FDI has historically played an essential role in China’s economic development. Chinese government officials have prioritized promoting relatively friendly FDI policies promising market access expansion and non-discriminatory, “national treatment” for foreign enterprises through general improvements to the business environment.  They also have made efforts to strengthen China’s regulatory framework to enhance broader market-based competition.

In 2020, China issued an updated nationwide “negative list” that made some modest openings to foreign investment, most notably in the financial sector, and promised future improvements to the investment climate through the implementation of China’s new FIL.  MOFCOM reported FDI flows grew by 4.5 percent year-on-year, reaching USD144 billion.  In 2020, U.S. businesses expressed concern over China’s COVID-19 restrictive travel restrictions, excessive cyber security and personal data-related requirements, increased emphasis on the role of CCP cells in foreign enterprises, and an unreliable legal system.  See the following: HYPERLINK “https://www.amchamchina.org/white_paper/2020-american-business-in-china-white-paper/” t “_blank” American Chamber of Commerce China 2020 American Business in China White Paper

• American Chamber of Commerce China 2020 American Business in China White Paper
• American Chamber of Commerce China 2020 Business Climate Survey

Limits on Foreign Control and Right to Private Ownership and Establishment

Entry into the Chinese market is regulated by the country’s “negative lists,” which identify the sectors in which foreign investment is restricted or prohibited, and a catalogue for encouraged foreign investment, which identifies the sectors in which the government encourages investment.

• (the “FTZ Negative List”) used in China’s 20 FTZs and one free trade port.
• (̈the “Nationwide Negative List”) came into effect on June 23, 2020.
•  released on December 27, 2020.  The PRC uses this list to encourage FDI inflows to key sectors, in particular semiconductors and other high-tech industries, to help China achieve MIC 2025 objectives.
• The “Encouraged list” is subdivided into a cross-sector nationwide catalogue and a separate catalogue for western and central regions, China’s least developed regions.

MOFCOM and NDRC also released on September 16 the annual  Market Access Negative List  to guide FDI. This negative list – unlike the previous lists that apply only to foreign investors – defines prohibitions and restrictions for all investors, foreign and domestic.  Launched in 2016, this list highlights what economic sectors are only open to state-owned investors.  In restricted industries, foreign investors face equity caps or joint venture requirements to ensure control is maintained by a Chinese national and enterprise.  Due to these requirements, foreign investors often feel compelled to enter into partnerships that require transfer of technology in order to participate in China’s market.  Foreign investors report fearing government retaliation if they publicly raise instances of technology coercion.

Below are a few examples of industries where these sorts of investment restrictions apply:

• Preschool to higher education institutes require a Chinese partner with a dominant role.
• Establishment of medical institutions require a Chinese JV partner.

Examples of foreign investment sectors requiring Chinese control include:

• Selective breeding and seed production for new varieties of wheat and corn.
• Basic telecommunication services and radio/television market research.

The 2020 negative lists made minor modifications to some industries, reducing the number of restrictions and prohibitions from 40 to 33 in the nationwide negative list, and from 37 to 30 in China’s pilot FTZs. Notable changes included openings in the services sector, yet most of these openings had previously been announced in 2019. In the service sector, the lists codified the removal of equity caps in financial services, eliminated requirements for investing in water and sewage systems for any city of half a million residents or fewer, and scrapped the ban on foreign investment in air traffic control.  While U.S. businesses welcomed market openings, foreign investors remained underwhelmed and disappointed by Chinese government’s lack of ambition and refusal to provide more significant liberalization.  Foreign investors noted these announced measures occurred mainly in industries that domestic Chinese companies already dominate.

Other Investment Policy Reviews

China is not a member of the Organization for Economic Co-Operation and Development (OECD), but the OECD Council established a country program of dialogue and co-operation with China in October 1995.  The OECD completed its most recent investment policy review for China in 2008 and published an update in 2013.

China’s 2001 accession to the World Trade Organization (WTO) boosted China’s economic growth and advanced its legal and governmental reforms.  The WTO completed its most recent investment trade review for China in 2018, highlighting that China remains a major destination for FDI inflows and a key market for multinational companies.

