China's Changing Inbound Investment Landscape: Recent Notable Trends and Developments

Backdrop: US-China Trade Tension, Trade Protectionism, COVID-19

Since the start of the Trump administration, US-China trade tensions have led to increased uncertainty in cross-border investment, particularly outbound from China to the US, which has become more and more difficult. In the past two years, the US and other European countries including the United Kingdom and some members of the European Union, have introduced more stringent foreign direct investment restrictions on overseas investment, only exacerbating the situation. All things considered, the recent drift towards trade protectionism worldwide has created tough headwinds for China outbound investment.

Against such an economic backdrop, China has shifted its efforts to refocus on improving its inbound investment regime. With the containment of the COVID-19 outbreak in sight, it is likely to come out of this pandemic crisis ahead of other jurisdictions. Recent policies and initiatives the government has rolled out, particularly on foreign investment, give further clues about China's determination to normalise and stimulate its economic activities by appealing to foreign investors to cushion the financial impact caused by the pandemic crisis.

China Signals Additional Support to Foreign-Invested Enterprises (FIEs) Amid COVID-19

Since the beginning of COVID-19 crisis, China has adopted a proactive stance in supporting foreign enterprises investing in the Mainland.^[1]

Soon after Chinese New Year and as early as 10 February 2020, while China was still battling the first wave of the pandemic crisis, the Ministry of Commerce of the People's Republic of China (MOFCOM) published the Notice on Actively Strengthening Services to Foreign Enterprises and Attracting Investment during the COVID-19 Epidemic. The Notice urged local governments to assist foreign companies doing business in China to mitigate and tackle challenges presented by COVID-19 as they resume normal operations after the temporary lockdown, such as labour mobility and project management. The government also gave extra support to foreign businesses through streamlining administrative procedures and offering stimulus packages to optimise the business environment.

Subsequently, on 18 February 2020, MOFCOM announced further measures to stabilise foreign trade and investment in the Notice on Stabilising Foreign Trade and Foreign Investment and Promoting Consumption to Fight COVID-19 Epidemic, encouraging closer communication with foreign enterprises. Proposed additional measures include expediting licensing approvals, strengthening legal services support such as issuance of force majeure certificates, and collaborating with insurers to extend the scope of insurance coverage, lower insurance premiums and increase compensation amounts.

The National Development and Reform Commission of the People's Republic of China (NDRC) also echoed MOFCOM's stance in its Notice on Further Deepening the Reformation in Handling Foreign Investment Projects to Fight the Epidemic shortly afterwards.

In early April, with signs of the coronavirus outbreak being brought under control, and businesses started to resume operations in phases, MOFCOM further issued the Notice on Further Opening Up and Stabilising Foreign Investment in Response to COVID-19 Epidemic, highlighting China's attempt to reassure foreign investors its determination to further open its doors to overseas investors.

Emerging Foreign Investment Trends in China

The above policies, together with the foreign investment reforms implemented in 2019 and early 2020, indicate five notable trends in China's inbound investment landscape:

1. Lower Entry Barriers for Foreign Investment

   Shortened Negative Lists. In 2019, China took progressive steps to further remove restrictions on foreign investment. Effective on 30 July 2019, the Special Administrative Measures (Negative List) for Foreign Investment Access (2019 Edition) (National Negative List) and the Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (2019 Edition) (FTZ Negative List), which set out sectors with restrictions on foreign investment in the Mainland nationally and the Free Trade Zone regions respectively, were shortened. Compared to the 2018 Editions, the 2019 Editions reduced the number of restricted items on the National Negative List from 48 to 40, and from 45 to 37 on the FTZ Negative List. These were substantial reductions from 180 items in 2011 on the National Negative List and 190 items in 2013 on the FTZ Negative List. With the more relaxed policies in place, foreign-controlled enterprises in sectors such as value-added telecommunications, shipping, power and heat production and operation, cinemas operations, are permitted.^[2]

   Encouraged Industry Catalogue. Introduced at the same time as the 2019 negative lists, the Encouraged Industry Catalogue delineates sectors where foreign investment and knowhow are welcome. The Catalogue lists 1,108 items as encouraged industries, compared to 121 items only in the 2017 Edition. Major additions include high-tech industries such as 5G, circuits and chips, artificial intelligence, cloud computing and autonomous vehicles. This effectively creates a more inclusive business environment for foreign investments in an expanded list of industries.

   Additional Pilot Free Trade Zones. In August 2019, China announced plans to develop six new provinces (Jiangsu, Shandong, Hebei, Heilongjiang, Guanxi, and Yunnan) as pilot free trade zones (FTZs), increasing the number of FTZs from 12 to 18.

   Liberalising Service Sectors. Around the same time in August 2019, Beijing (being one of the FTZs) also revealed its three-year action plan to further liberalise the city's service sectors to foreign investment, including information technology, finance, education, healthcare, culture and travel and professional services.

   What's the Trend? What's Next?

   The FTZ model, first established in Shanghai in 2013, has expanded quickly in only a few years, showing China's dedication to lowering the entry barriers for foreign investment. Riding on previous ongoing efforts, recent notices from MOFCOM illustrate China's intention to further accelerate the construction and development of the FTZs and open up service industries.

   MOFCOM also indicated that it will liaise with the NDRC to revisit the Negative Lists and Encouraged Industry Catalogue, with the aim of further reducing investment obstacles for foreign investors. The further opening-up of service industries, such as the financial sector, is likely. It also emphasised high-tech manufacturing and renewable energy as key promoted industries for investment, and indicated that tax rebates and incentives would also be means to counter the effects of the COVID-19 pandemic. These all represent China's effort to improve the business environment for foreign investors.

