Attitude toward Foreign Direct Investment
The Chinese government has stated it welcomes foreign investment. In 2015, China’s inward FDI flow rose around six percent from the year earlier to USD 126.3 billion, according to the Ministry of Commerce (MOFCOM). China’s sustained high economic growth rate and the expansion of its domestic market help explain its attractiveness as an FDI destination. Foreign investors, however, often temper their optimism regarding potential investment returns with uncertainty about China’s willingness to offer a level playing field with domestic competitors. In addition, foreign investors report a range of challenges related to China’s current investment climate. These include industrial policies that protect and promote state-owned and other domestic firms, equity caps and other restrictions on foreign ownership in many industries, weak IPR protection, a lack of transparency, corruption, discriminatory and non-transparent anti-monopoly enforcement, excessive national or cyber security requirements, and an unreliable legal system. The 2015 Anti-Terrorism Law, the draft Foreign Non-Governmental Organizations (NGO) Law, and the measures restricting bank purchases of foreign technology raised concerns that China was back-tracking on reforms to further open to foreign investment.
The AmCham 2015 American Business in China White Paper: http://www.amchamchina.org/whitepaper
The AmCham 2016 Business Climate Survey: http://www.amchamchina.org/policy-advocacy/business-climate-survey
The U.S.-China Business Council’s China Economic Reform Scorecard: https://www.uschina.org/reports/uscbc-china-economic-reform-scorecard-september-2015
FDI Statistics from MOFCOM: http://www.fdi.gov.cn/1800000121_10000177_8.html
Other Investment Policy Reviews
Organization for Economic Cooperation and Development (OECD)
China is not a member of the OECD. The OECD Council decided to establish a country program of dialogue and co-operation with China in October 1995. The most recent OECD Investment Policy Review for China was completed in 2008. The OECD Investment Policy Review noted that the policy changes in China between 2006 and 2008 tightened restrictions on inward direct investment, including cross-border mergers and acquisitions.
OECD 2008 report: http://www.oecd.org/investment/investmentfordevelopment/oecdinvestmentpolicyreviews-china2008encouragingresponsiblebusinessconduct.htm
In 2013, OECD published “China Investment Policy: An Update.” This working paper examines China’s investment policy since the publication of the 2008 Investment Policy Review. The report noted that while China’s economic strength buoys foreign investor confidence, fears of investment protectionism are growing.
OECD 2013 Update: http://www.oecd.org/china/WP-2013_1.pdf
World Trade Organization (WTO)
China became a member of the World Trade Organization (WTO) in 2001. WTO membership boosted China’s economic growth and advanced its legal and governmental reforms. The most recent WTO Investment Trade Review for China was completed in 2014. The report states that, despite the establishment of the Shanghai FTZ, there were few changes to China’s policies on inward foreign investment during the period under review (2012-2014). The trade review also said that China encourages inward FDI as well as joint ventures between Chinese and foreign companies, particularly in research and development.
WTO Investment Trade Review for China: https://www.wto.org/english/tratop_e/tpr_e/tp400_e.htm
IMF information on China: http://www.imf.org/external/country/Chn/
Laws/Regulations on Foreign Direct Investment
China has a legal and regulatory framework that provides the government with discretion to promote investment in specific regions or industries it wishes to develop, and to restrict foreign investment deemed not to be in its national interest or that would compete with state-sanctioned monopolies or other favored domestic firms. Foreign investors report that many regulations contain undefined key terms and standards, and that regulations are often applied in an inconsistent manner by different regulatory entities and localities. Potential investment restrictions in China are thus much broader than those of many developed countries, including the United States.
China’s accession to the WTO spurred significant transformations in various areas of Chinese domestic law. The current Chinese leadership has emphasized the need to strengthen the rule of law in China. Nonetheless, foreign investors have expressed concern that the legal system allows regulators significant discretion to adapt decisions to changing circumstances, which results in an unpredictable business climate and rulings that can appear arbitrary or discriminatory. Generally, unlike the United States, the legal system is designed to serve state and Communist Party interests, and as such, does not consistently protect individual rights or effectively resolve disputes. The current legal system is still being developed as a venue to address investment and commercial disputes.