In 2020, China improved its rating in the World Bank’s Ease of Doing Business Survey to 31st place out of 190 economies.  This was partly due to regulatory reforms that helped streamline some business processes. This ranking does not account, however, for major challenges U.S. businesses face in China like IPR violations and market access.  Moreover, China’s ranking is based on data limited only to the business environments in Beijing and Shanghai.    HYPERLINK “https://www.doingbusiness.org/en/rankings?region=east-asia-and-pacific” t “_blank” World Bank Ease of Doing Business

• World Bank Ease of Doing Business

Created in 2018, the State Administration for Market Regulation (SAMR) is now responsible for business registration processes.  Under SAMR’s registration system, investors in sectors outside of the Foreign Negative List are required to report when they (1) establish a Foreign Invested Enterprise (FIE); (2) establish a representative office in China; (3) acquire stocks, shares, assets or other similar equity of a domestic Chinese company; (4) re-invest and establish subsidiaries in China; and (5) invest in new projects.  While an improvement relative to previous requirements for similar activities to require regulatory approval, foreign companies still complain about continued challenges when setting up a business relative to their Chinese competitors. Many companies offer consulting, legal, and accounting services for establishing operations in China. Investors should review their options carefully with an experienced advisor before investing.

 Outward Investment

Since 2001, China has pursued a “going-out” investment policy.  At first, the PRC mainly encouraged SOEs to invest overseas but in recent years, China’s overseas investments have diversified with both state and private enterprises investing in nearly all industries and economic sectors.  While China remains a major global investor, total outbound direct investment (ODI) flows fell 4.3 percent year-on-year in 2019 to USD136.9 billion, according to 2019 Statistical Bulletin of China’s Outward Foreign Director Investment .

The Chinese government also created “encouraged,” “restricted,” and “prohibited” outbound investment categories to suppress significant capital outflow pressure in 2016 and to guide Chinese investors into “more” strategic sectors. While the Sensitive Industrial-Specified Catalogue of 2018  restricted Chinese outbound investment in sectors like property, cinemas, sports teams and non-entity investment platforms, they encouraged outbound investment in sectors that supported China’s industrial policy by acquiring advanced manufacturing and high-tech assets.  Chinese firms involved in MIC 2025 sectors often receive preferential government financing and subsidies for outbound investment.  The guidance also encourages investments that promoted China’s Belt and Road Initiative (BRI), which seeks to create cooperation agreements with other countries via infrastructure investment, construction projects, etc.

Transparency of the Regulatory System

One of China’s WTO accession commitments was to establish an official journal dedicated to the publication of laws, regulations, and other measures pertaining to or affecting trade in goods, services, trade related aspects of intellectual property rights (TRIPS), and the control of foreign exchange.  Despite mandatory 30-day public comment periods, Chinese ministries continue to post only some draft administrative regulations and departmental rules online, often with a public comment period of less than 30 days. As part of the Phase One Agreement, China committed to providing at least 45 days for public comment on all proposed laws, regulations, and other measures implementing the Phase One Agreement. While China has made some progress, U.S. businesses operating in China consistently cite arbitrary legal enforcement and the lack of regulatory transparency among the top challenges of doing business in China.

In China’s state-dominated economic system, the relationships are often blurred between the CCP, the Chinese government, Chinese business (state- and private-owned), and other Chinese stakeholders.  Foreign-invested enterprises (FIEs) perceive that China prioritizes political goals, industrial policies, and a desire to protect social stability at the expense of foreign investors, fairness, and the rule of law.  The World Bank   Global Indicators of Regulatory Governance gave China a composite score of 1.75 out 5 points, attributing China’s relatively low score to stakeholders not having easily accessible and updated laws and regulations; the lack of impact assessments conducted prior to issuing new laws; and other concerns about transparency.

For accounting standards, Chinese companies use the Chinese Accounting Standards for Business Enterprises (ASBE) for all financial reporting within mainland China. Companies listed overseas or in Hong Kong may choose to use ASBE, the International Financial Reporting Standards, or Hong Kong Financial Reporting Standards.

International Regulatory Considerations

As part of its WTO accession agreement, China agreed to notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations.  However, China continues to issue draft technical regulations without proper notification to the TBT Committee.

