organisation applauds the government’s recent effort.

AmCham China supports a revision of the law “that will ease the approval procedures” for foreign investment and reduce “trade barriers that impact American companies,” he says.

The draft foreign investment law is also expected to tackle the variable interest entity (VIE) structure — a complex series of contractual agreements exploiting a legal loophole so foreign investors can buy shares of companies in restricted industries. Chinese Internet companies such as Alibaba Group Holding, Baidu Inc, Tencent Holdings and JD.com are listed in this way.

Beijing is proposing to make a distinction between VIEs controlled by Chinese investors and those controlled by foreign investors, according to the law firm Weil, Gotshal & Manges LLP.

Chinese-controlled VIEs may retain their structure and operate as usual, the firm says in a research note.

“(The proposed law) reduces the uncertainty of investing through the VIE structure,” says Wenfeng Li, a counsel at Weil, Gotshal & Manges’ Beijing office.

“There has been no formal regulation governing the VIE structure. Investors have long been concerned about potential risks.”

The impact on Alibaba Group will be limited, as the e-commerce firm is obviously a China-controlled company due to its corporate structure that leaves the group firmly in the hands of its partners, according to Zhong Lun’s Ren.

However, the fates of foreign-controlled VIEs are less certain.

Other than shutting those companies down, Beijing may choose to force foreign stakeholders to sell their shares to Chinese investors, or ask those firms to move to free-trade zones, says Antony Dapiran, a partner at the law firm Davis Polk & Wardwell.

In the future, the use of VIEs is expected to go down, as the government opens up more industries to foreign investment.

And restrictions on the e-commerce sector may be scaled back nationwide analysts say, after Beijing allowed foreign investors to fully own e-commerce companies in the Shanghai Free-Trade Zone starting in January.

E-commerce companies operating in the Shanghai FTZ include yhd.com, an online supermarket controlled by the US corporation Wal-Mart Stores Inc.

In addition, another American firm, Amazon.com Inc, said in August last year that it planned to set up operations in the zone, hoping to benefit from less stringent regulations and to sell more imported goods to Chinese consumers. — South China Morning Post.

Share This:

Survey


We value your opinion! Take a moment to complete our survey

This will close in 20 seconds