The Constitution of the People’s Republic of China was adopted by the 5th National People’s Congress on December 4, 1982, with several revisions through 2004. Article 18 of the Constitution permits foreign enterprises and other economic organizations or individuals to invest in China. The issuance of the China-Foreign Equity Joint Venture Enterprise Law in 1979 marked the beginning of the establishment of China’s foreign investment legal regime. Since then, China has established a foreign investment legal regime based on three central laws. These are: the China-Foreign Equity Joint Venture Enterprise Law, the China-Foreign Cooperative Joint Venture Enterprise Law, and the Foreign-Invested Enterprise Law.
Administrative regulations and regulatory documents governing FDI issued by the State Council – China’s cabinet – include, but are not limited to:
Implementation Regulations of the China-Foreign Equity Joint Venture Enterprises Law
Implementation Regulations of the China-Foreign Cooperative Joint Venture Enterprise Law
Implementation Regulations of the Foreign-Invested Enterprise Law
State Council Provisions on Encouraging Foreign Investment
Provisions on Guiding the Direction of Foreign Investment
Administrative Provisions on Foreign Investment to Telecom Enterprises
There are over 1,000 rules and regulatory documents related to foreign investment in China issued by government ministries. They include, but are not limited to:
Catalogue for the Guidance of Foreign Investment Industries
Provisions on Mergers & Acquisitions of Domestic Enterprises by Foreign Investors
Administrative Provisions on Foreign Investment in Road Transportation Industry
Interim Provisions on Foreign Investment in Cinemas
Administrative Measures on Foreign Investment in Commercial Areas
Administrative Measures on Ratification of Foreign Invested Projects
Administrative Measures on Foreign Investment in Distribution Enterprises of Books, Newspapers and Periodicals
Provision on the Establishment of Investment Companies by Foreign Investors
Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors
In addition, local legislatures and governments also enact their own regulations and rules to regulate foreign investments within their jurisdictions, in accordance with national laws and policies. Examples include Wuhan’s Administration Regulation on Foreign-Invested Enterprises and Shanghai’s Municipal Administration Measures on the Land Usage of Foreign-Invested Enterprises.
Under this foreign investment legal regime, China approves foreign investments on a case-by-case basis following review by multiple government agencies. China claims to provide foreign investors with national treatment, or treatment no less favorable than that provided to domestic investors, after an investment has been established, but not before. Foreign investors may only invest where allowed by laws, regulations, and rules, in specified areas or industries, and are required to obtain ratification for planned investment projects and to establish companies. In some industries, such as the telecommunication industry, foreign investors are also required to obtain approval from relevant industry regulators. Separate approval processes govern land use and other administrative areas. Reviews may overlap, resulting in potentially redundant examinations. Low transparency limits the predictability of outcomes.
A list of Chinese laws and regulations, central and local: http://www.gov.cn/zhengce/
FDI Reform Announcements
In November 2013, following the Third Plenum of the 18th Party Congress, the Chinese Communist Party issued a decision which is described by the Chinese leadership as one of the largest and most ambitious economic reform programs since Deng Xiaoping’s pioneering market-oriented reforms in 1978. Among other things, the decision directs China to broaden foreign investment access in China; to explore the possibility of a model for allowing foreign investment that would provide national treatment at all phases of investment, including market access (i.e., the “pre-establishment” phase of investment), and employ a “negative list” approach in identifying exceptions (meaning that all investments are permitted except for those explicitly identified ); and to set up more free trade zones like the recently established and still evolving Shanghai FTZ. The decision also stated that China intends to unify laws and regulations governing foreign and domestic investment.
The English version of the Third Plenum decision: http://www.china.org.cn/china/third_plenary_session/2013-11/16/content_30620736.htm
In January 2015, MOFCOM issued a new draft Foreign Investment Law for public comment. When enacted, the law will unify and supersede the three main laws governing foreign-invested enterprises (FIEs): the China-Foreign Equity Joint Venture Enterprise Law, the Foreign-Invested Enterprise Law, and the China-Foreign Cooperative Joint Venture Enterprise Law. The draft Foreign Investment Law would abolish case-by-case approval of foreign investment in favor of a system that would treat FDI the same as domestic investment, except for foreign investment in sectors detailed in a “negative list.” While this approach has the potential to equalize treatment in some sectors, it would also codify discrimination in the sectors on the negative list. Thus, its impact depends on both the length of the negative list and the consistency of the approval processes that apply to both foreign and domestic investors for unlisted sectors.