Legal System and Judicial Independence

The Chinese legal system borrows heavily from continental European legal systems, but with “Chinese characteristics.”  The rules governing commercial activities are found in various laws, regulations, administrative rules, and Supreme People’s Court (SPC) judicial interpretations, among other sources. While China does not have specialized commercial courts, it has created specialized courts and tribunals for the hearing of intellectual property disputes (IP), including in Beijing, Guangzhou, Shanghai, and Hainan.  In 2020, the original IP Courts continued to be popular destinations for both Chinese and foreign-related IP civil and administrative litigation, with the IP court in Shanghai experiencing a year-on-year increase of above 100 percent. China’s constitution and laws, however, are clear that Chinese courts cannot exercise power independent of the Party.  Further, in practice, influential businesses, local governments, and regulators routinely influence courts.  U.S. companies may hesitate in challenging administrative decisions or bringing commercial disputes before local courts due to perceptions of futility or fear of government retaliation.

Laws and Regulations on Foreign Direct Investment

China’s new investment law, the FIL, came into force on January 1, 2020, replacing China’s previous foreign investment framework. The FIL provides a five-year transition period for foreign enterprises established under previous foreign investment laws, after which all foreign enterprises will be subject to the same domestic laws as Chinese companies, such as the Company Law. The FIL standardized the regulatory regimes for foreign investment by including the negative list management system, a foreign investment information reporting system, and a foreign investment security review system all under one document. The FIL also seeks to address foreign investors complaints by explicitly banning forced technology transfers, promising better IPR, and the establishment of a complaint mechanism for investors to report administrative abuses. However, foreign investors remain concerned that the FIL and its implementing regulations provide Chinese ministries and local officials significant regulatory discretion, including the ability to retaliate against foreign companies.

In December 2020, China also issued a revised investment screening mechanism under the Rules on Security Reviews on Foreign Investments without any period for public comment or prior consultation with the business community. Foreign investors complained that China’s new rules on investment screening were expansive in scope, lacked an investment threshold to trigger a review, and included green field investments – unlike most other countries. Moreover, new guidance on Neutralizing Extra-Territorial Application of Unjustified Foreign Legislation Measures, a measure often compared to “blocking statutes” from other markets, added to foreign investors’ concerns over the legal challenges they would face in trying to abide by both their host-country’s regulations and China’s. Foreign investors complained that market access in China was increasingly undermined by national security-related legislation. In 2020, the State Council and various central and local government agencies issued over 1000 substantive administrative regulations and departmental/local rules on foreign investment. While not comprehensive, a list of published and official Chinese laws and regulations is available here .

FDI Requirements for Investment Approvals

Foreign investments in industries and economic sectors that are not explicitly restricted on China’s negative lists do not require MOFCOM pre-approval.  However, investors have complained that in practice, investing in an industry not on the negative list does not guarantee a foreign investor “national treatment,” or treatment no less favorable than treatment accorded to a similarly situated domestic investor.  Foreign investors must still comply with other steps and approvals such as receiving land rights, business licenses, and other necessary permits.  When a foreign investment needs ratification from the NDRC or a local development and reform commission, that administrative body is in charge of assessing the project’s compliance with a panoply of Chinese laws and regulations.  In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and consulting agencies acting on behalf of Chinese domestic firms, creating potential conflicts of interest disadvantageous to foreign firms.

The Anti-Monopoly Bureau of the SAMR enforces China’s Anti-Monopoly Law (AML) and oversees competition issues at the central and provincial levels.  The agency reviews mergers and acquisitions, and investigates cartel and other anticompetitive agreements, abuse of a dominant market position, and abuse of administrative powers by government agencies.  SAMR also oversees the Fair Competition Review System (FCRS), which requires government agencies to conduct a review prior to issuing new and revising existing laws, regulations, and guidelines to ensure such measures do not inhibit competition. SAMR issues implementation guidelines and antitrust provisions to fill in gaps in the AML, address new trends in China’s market, and help foster transparency in enforcement. Generally, SAMR has sought public comment on proposed measures, although comment periods are sometimes less than 30 days.

In January 2020, SAMR published draft amendments to the AML for comment, which included, among other changes, stepped-up fines for AML violations and specified the factors to consider in determining whether an undertaking in the Internet sector has a dominant market position, when investigating the undertaking for abuse of market dominance. SAMR also issued four sets of AML guidelines. These guidelines addressed leniency in horizontal monopoly agreements, undertakings’ commitments to resolve Anti-Monopoly cases, the application of AML to the automobile industry, and the application of the AML to intellectual property rights. In February 2021, SAMR published (after public comment) the “Antitrust Guidelines for the Platform Economy.” The Guidelines address monopolistic behaviors of online platforms operating in China, most notably exclusionary agreements and abuses of a dominant market position. Contacts predicted the Guidelines would lead to an uptick in SAMR investigations of online platform behavior, particularly around M&A and variable interest entities.

