What is the implication of “National Treatment” for foreign investors under China’s new Foreign Investment Law?

China’s top legislature passed the new Foreign Investment Law on March 15, 2019, at the country’s annual People’s Congress.  The new law will take effect on January 1, 2020. This new Foreign Investment Law provides foreign investors with “national treatment,” that is, the same treatment as Chinese enterprises, except for certain restrictions in limited sectors under the “Negative List.” According to this statutory confirmation, international investors can expect to have the same treatment as Chinese companies in terms of forming subsidiaries, M&As, doing business or bidding for contracts in most sectors including without limitation cleantech, environmental services, biotechnology, software and agri-technology.

Although international companies have been allowed to set up 100% wholly-owned subsidiaries in China since 1986 in certain so-called “encouraged” and “permitted” areas, the list of “restricted” and “prohibited” areas for foreign investment (and sometimes, even in some “permitted” areas) was fairly long, and in many scenarios, a foreign corporation had to find a local Chinese partner as a matter of law.

Although as a matter of practice it is worth a separate discussion regarding the pros and cons of setting up your wholly-owned subsidiary in China versus a joint venture with a local Chinese partner, it is a positive consequence of the new Foreign Investment Law that foreign investors will have the “national treatment.” Therefore in most cases, foreign investors will no longer need the approval from, or filing with, the Ministry of Commerce (MOC) in Beijing (and in many cases its local counterparts) before setting up their subsidiary or JV in China, closing an M&A deal or acquiring assets from another Chinese company.

Not needing MOC approval/filing means not only a shorter and smoother process but also less uncertainty.  Of course, as in the U.S. and many other countries, national security review and merger clearance by a Chinese government authority (e.g. MOC) would still be applicable if a proposed transaction falls within the relevant scope, although most transactions initiated by an international small and medium-sized enterprise would probably not trigger those reviews.

Tianpeng Wang

CEO and Co-Founder of Trustiics
call us