In April 2015, the State Council issued a General Plan for the free trade zones in Tianjin, Guangdong, and Fujian that offers national treatment in the pre-establishment phase of investment, except for discriminatory measures identified on a negative list. The State Council-issued negative list for these free trade zones, plus the Shanghai FTZ, comprises 85 measures restricting foreign investment and 37 measures forbidding foreign investment. Together, this negative list has 17 fewer measures than the negative list adopted in the Shanghai FTZ in 2014 and 68 fewer measures than Shanghai FTZ’s 2013 negative list. Despite the numerical reduction in discriminatory measures, no commercially significant openings for foreign investment were created.
China also issued in 2015 the Interim Measures on the National Security Review of Foreign Investment in Free Trade Zones. The definition of national security contained in these Interim Measures is broad, implicating investments in military, national defense, agriculture, energy, infrastructure, transportation, culture, information technology products and services, key technology, and manufacturing.
In addition, MOFCOM issued the Administrative Measures for the Record-Filing of Foreign Investment in Free Trade Zones, outlining the streamlined process that foreign investors need to follow to register investments in the free trade zones.
In May 2015, the State Council approved a pilot program in Beijing to test openness to investors in science and technology, internet and information, culture and education, financial services, commerce and tourism, and healthcare. The pilot program has not yet begun, however, because authorities have not issued any implementation regulations.
Basic business registration procedures are difficult. The World Bank ranked China 84th out of 189 economies in ease of doing business. For starting a business, the World Bank ranked China 136th (between Paraguay and Cameroon), reporting that starting a business requires at least 11 procedures in Shanghai and Beijing that average more than 30 days to complete. Procedures include pre-approval for the company name, a business license with the State Administration for Industry and Commerce, an organization code certificate with the Quality and Technology Supervision Bureau, registration with the provincial and local tax bureaus, a company seal from the police department, registration with the local statistics bureau, a bank account, the authorization to print or purchase invoices and receipts, and registration with the Ministry of Human Resources and Social Security, as well as with the Social Welfare Insurance Center.
Recently, however, the State Council has tried to reduce red tape. For example, the State Council eliminated hundreds of administrative licenses and either cancelled or delegated administrative approval power across a range of sectors. The number of investment projects subject to central government approval reportedly dropped more than 75 percent. The State Council has set up a website in English about doing business in China (http://english.gov.cn/services/doingbusiness). MOFCOM’s Department of Foreign Investment Administration is responsible for foreign investment promotion in China.
Despite streamlining efforts, though, foreign companies continue to complain about the challenges of setting up a business, including registration and administrative licenses. Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices. The differences among these corporate entities are significant, and investors should review their options carefully with an experienced advisor before choosing a particular corporate entity or investment vehicle.
Despite these challenges, China is the third-largest export market for U.S.-based small- and medium-sized enterprises (SMEs). According to the National Bureau of Statistics, SMEs account for 99.7 percent of all companies registered in China. These SMEs contribute 60 percent of China’s industrial output and create 80 percent of China’s jobs. The Regulations on the Standards for Classification of SMEs defines “mini,” “small,” and “medium,” and vary by sector. In the software and IT services industry, for instance, a small enterprise would have between 10 and 100 employees with operating revenue greater than RMB 500,000 (USD 76,800). A medium enterprise would have between 100 and 300 employees and an operating revenue between RMB 10 million (USD 1.5 million) and 100 million (USD 15.4 million). In some services-based industries, such as architecture, regulators consider operating revenue and total assets rather than the number of employees. The central government has developed several policies to support SME growth, including access to credit from state-owned and small private banks.
China defines its broad economic goals through five-year macro-economic plans. The most significant of these for foreign investors is China’s Five-Year Plan (FYP) on Foreign Capital Utilization. The 12th FYP for Utilization of Overseas Capital and Investment Abroad, issued by the National Development and Reform Commission (NDRC) in 2012, promises to guide more foreign direct investment to an identified set of strategic and newly emerging industries (SEIs), namely energy efficiency and environmental technologies, next generation information technology, biotechnology, advanced equipment manufacturing, new energy sector, new materials, and new-energy vehicles, while “strictly” limiting FDI in energy and resource-intensive and environmentally damaging industries; encourage foreign multinationals to set up regional headquarters and research and development centers in China; encourage foreign investment in production services such as modern logistics, software development, engineering design, vocational skill training, information consulting, technology, and intellectual property services; “steadily open up” banking, securities, insurance, telecom, fuel, and logistics industries; “gradually open up” education and sports; guide foreign capital to enter healthcare, culture, tourism, and home services; and encourage foreign capital to enter creative design. The National People’s Congress approved the 13th FYP, covering 2016 to 2020, in March 2016.
