On 15 March 2019, the second session of the 13th National People's Congress (NPC) passed the Foreign Investment Law of the People's Republic of China (外商投资法) (FIL), which will come into force on 1 January 2020. After the FIL takes effect, the law will become the unified, basic law regulating Chinese foreign investment matters, repealing and replacing China's existing three foreign investment laws (Three FIE Laws) that have been in place for decades. (For a comprehensive overview of the Chinese foreign investment regime, see Practice note, Chinese foreign direct investment law: overview.)

With an unusual (but not surprising) fast-track speed, the FIL bill took less than three months from the NPC Standing Committee's first and second reading, on 23 December 2018 and 29 January 2019 respectively, to a final vote by China's top legislature on the closing date of its 2019 annual session held in Beijing between 5 to 15 March 2019.

A draft of the law was circulated for public consultation on 26 December 2018, which is three days after the first legislative reading, but nearly four years after MOFCOM's release of a precedent version (the draft Law of Investment from Foreign Countries (外国投资法)) for public consultation in January 2015. (For detail on the two drafts, see Legal updates, China opens revised draft foreign investment law for public consultation and Draft Foreign Investment Law open for comment until 17 February 2015.)

The enacted FIL, with 42 articles, largely resembles the 2018 draft, with a few tweaks to balance the level of government commitments that China is willing to codify in the form of a top-tier landmark law, and most changes reflecting legislative fine-tuning. Noteworthy last minute tweaks include:

The FIL was deliberated and enacted amid stretched US-China trade talks, in part as China's good faith gesture (but also as a political tactic) in response to key complaints from the US commerce community. These complaints include increasing calls for:

The FIL, with 42 articles, is much simpler than the 2015 precedent, which had 170 articles. Many of the ground-breaking or controversial provisions proposed in the 2015 draft were intentionally deleted in the FIL. Some of the deletions are because similar mechanisms have been gradually established or evolving through China's legislative reforms since 2015 (for example, the regimes on negative list administration, information reporting and national security review), while others are likely due to intense lobbying efforts of interested groups and the legislature taking precautions to prevent market turbulence for certain restricted sectors where variable interest entity (VIE) structures are commonly used.

The body of the FIL is largely centred around the chapters of investment promotion, investment protection and investment administration, alongside the intention to signal the government's willingness to resolve certain long-standing issues that are claimed to have bothered foreign investors and their China operations. See Investment promotion, Investment protection and Investment administration for details.

After the FIL takes effect:

(Articles 31 and 42.)

Foreign investment is defined as any investment activity carried out by foreign natural persons, corporations and other organisations (collectively, foreign investors) directly or indirectly in China, including where:

(Article 2.)

The FIL adopts a narrower approach to define the jurisdictional scope of the law, which generally includes greenfield establishment, inbound acquisitions and de novo projects by foreign investors.

Under the 2015 draft, the term "foreign investor" was extended to bring in any domestic entity under the control of foreign entities, and the term "foreign investment" was broadly defined to include, among others, long-term inbound financing, foreign investors' direct property purchase of real estate located in China, and businesses conducted through VIE structures.

The broader 2015 definition was apparently over-inclusive when looking at China's on-going evolving regulatory regimes. For example:

With China's transformative evolution and gap-filling of its major business regulatory regimes in recent years, a slimmed-down version of the FIL works as a more appropriate blueprint to reshape China's foreign investment landscape.

The FIL follows a competitive neutrality concept in treating foreign and domestic market players, aiming to create a level playing field for all sorts of investors.

The investment promotion chapter (Chapter 2) specifically calls for:

The "fair" and "equal" treatment notion is a positive development and does respond to certain frequently battled areas where foreign businesses are concerned or claim systematic prejudice. However, it remains questionable how determined the government is (and can be) to fully implement these competitive neutrality initiatives in practice, which may require a comprehensive and structural reform of a wide range of regulatory regimes.

Chapter 3 of the FIL sets forth a series of investment protection measures, including:

The tone of this chapter gives a strong signal that the government prepares to enforce enhanced IPR protection for foreign investors and foreign-invested businesses, an area in which China has faced increasing complaints from its major trading partners.

The FIL uses a highly simplified chapter (composing merely eight articles) to lay out the framework of China's foreign investment administration landscape (Articles 28 to 35), which are compatible with the foreign investment regulatory regimes gradually reformed or established in recent years.

FIEs already in existence before the FIL comes into force may retain their corporate governance forms for a period of five years (Article 42). Existing FIEs should use this grandfathering period to amend their articles and restructure their corporate governance forms to comply with the Chinese corporate and business law regime that currently applies to domestic entities.

This is because the body of the Three FIE Laws was mostly adopted around 2000, while the Company Law was last amended in 2018 (following a prior set of major revisions in 2013). As a result of the evolution of China's company law system, the two regimes contain many discrepancies. To name just a few examples:

For detailed discussion on the discrepancies, see Practice note, Corporate governance and liabilities of senior management in China: overview.

Each existing FIE in China must review their current articles and joint venture contracts (if any) to align their corporate governance forms with laws including the Company Law or the Partnership Law, as appropriate. For joint ventures, this might lead to a re-negotiation of the articles and contract terms between investing partners against the unified company law norms. For example, under the Three FIE Laws, the highest authority of a Sino-foreign equity joint venture (EJV) is the board of directors, which are appointed by the shareholders in proportion to the ratio of the shareholders' respective equity interests in the EJV. A minority shareholder might therefore be able to veto (through its appointed director on the board) certain important matters (including any amendment to the company's articles or a merger or division of the company), as the board's voting mechanism for said matters must require the unanimous approval of all directors attending the board meeting. With corporate governance terms aligned with the Company Law, the minority shareholder might lose its veto right on these important matters, as under the latter regime, decisions can be passed by shareholders representing at least two-thirds of the voting shares.

For more discussion, see:

NPC website, Foreign Investment Law of the People's Republic of China.