2. Creation of a Level Playing Field between FIEs and Domestic Companies

   New Foreign Investment Law. The new Foreign Investment Law (FIL), which came into force on 1 January 2020, marks China's commitment to reform the inbound investment landscape. Though more detailed measures are yet to be announced, this statute represents a big step towards optimising the business environment for foreign investors and safeguarding fair participation in the market by FIEs.

   What's the Trend? What's Next?

   All things considered, the FIL reform and rolling measures on Negative Lists and FTZs show that China is seeking to create a level playing field for FIEs to compete with domestic companies. MOFCOM also strongly emphasised, in its recent publication, the efficient implementation of policies that promote, protect and manage FIEs to create an environment that fosters fair competition between domestic and foreign investors. Also, no restriction on foreign investment can be imposed on sectors not specified on the Negative Lists. This highlights the adoption of a "treat like cases alike" approach, where FIEs and domestic companies in non-restricted industries should receive equal treatment.

3. Increased Protection and Enhanced Communication for Foreign Investment

   New Foreign Investment Complaint Mechanism. In March 2020, MOFCOM issued the Draft Measures for Processing Complaints of Foreign-Invested Companies (Draft Complaints Measures) for consultation.^[3] The Draft Complaints Measures set out a new formal mechanism for addressing complaints filed by FIEs and their investors, and seek to supersede the relatively dated complaint mechanism currently in place. The Draft Complaints Measures strengthen case-handling procedures, introduce accountability and enhance transparency and impartiality for foreign investors.

   Foster Two-Way Communication. The authorities have also indicated that they intend to leverage their relationships with business or industry associations and foreign chambers of commerce to build a two-way communication channel. On the one hand, the government can work with these agencies to release more information to FIEs and guide FIEs through any operational difficulties. On the other, these agencies can act as a bridge to convey government officials need from and request of FIEs.

   What's the Trend? What's Next?

   Being one of the earliest FIL-related policies released, the Draft Complaints Measures signify China's priority to listen to and address the foreign business community's views and concerns. The Draft Complaints Measures are an example demonstrating the Chinese authorities' commitment to build and restore foreign investors’ confidence and increase protection of their investments. One can anticipate many more foreign investor-friendly policies following the footsteps of the Draft Complaints Measures as the new FIL is implemented.

   Strengthening information exchange has been identified as key to reviving the confidence of foreign investors. Business or industry associations and foreign chambers of commerce are likely to play a more pivotal role in channelling information and facilitating FIEs in doing businesses in China going forward.

4. Expedited Digitalisation

   Paperless Filings and Records. In March 2020, to minimise the impact of the pandemic outbreak on foreign investment, MOFCOM issued the Notice of MOFCOM on Improving the Administration of Paperless Record-filing (Approval) for Foreign Investment. It encourages enterprises to file applications in PDF format via its online platform system. During the pandemic outbreak, the State Administration for Market Regulation (SAMR) has also adopted electronic filing and accepted antitrust submissions via email.

   E-communication. The COVID-19 crisis has also promoted the adoption of video conferencing, online negotiation and virtual signing. To optimise information and services available to foreign investors, the official China foreign direct investment website is expected to be revamped.

   What's the Trend? What's Next?

   Embracing digitalisation has become a mode of survival amid the country's pandemic lockdown. The COVID-19 outbreak has been a catalyst for the adoption of more up-to-date technology that eliminates traditional paper filings, physical signing and face-to-face communication. The Chinese authorities are likely to continue to push the paperless conversion. This will benefit foreign investors in overcoming demographic restraints, accessing more information and minimising time and costs.

5. Increased Efficiency

Reduced Bureaucracy. In 2018, the SAMR was created as part of an overhaul of governmental administrative departments. It consolidated several regulatory areas including antitrust and competition, intellectual property and drug administration. Following the implementation of the FIL, all local and state authorities are to remove all additional approval or recordal requirements specific to FIEs and their affairs.

Streamlining of Information Reporting. In December 2019, MOFCOM and SAMR jointly issued the Measures for Foreign Investment Information Reporting (Reporting Measures), and MOFCOM further issued the Notice on Matters Related to Foreign Investment Information Reporting (Reporting Notice). Pursuant to the Reporting Measures and the Reporting Notice, FIEs can submit information relating to their establishment and change of affairs and annual reports uniformly to the SAMR, which will share information already submitted by FIEs with MOFCOM, eliminating the need for it to be submitted separately again.

What's the Trend? What's Next?

These new measures reduce the burden for FIEs in navigating through layers of administrative procedures and filings. Different departments are being encouraged to streamline filing procedures for efficiency and improve service platforms to eventually create a convenient, one-stop shop for foreign investors. Technology is also likely to play a role in cutting red-tape from China's foreign investment regime as well as increasing information transparency and automation.

These all paint one overarching theme – China is committed to attract and support foreign investors. It is encouraging local government to go above and beyond to assist FIEs to overcome practical challenges they may face. As the country gets back on its feet after the pandemic lockdown, the limelight is once again on boosting economic growth and combating economic slowdown the US-China trade tensions and the pandemic have caused.

Strategic moves to modernise China's foreign investment business landscape, and increase transparency and efficiency are cornerstones in the creation of a more predictable investment environment for overseas investors. The push for FIL reform, the opening-up of less-developed provinces and previously-restricted industry sectors and digitalisation go hand-in-hand with enhancing protection and communication with foreign investors. With the COVID-19 havoc hopefully in China's rear mirror, the speed of change there in relation to attracting foreign investment is likely to pick up rapidly once again.