A major goal of China’s investment policies, stated in the 12th FYP, is to encourage the domestic development of technology and know-how. China’s investment authorities tend to look favorably on investments that transfer technology or facilitate “indigenous innovation.” China seeks to promote investment in higher value-added sectors, including high technology research and development, advanced manufacturing, clean energy technology, and select services sectors. Foreign investors often must weigh the potential value of accessing China’s market against China’s inability or unwillingness to protect intellectual property.
China also seeks to spread the benefits of foreign investment beyond its relatively wealthy coastal areas by encouraging foreign companies to establish regional headquarters and operations in Central, Western, and Northeastern China. China publishes and regularly revises a Catalogue of Priority Industries for Foreign Investment in the Central-Western Regions, which outlines incentives to attract investment in targeted sectors to those parts of China.
Catalogue of Priority Industries for Foreign Investment in the Central-Western Regions: http://www.ndrc.gov.cn/zcfb/zcfbl/201305/W020130516388520815145.pdf
Limits on Foreign Control and Right to Private Ownership and Establishment
Catalogue for the Guidance of Foreign Investment in Industries
China outlines its specific foreign investment objectives primarily through its Catalogue for the Guidance of Foreign Investment in Industries, most recently revised in March 2015, and maintained by MOFCOM and NDRC. The catalogue delineates sectors of the economy where foreign investment is “encouraged,” “restricted,” and “prohibited.” Investment in sectors not listed in the catalogue is considered permitted. China “encourages” investment in sectors where it believes it will benefit from foreign assistance or technology. Investment is “restricted” and “prohibited” in sectors that China deems sensitive, that touch on national security, or that do not meet the goals of China’s economic development plans.
The 2015 edition of the Catalogue lifts restrictions on foreign investment in several areas, including in manufacturing, but makes limited progress in services, agriculture, and infrastructure. According to NDRC, the Catalogue reduces the number of restricted industries from 79 to 38, with direct sales and insurance brokerage companies among the beneficiaries. It also limits the number of sectors for which Chinese-controlled joint ventures are required from 44 to 35. Additionally, the new Catalogue reduces the number of industries requiring joint ventures with Chinese partners, but allowing foreign control, from 43 to 15, including in real estate development.
The overall reforms to the Catalogue may improve market access in some sectors, but the Catalogue also reduces access in others. In general, foreign investment restrictions remain largely unaltered in industries that have traditionally faced heavy restrictions, such as banking, telecommunications, and cultural industries. On the positive side, the new Catalogue exempts the e-commerce industry from the 50 percent equity cap for foreign investment in value-added telecom services.
The Chinese version of the 2015 Foreign Investment Catalogue: http://www.mofcom.gov.cn/article/b/f/201503/20150300911747.shtml
Problems with the Catalogue
The Catalogue exhaustively describes China’s foreign investment restrictions. Contradictions between the Catalogue and other measures have confused investors and added to the perception that investment guidelines do not provide a secure basis for business planning. Even in “encouraged” and “permitted” sectors, regulations apart from the Catalogue often detail additional restrictions on the specific forms of investment that are allowed. Chinese regulators have maintained the flexibility to ignore the Catalogue’s guidance in some instances, and to restrict or approve foreign investment for reasons other than those specified. The government may also adopt new regulations or establish industrial policies that supersede the most recently published edition of the Catalogue. Uncertainty as to which industries are being promoted and how long such designations will be valid undermines confidence in the stability and predictability of the investment climate.
In addition to dividing industries into “encouraged,” “restricted,” and “prohibited” categories, the catalogue may also require that investment take certain forms (such as a domestic-foreign equity joint venture) and/or that the foreign shareholder’s proportion of investment in the enterprise be limited to a minority share. Agency-specific regulations may also require that investment take certain forms.
In the oil and natural gas exploration and development industry, foreign investment is required to take the form of equity joint ventures and cooperative joint ventures.