Foreign companies have expressed concern that the government uses AML enforcement in support of China’s industrial policies, such as promoting national champions, particularly for companies operating in strategic sectors.  The AML explicitly protects the lawful operations of government monopolies in industries that affect the national economy or national security.  U.S. companies have expressed concerns that in SAMR’s consultations with other Chinese agencies when reviewing M&A transactions, those agencies raise concerns not related to antitrust enforcement in order to block, delay, or force transacting parties to comply with preconditions, including technology transfer, in order to receive approval.

Expropriation and Compensation

Chinese law prohibits nationalization of FIEs, except under vaguely specified “special circumstances” where there is a national security or public interest need. Chinese law requires fair compensation for an expropriated foreign investment but does not detail the method used to assess the value of the investment.  The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.

Dispute Settlement

ICSID Convention and New York Convention

China is a contracting state to the Convention on the Settlement of Investment Disputes (ICSID Convention) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).  Chinese legislation that provides for enforcement of foreign arbitral awards related to these two Conventions includes the Arbitration Law, the Civil Procedure Law, and other laws with similar provisions that have embraced many of the fundamental principles of the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration.

Investor-State Dispute Settlement (ISDS)

Initially, China was disinclined to accept ISDS as a method to resolve investment disputes based on its suspicions of international law and arbitration, as well as its emphasis on state sovereignty. China’s early BITs, such as the 1982 China–Sweden BIT, only included state–state dispute settlement. As China has become a capital exporter under its initiative of “Going Global” and infrastructure investments under BRI, its views on ISDS have shifted to allow foreign investors with unobstructed access to international arbitration to resolve any investment dispute that cannot be amicably settled within six months. Chinese investors did not use ISDS mechanisms until 2007, and the first known ISDS case against China was initiated in 2011 by Malaysian investors. China submitted a proposal on ISDS reform to the United Nations Commission on International Trade Law (UNCITRAL) Working Group III in 2019. Under the proposal, China reaffirmed its commitment to ISDS as an important mechanism for resolving investor-state disputes under public international law. However, it suggested various pathways for ISDS reform, including supporting the study of a permanent appellate body.

International Commercial Arbitration and Foreign Courts

Chinese officials typically urge private parties to resolve commercial disputes through informal mediation.  If formal mediation is necessary, Chinese parties and the authorities typically prefer arbitration to litigation.  Many contract disputes require arbitration by the Beijing-based China International Economic and Trade Arbitration Commission (CIETAC).  Established by the State Council in 1956 under the auspices of the China Council for the Promotion of International Trade (CCPIT), CIETAC is China’s most widely utilized arbitral body for foreign-related disputes.  Some foreign parties have obtained favorable rulings from CIETAC, while others have questioned CIETAC’s fairness and effectiveness.  Besides CIETAC, there are also provincial and municipal arbitration commissions.  A foreign party may also seek arbitration in some instances from an offshore commission.  Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies.  In these instances, foreign investors may appeal to higher courts.  The Chinese government and judicial bodies do not maintain a public record of investment disputes.  The SPC maintains an annual count of the number of cases involving foreigners but does not provide details about the cases.

In 2018, the SPC established the China International Commercial Court (CICC) to adjudicate international commercial cases, especially cases related to BRI. The CICC has established three locations in Shenzhen, Xi’an, and Suzhou. As of June 2020, the courts have accepted a total of 213 international commercial cases, with most cases filed in Suzhou. Despite its international orientation, CIIC’s 16 judges are all PRC citizens and Mandarin Chinese is the court’s working language. Parties to a dispute before the CICC can only be represented by Chinese law-qualified lawyers, as foreign lawyers do not have a right of audience in Chinese courts; and unlike other international courts, foreign judges are not permitted to be part of the proceedings. Judgments of the CICC, given it is a part of the SPC, cannot be appealed from, but are subject to possible “retrial” under the Civil Procedure Law.

China has bilateral agreements with 27 countries on the recognition and enforcement of foreign court judgments, but not with the United States. Under Chinese law, local courts must prioritize the Party’s needs, China’s laws and other regulatory measures above foreign court judgments.

