China’s New Foreign Investment Complaint Mechanism – A Sign of Commitment to Protect and Attract Foreign Investment?

On 23 March 2020, China’s Ministry of Commerce (MOFCOM) released the Draft Measures for Processing Complaints of Foreign-Invested Companies (Draft Measures) for comments. The Draft Measures establish a formal mechanism for handling complaints lodged by foreign-invested enterprises and their investors. For a summary of the key features of the Draft Measures, please refer to our earlier Legal Update The Past and Future of China’s Foreign Investment Complaint Mechanism.

It is significant in the sense that the Draft Measures was one of the earliest measures released to implement China's new Foreign Investment Law (FIL), and that it was released soon after COVID-19 was brought under control in China. It is clear, therefore, that attracting foreign investment is still a priority item for the Chinese government.

The Draft Measures convey key messages about the Chinese government's attitude towards foreign investment. This Legal Update will examine each key message, its expression in the Draft Measures and its effectiveness.

Key Message #1: Commitment to Protecting Foreign Investment

Under the Draft Measures, foreign investors may lodge complaints against administrative actions of administrative agencies. These complaints will be handled either at the national complaint centres or the local complaint centres. Various provisions in the Draft Measures reflect the seriousness with which such complaints will be handled.

Additional Channel. It should be emphasised that the complaint mechanism under the Draft Measures is an additional channel for addressing complaints. It does not exclude foreign investors from pursuing other channels of redress such as initiating administrative proceedings, requesting discipline inspection, and making petitions to the central government.

Improved Structure. The Draft Measures strengthen the structure of the complaint mechanism, as evidenced by the following:

• The Draft Measures require MOFCOM and the relevant State Council departments to implement a joint-conference system to coordinate and facilitate the resolution of complaints at the state level, and to supervise and provide guidance to local complaint centres. The overarching coordination, supervision and guidance at the central government level should increase the effectiveness of the complaint mechanism.
• The Draft Measures define the respective roles and responsibilities of both national and local complaint centres in greater detail than the current regime. They also contain more details regarding how complaints may be lodged. These provisions provide foreign investors with more clarity and certainty as to whom and how a complaint may be lodged.

Introduce Accountability. Each local complaint centre is required to submit monthly reports to its higher-level complaint centre with information such as the number of complaints received, details on how the complaints were handled and their respective status, and details on how the complaints were resolved. The Draft Measures also explicitly provide that if there is misconduct or abuses of power on the part of complaint centres or their officials in exercising their duties, they will face legal consequences including criminal liability. These provisions increase the accountability of local complaint centres and their officials and hence the effectiveness of the mechanism.

Increase Transparency. The national complaint centre is required to publish work reports to provincial governments and the public from time to time. This will increase transparency and promote consistency in the treatment of similar cases.

Stricter Timeline. The complaint centres are required to adhere to stricter timelines for resolving complaints. Under the current regime, if the complaint centre cannot close the case within the prescribed time-frame, it only needs to inform the complainant as soon as possible. Under the Draft Measures, the timeline can only be extended under certain prescribed circumstances and with the approval of the person in charge of the complaint centre.

Enhance Fairness and Impartiality. The Draft Measures take steps to ensure the fairness of the complaint handling process. In particular, if a case handling officer has a conflict of interest that may affect his or her impartiality, then they should be excused. The Draft Measures also contain provisions that allow a complainant to challenge the impartiality of the case handling officer.

Our Assessment

The Draft Measures obviously improve the efficiency, structure, transparency, accountability and fairness of the existing regime. However, there are still uncertainties, for example:

• It is unclear which State Council departments will form part of the joint-conference system. Moreover, the effectiveness of the joint-conference system will depend on how active it exercises its coordination and supervisory function;
• Since local complaint centres are encouraged to establish their own detailed procedures, there might be different local rules which would increase the complexities and inconsistencies foreign investors face;
• It is unclear how frequently the national complaint centre will publish work reports to provincial governments and the public;
• While the Draft Measures require all local governments at the county level and above to set up local complaint centres, it is unclear how many levels of local complaint centres there will be and how work will be allocated at each local level; and
• The separation of local complaint centres and national complaint centres makes sense as it would be more efficient for local complaint centres to address local issues which they are more familiar with, and for the national complaint centres to address issues on a nationwide level or issues which involve multiple provinces. However, if the local government is to set up a complaint centre to address complaints against itself or its relevant administrative departments, there might be concerns of bias on the part of the local complaint centre (despite the fact that a mechanism for screening out conflicts of interest on the part of the case handling officer is in place). Besides, the Draft Measures do not provide a clear escalation mechanism for different levels of complaint centres or, for example, allow foreign investors to choose an appropriate level of complaint centre based on the amount of investment, size and importance of the investment and seriousness of the complaint. Foreign investors may have reservations as to the usefulness of the complaint mechanism.

Key Message #2: Commitment to Communication

The complaint mechanism under the Draft Measures is not just for resolving complaints and disputes. Foreign investors may also raise concerns, requests and make suggestions through this mechanism. Seen in this light, the complaint mechanism can be viewed as another channel of communication between foreign investors and the government.

Indeed, the release of the Draft Measures for consultation is in itself a testament of the government’s commitment to strengthen communication with foreign investors and consult foreign investors on related policy matters.

Our Assessment

To establish a formal channel and a set of procedures for foreign investors to provide recommendations on foreign investment policies is both innovative and revolutionary. The success of the complaint mechanism as a communication channel will depend on the government's receptiveness to recommendations and its readiness to act on them.

Key Message #3: Bottom-up Approach to Policy-making

The Draft Measures reflect that the government is embracing a more bottom-up approach to formulating and revising its policies on foreign investment. For example, under the Draft Measures:

• If a local complaint centre identifies common issues or irregularities during their handling of complaints, the local complaint centre may report the issues and offer recommendations to the national complaint centre;
• Based on the complaints, concerns, and suggestions foreign investors raise through the complaint mechanism, each complaint centre is required to compile monthly reports for its higher-level complaint centre with policy recommendations.

Our Assessment

The regular feedback from local complaint centres to higher-level complaint centres and national complaint centres will help the government become more attuned to the practical problems foreign investors face, and will assist the government in formulating better policies. The key question, however, is whether and how soon such feedback is translated into new or revised policies.

Step in the Right Direction

The Draft Measures are no doubt a step in the right direction. They are a significant improvement on the existing regime in terms of efficiency, structure, transparency, accountability and fairness. The success of the complaint mechanism, however, will depend on its actual implementation, the coordination between local and national levels, the government's receptiveness towards policy recommendations and its readiness to act on them.

All in all, the Draft Measures indeed send a clear signal to foreign investors about the government’s determination to protect and thus attract foreign investments.

What Is Next?

Hot on the heels of releasing the Draft Measures, the "Notice on Further Opening up and Stabilising Foreign Investment in Response to the COVID-19 Outbreak" dated 1 April 2020 was released by MOFCOM on 3 April 2020. We will examine the trends in and implications of the Notice in our next Legal Update.