In the accounting and auditing sectors, the Chief Partner of a firm must be a Chinese national.
In higher education and pre-school, foreign investment is only permitted in the form of cooperative joint ventures led by a Chinese partner.
In some sectors, the Chinese partners, individually or as a group, must maintain control of the enterprise; for example, in construction and operation of civilian airports, construction and operation of nuclear power plants, establishment and operation of cinemas, and the design and manufacture of civil-use satellites.
In some sectors, the foreign shareholder’s proportion of the investment may not exceed a certain percentage. For example, foreign stakes are limited to:
50 percent in value-added telecom services (excepting e-commerce)
49 percent in basic telecom enterprises
50 percent in life insurance firms
49 percent in security investment fund management companies
Mandatory Intellectual Property (IP)/technology transfer requirements
Mandatory joint venture structures and equity caps give Chinese partner firms significant control, often allowing them to benefit from technology transfer. In addition, the relative opacity of the approvals process and the broad discretion granted to the authorities foster an environment where government authorities can impose deal-specific conditions beyond written legal requirements, often with the intent to force technology transfer as a condition of market access or to support industrial policies and the interests of local competitors.
Early indications following China’s November 2013 Third Plenum reform pronouncements suggest that China will attempt to sell shares in state-owned enterprises (SOEs) to outside investors, improve SOE management structures, emphasize the importance of SOEs meeting financial goals, and take steps to bring private capital into some sectors traditionally monopolized by SOEs, such as energy, telecoms, and finance. Practically, the government must still work out how to implement its SOE reform vision. The government’s listing over the past few years of several large SOEs and their assets in Hong Kong, where they are subject to greater transparency rules and heightened regulatory scrutiny, suggests a possible mechanism to improve SOE corporate governance and transparency. The government also committed at the Third Plenum to raise the portion of earnings that SOEs pay out as dividends to the public budget, although here, too, the pace and method of implementation remain uncertain.
Screening of FDI
As mentioned, foreign investors are required to obtain approvals for their investment projects and to establish an enterprise. In some industries, such as telecommunications, foreign investors are also required to get approval from industry regulators.
Catalogue of Investment Projects Subject to Government Ratification
In July 2004, the State Council issued its Decision on Investment Regime Reform and the Catalogue of Investment Projects subject to Government Ratification (Ratification Catalogue). According to the Ratification Catalogue, all proposed foreign investment projects in China must be submitted for “review and ratification” by the National Development and Reform Commission (NDRC) or provincial or local Development and Reform Commissions, depending on the sector and value of the investment. In 2013, however, the government issued a new catalogue narrowing the scope of foreign investment projects subject to NDRC ratification. Foreign investment which does not require Chinese control according to the Foreign Investment Catalogue and which is not listed in the Ratification Catalogue requires only “filing for record” with the local NDRC office. The policy shift marked a positive step toward easing bureaucratic barriers to foreign investment.
In November 2014, China released a new edition of the Ratification Catalogue, which eliminates the requirement for NDRC ratification in 15 sectors (out of approximately 50) and delegates ratification authority to local governments in another 23 sectors. The new Ratification Catalogue also raises the threshold of foreign ownership that would trigger the requirement for NDRC approval, as opposed to registration, in several sectors. When announcing the reforms, NDRC stated the goal of the latest revision to the Ratification Catalogue is to limit ratification to projects relating to “national and ecological security, geographic and resource development” and the “public interest.” NDRC estimated the number of projects requiring ratification from central government authorities would fall by 76 percent following revisions made over the past several years.
NDRC’s approval process for foreign investment projects includes assessing the project’s compliance with China’s laws and regulations; its compliance with the Foreign Investment Catalogue and industrial policy; its national security, environmental safety, and public interest implications; its use of resources and energy; and its economic development ramifications. In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and “consulting agencies,” which may include industry associations that represent domestic firms. This can create conflicts of interest that disadvantage foreign investors. The State Council may also weigh in for high-value projects in “restricted” sectors.