Bankruptcy Regulations

China introduced formal bankruptcy laws in 2007, under the Enterprise Bankruptcy Law (EBL), which applies to all companies incorporated under Chinese laws and subject to Chinese regulations.  After a decade of heavy borrowing, China’s growth has slowed and forced the government to make needed bankruptcy reforms. China now has more than 90 U.S.-style specialized bankruptcy courts. In 2020 the government added new courts in Nanjing, Suzhou, Jinan, Qingdao and Xiamen.  Court-appointed administrators – law firms and accounting firms that help verify claims, organize creditors’ meetings, list, and sell assets online – look to handle more cases and process them faster.  China’s SPC recorded over 19,000 liquidation and bankruptcy cases in 2019, double the number of cases in 2017.  National data is unavailable for 2020, but local courts have released some information that suggest an over 40 percent increase in liquidation and bankruptcy cases in cities such as Shanghai and Shandong. While Chinese authorities are taking steps to address mounting corporate debt and are gradually allowing some companies to fail, companies generally avoid pursing bankruptcy because of the potential for local government interference and fear of losing control over the bankruptcy outcome. According to experts, Chinese courts not only lack the resources and capacity to handle bankruptcy cases, but bankruptcy administrators, clerks, and judges lack relevant experience.

In May 2020, China released the Civil Code, one of the most important set of contract and property rights rules that will have a direct impact to upcoming amendments to China’s bankruptcy laws, especially the EBL. The National People’s Congress (NPC) has listed amendments to the EBL as the top work priority for 2021. In August 2020, Shenzhen released the Personal Bankruptcy Regulations of Shenzhen Special Economic Zone, to take effect on March 1, 2021. This is China’s first regulation on personal bankruptcy.

Investment Incentives

To attract foreign investment, different provinces and municipalities offer preferential packages like a temporary reduction in taxes, import/export duties, land use, research and development subsidies, and funding for initial startups.  Often, these packages stipulate that foreign investors must meet certain benchmarks for exports, local content, technology transfer, and other requirements.  However, many economic sectors that China deems sensitive due to broadly defined national or economic security concerns remain closed to foreign investment.

Foreign Trade Zones/Free Ports/Trade Facilitation

In 2013, the State Council announced the Shanghai pilot FTZ to provide open and high-standard trade and investment services to foreign companies. China gradually scaled up its FTZ pilot program to a total of 20 FTZs and one Free Trade Port.  China’s FTZs are in: Shanghai, Tianjin, Guangdong, Fujian, Chongqing, Hainan, Henan, Hubei, Liaoning, Shaanxi, Sichuan, Zhejiang, Jiangsu, Shandong, Hebei, Heilongjiang, Guangxi, Yunnan provinces, Beijing, Shanghai FTZ Lingang Special Area and Hainan Free Trade Port.  The goal of China’s FTZs/FTP is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects to eventually introduce in other parts of the domestic economy. The FTZs promise foreign investors “national treatment” investment in industries and sectors not listed on China’s negative lists.  However, the 2020 FTZ negative list lacked substantive changes, and many foreign firms report that in practice, the degree of liberalization in FTZs is comparable to opportunities in other parts of China.

As part of China’s WTO accession agreement, the PRC government promised to revise its foreign investment laws to eliminate sections that imposed on foreign investors requirements for export performance, local content, balanced foreign exchange through trade, technology transfer, and research and development as a prerequisite to enter China’s market.  In practice, China has not completely lived up to these promises.  Some U.S. businesses report that local officials and regulators sometimes only accept investments with “voluntary” performance requirements or technology transfer that help develop certain domestic industries and support the local job market.

Moreover, China’s evolving cybersecurity and personal data protection regime includes onerous restrictions on firms that generate or process data in China, such as requirements for certain firms to store data in China.  Restrictions exist on the transfer of certain personal information of Chinese citizens outside of China. These restrictions have prompted many firms to review how their networks manage, store, and process data, in some cases necessitating changes to business models and reduplicative infrastructure.

Real Property

The Chinese state owns all urban land, and only the state can issue long-term land leases to individuals and companies, including foreigners, subject to many restrictions.  Chinese property law stipulates that residential property rights renew automatically, while commercial and industrial grants renew if it does not conflict with other public interest claims. Several foreign investors have reported revocation of land use rights so that Chinese developers could pursue government-designated building projects.  Investors often complain about insufficient compensation in these cases.  In rural China, the registration system suffers from unclear ownership lines and disputed border claims, often at the expense of local farmers whom village leaders exclude in favor of “handshake deals” with commercial interests.  China’s Securities Law defines debtor and guarantor rights, including rights to mortgage certain types of property and other tangible assets, including long-term leases.  Chinese law does not prohibit foreigners from buying non-performing debt, but it must be acquired through state-owned asset management firms, and it is difficult to liquidate.