The Catalogue of Investment Projects subject to Government Ratification: http://www.gov.cn/zhengce/content/2014-11/18/content_9219.htm
Based on the three foreign investment laws, once NDRC approves the foreign investment project, foreign investors must apply to MOFCOM for approval to legally establish a company. Next, foreign investors apply for a business license from the State Administration for Industry and Commerce (SAIC), which allows the firm to operate. Once a license is obtained, the investor registers with China’s tax and foreign exchange agencies. Greenfield investment projects must also seek approval from China’s Environmental Protection Ministry and its Ministry of Land Resources. The actual implementation of China’s foreign investment approvals process may vary in specific cases, depending on the details of a particular investment proposal and local rules and practices.
U.S. Chamber of Commerce report on China’s Approval Process for Inbound Foreign Direct Investment: http://www.uschamber.com/sites/default/files/reports/020021_China_InvestmentPaper_hires.pdf
Draft Foreign Investment Law
As mentioned, MOFCOM in January 2015 proposed a new Foreign Investment Law, which reflects key principles from the U.S. model Bilateral Investment Treaty, including the use of a negative list to enumerate instances where FDI is treated differently than domestic investment. The draft would also streamline the approval process for foreign investment in some sectors, but contains a number of troubling provisions that could facilitate discriminatory treatment of foreign investment. The draft law was released for public comment in January 2015. Since then, there has been no further update.
Anti-monopoly Review and National Security Review
MOFCOM conducts anti-monopoly and/or national security reviews of proposed mergers and acquisitions (M&As) of domestic enterprises by foreign investors. The anti-monopoly review is detailed further below, in the section on competition policy. Article 31 of China’s Anti-monopoly Law also notes that if a merger or acquisition of a domestic enterprise by a foreign investor poses national security concerns, a separate national security review is also required. Article 12 of MOFCOM’s Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investment stipulates that parties are required to report a transaction to MOFCOM if:
Foreign investors obtain actual control, via merger or acquisition, of a domestic enterprise in a key industry.
The merger or acquisition affects or may affect national economic security.
The merger or acquisition would cause the transfer of actual control of a domestic enterprise with a famous trademark or a Chinese time-honored brand.
If MOFCOM determines that the parties did not report a merger or acquisition that affects or could affect national economic security, MOFCOM, together with other government agencies, may require the parties to terminate the transaction or adopt other measures to eliminate the impact on national economic security.
In February 2011, China released the State Council Notice Regarding the Establishment of a Security Review Mechanism for Foreign Investors Acquiring Domestic Enterprises. The notice established an interagency Joint Conference, led by NDRC and MOFCOM, with the authority to block foreign mergers and acquisitions of domestic firms that it believes may impact national security. The Joint Conference is instructed to consider not just national security, but also national economic security and “social order,” when reviewing transactions. China has not disclosed any instances in which it has invoked this formal review mechanism.
Local commerce departments are responsible for flagging transactions that require a national security review when they review them in an earlier stage of China’s foreign investment approval process. Some provincial and municipal departments of commerce have previously posted on the internet a Security Review Industry Table listing non-defense industries where transactions may trigger a national security review, but MOFCOM has declined to confirm whether these lists reflect official policy. In addition, third parties such as other governmental agencies, industry associations, and companies in the same industry can seek MOFCOM’s review of transactions, which can pose conflicts of interest that disadvantage foreign investors. Investors may also voluntarily file for a national security review.
In addition to transforming the current foreign investment regime, the aforementioned MOFCOM draft Foreign Investment Law would also establish a broad and potentially intrusive national security review mechanism. As it is currently envisaged, the national security review could be used to hinder market access and increase the financial burden of foreign investment in China.
Competition Policy, Laws, and Regulations
China has many laws and regulations that classify sectors into monopolies, near-monopolies, or authorized oligopolies. These measures are most common in resource-intensive sectors such as electricity and transportation, as well as in fixed-line telephony and postal services to ensure national coverage. The measures also target sectors the government deems vital to national security and economic stability, including defense, energy, and banking. Examples of such laws and regulations include the Law on Electricity (1996), Civil Aviation Law (1995), Regulations on Telecommunication (2000), Postal Law (1986), Railroad Law (1991), and Commercial Bank Law (amended in 2003), among others.
China’s Anti-monopoly Law (AML) took effect in August 2008 and established an anti-monopoly commission with oversight and coordinating responsibilities. Three agencies share enforcement responsibilities: MOFCOM reviews mergers and acquisitions; NDRC reviews cartel agreements to fix prices, abuse of dominance, and abuse of administrative power involving pricing; and SAIC reviews the same types of activities as NDRC when those activities are not directly price-related. After the AML was enacted, MOFCOM, NDRC, SAIC, and other Chinese government ministries and agencies began to formulate implementing regulations, departmental rules, and other measures. Generally, these ministries and agencies have been willing to seek public comment on their proposed measures, although sometimes comment periods are less than 30 days.
Implementation Rules for AML Enforcement
In 2015, for the first time, the Chinese Communist Party’s Central Committee and the State Council stated that all future economic policies would reflect China’s competition policy. In addition, the State Council tasked the three AML enforcement agencies to draft guidelines on six enforcement themes, including “abuse” of intellectual property rights. The State Council is expected to consolidate those draft guidelines in 2016.
China’s enforcement of competition laws and regulations is uneven. Inconsistent central and provincial enforcement may be exacerbated by local protectionism. Government authorities at all levels in China may also restrict competition with favored firms through various forms of regulation. Official statements frequently suggest these efforts are tied primarily to employment concerns. However, the ultimate beneficiaries of the resulting measures are often unclear. In addition, local governments frequently enact rules that restrict inter-provincial trade, which may also restrict market access for certain imported products, raise production costs, and limit market opportunities for FIEs. Foreign companies have expressed concern that the central government uses AML enforcement to promote industrial policy, thereby favoring Chinese companies over foreign companies.
Since the AML went into effect, MOFCOM’s oversight of mergers has yielded the most enforcement activity. Under the AML, through the end of 2015, China has “unconditionally” approved 1,278 merger cases and “conditionally” approved 27, according to Chinese statistics. Twenty-three of the 27 cases approved with conditions have involved offshore transactions between foreign parties. The other four transactions involved foreign companies merging with Chinese enterprises. Observers have expressed concern over the speed and inconsistent review process. In 2015, MOFCOM amended two sets of rules concerning M&A notification and review process. The average time to start a review fell 13 percent, according to MOFCOM.
In 2015, foreign companies expressed fewer complaints than in 2014 about NDRC’s conduct during investigations. Some believe that a leadership change at NDRC improved enforcement practices. In 2015, NDRC opened more investigations into Chinese companies than foreign ones. That said, many foreign companies still complain that AML regulators use competition law to promote China’s industrial policy goals by limiting competition from foreign firms.
At the same time, NDRC has made progress towards greater transparency by releasing aggregate data on investigations and publicizing case decisions. MOFCOM stated it will enforce the requirement that Chinese firms, in addition to foreign firms, must also notify China of proposed mergers and acquisitions for review.
During the U.S.-China Joint Commission on Commerce and Trade in November 2015, China expressed support for key competition policy principles, including recognizing that intellectual property licensing enhances competition and the need for coherent AML rules related to intellectual property rights; that AML agencies should be free from intervention from other agencies; and that commercial secrets obtained in AML proceedings should not be disclosed.
It remains unclear how China will implement the AML with respect to SOEs and government monopolies in industries deemed nationally important. While introductory language in the law says the AML protects the lawful operations of SOEs and government monopolies in industries deemed nationally important, the three AML enforcement agencies have publicly stated the law applies to SOEs, and have pursued some enforcement actions against them. But concerns remain that enforcement against SOEs will remain limited, especially given China’s proactive orchestration of mergers in rail, marine shipping, metals, and other strategic sectors. Such actions may limit competition, raising prices in China while also increasing the market power of the combined Chinese firms, just as China is promoting their expansion into new overseas markets.
On the positive side, AML provisions restricting regulators from abusing administrative monopolies, which also appear in NDRC’s and SAIC’s implementing regulations, could help promote the establishment and maintenance of more competitive markets in China, if enforced.
Additional Laws Related to Foreign Investment
China’s State Secrets Law gives the government broad authority to classify information as a “state secret,” creating uncertainty and potential risk for investors negotiating with SOEs or operating in sensitive sectors. The Contract Law encourages contractual compliance by providing legal recourse for a breach of contract, although enforcement of judgments continues to be a problem. Additional investment-related laws include, but are not limited to, the Administrative Permissions Law, the Arbitration Law, the Corporate Income Tax Law, the Enterprise Bankruptcy Law, the Foreign Trade Law, the Government Procurement Law, the Insurance Law, the Labor Contract Law, the Law on Import and Export of Goods, and the Securities Law.