Intellectual Property Rights

China remained on the USTR Special 301 Report Priority Watch List in 2020 and was subject to continued Section 306 monitoring. Multiple Chinese physical and online markets were included in the 2020 USTR Review of Notorious Markets for Counterfeiting and Piracy. Of note, in 2020, China did take significant steps toward addressing long-standing U.S. concerns on a wide range of IP issues, from patents, to trademarks, to copyrights and trade secrets. The reforms addressed the granting and protection of IP rights as well as their enforcement, and included changes made in support of the Phase One Trade Agreement. In April 2020, China National Intellectual Property Administration (CNIPA) issued the 2020-2021 Plan for Implementing the Opinions on Strengthening IP Protection which contained 133 specific “steps” that CNIPA and other Chinese government entities intended to take in 2020 and 2021 – to strengthen IP protection and implement China’s IP-related commitments under Phase One. The 2020-2021 Implementing Plan, together with the work plans of the SPC’s and IP-related administrative organs, portended a year of aggressive IP reforms in China. The Chinese legislative, administrative, and judicial organs issued over 60 new and amended measures related to IP protection and enforcement, in both draft and final form, including amendments to core IP laws, such as the Copyright Law, the Patent Law, and the Criminal Law. Updates also included administrative measures addressing trademark and patent protection and enforcement, as well as enforcement of copyright and trade secrets.

Despite these reforms, IP rights remain subject to Chinese government policy objectives, which appear to have intensified in 2020. For U.S. companies in China, infringement remained both rampant and a low-risk “business strategy” for bad-faith actors. Further enforcement and regulatory authorities continue to signal to U.S. rights holders that application of China’s IP system remains subject to the discretion of the PRC government and its policy goals. High-level remarks by PRC leader Xi Jinping and senior leaders signaled China’s commitment to cracking down on IP infringement in the years ahead. However, they also reflected China’s vision of the IP system as an important tool for eliminating foreign ownership of critical technology and ensuring national security. While on paper China’s IP protection and enforcement mechanisms have inched closer to near parity with other foreign markets, in practice, fair, transparent, and non-discriminatory treatment will very likely continue to be denied to U.S. rights holders whose IP ownership and exploitation impede PRC industrial policy goals.

For detailed information on China’s environment for IPR protection and enforcement, please see the following reports:

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly developed, and multi-tiered capital market.  Since their founding over three decades ago, the Shanghai and Shenzhen Exchanges, combined, are ranked the third largest stock market in the world with over USD11 trillion in assets, according to statistics from World Federation of Exchanges.  China’s bond market has similarly expanded significantly to become the second largest worldwide, totaling approximately USD17 trillion.  In 2020, China fulfilled its promises to open certain financial sectors such as securities, asset management, and life insurance. Direct investment by private equity and venture capital firms has increased but has also faced setbacks due to China’s capital controls, which obfuscate the repatriation of returns. As of 2020, 54 sovereign entities and private sector firms, including BMW and Xiaomi Corporation, have since issued roughly USD41 billion in “Panda Bonds,” Chinese renminbi (RMB)-denominated debt issued by foreign entities in China.  China’s private sector can also access credit via bank loans, bond issuance, trust products, and wealth management. However, the vast majority of bank credit is disbursed to state-owned firms, largely due to distortions in China’s banking sector that have incentivized lending to state-affiliated entities over their private sector counterparts.  China has been an IMF Article VIII member since 1996 and generally refrains from restrictions on payments and transfers for current international transactions.  However, the government has used administrative and preferential policies to encourage credit allocation towards national priorities, such as infrastructure investments.

Money and Banking System

China’s monetary policy is run by the People’s Bank of China (PBOC), China’s central bank.  The PBOC has traditionally deployed various policy tools, such as open market operations, reserve requirement ratios, benchmark rates and medium-term lending facilities, to control credit growth.  The PBOC had previously also set quotas on how much banks could lend but ended the practice in 1998.  As part of its efforts to shift towards a more market-based system, the PBOC announced in 2019 that it will reform its one-year loan prime rate (LPR), which would serve as an anchor reference for other loans.  The one-year LPR is based on the interest rate that 18 banks offer to their best customers and serves as the benchmark for rates provided for other loans.  In 2020, the PBOC requested financial institutions to shift towards use of the one-year LPR for their outstanding floating-rate loan contracts from March to August. Despite these measures to move towards more market-based lending, China’s financial regulators still influence the volume and destination of Chinese bank loans through “window guidance” – unofficial directives delivered verbally – as well as through mandated lending targets for key economic groups, such as small and medium sized enterprises. In 2020, the China Banking and Insurance Regulatory Commission (CBIRC) also began issuing laws to regulate online lending by banks including internet companies such as Ant Financial and Tencent, which had previously not been subject to banking regulations.

The CBIRC oversees China’s 4,607 lending institutions, about USD49 trillion in total assets.  China’s “Big Five” – Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, and Industrial and Commercial Bank of China – dominate the sector and are largely stable, but over the past year, China has experienced regional pockets of banking stress, especially among smaller lenders.  Reflecting the level of weakness among these banks, in November 2020, the PBOC announced in “China Financial Stability Report 2020” that 12.4 percent of the 4400 banking financial institutions received a “fail” rating (high risk) following an industry-wide review in 2019.  The assessment deemed 378 firms, all small and medium sized rural financial institutions, “extremely risky.”  The official rate of non-performing loans among China’s banks is relatively low: 1.92 percent as of the end of 2020.  However, analysts believed the actual figure may be significantly higher.  Bank loans continue to provide the majority of credit options (reportedly around 60.2 percent in 2020) for Chinese companies, although other sources of capital, such as corporate bonds, equity financing, and private equity are quickly expanding in scope, reach, and sophistication in China.

As part of a broad campaign to reduce debt and financial risk, Chinese regulators have implemented measures to rein in the rapid growth of China’s “shadow banking” sector, which includes wealth management and trust products.  These measures have achieved positive results. In December 2020, CBIRC published the first “Shadow Banking Report,” and claimed that the size of China’s shadow banking had shrunk sharply since 2017 when China started tightening the sector. By the end of 2019, the size of China’s shadow banking by broad measurement dropped to 84.8 trillion yuan from the peak of 100.4 trillion yuan in early 2017. Shadow banking to GDP ratio had also dropped to 86 percent at the end of 2019, yet the report did not provide statistics beyond 2019. Foreign owned banks can now establish wholly-owned banks and branches in China, however, onerous licensing requirements and an industry dominated by local players, have limited foreign banks market penetration. Foreigners are eligible to open a bank account in China but are required to present a passport and/or Chinese government issued identification.

Foreign Exchange and Remittances

Foreign Exchange

While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported challenges and delays in obtaining approvals for foreign currency transactions by sub-national regulatory branches. Chinese authorities instituted strict capital control measures in 2016, when China recorded a surge in capital flight.  China has since announced that it would gradually reduce those controls, but market analysts expect they would be re-imposed if capital outflows accelerate again. Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately USD50,000 each year and restrict them from directly transferring RMB abroad without prior approval from the State Administration of Foreign Exchange (SAFE).  SAFE has not reduced the USD50,000 quota, but during periods of higher-than-normal capital outflows, banks are reportedly instructed by SAFE to increase scrutiny over individuals’ requests for foreign currency and to require additional paperwork clarifying the intended use of the funds, with the intent of slowing capital outflows. China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning.

Remittance Policies

According to China’s FIL, as of January 1, 2020, funds associated with any forms of investment, including profits, capital gains, returns from asset disposal, IPR loyalties, compensation, and liquidation proceeds, may be freely converted into any world currency for remittance. Based on the “2020 Guidance for Foreign Exchange Business under the Current Account” released by SAFE in August, firms do not need any supportive documents or proof that it is under USD50,000. For remittances over USD50,000, firms need to submit supportive documents and taxation records.  Under Chinese law, FIEs do not need pre-approval to open foreign exchange accounts and are allowed to retain income as foreign exchange or convert it into RMB without quota requirements. The remittance of profits and dividends by FIEs is not subject to time limitations, but FIEs need to submit a series of documents to designated banks for review and approval.  The review period is not fixed and is frequently completed within one or two working days of the submission of complete documents.  For remittance of interest and principal on private foreign debt, firms must submit an application, a foreign debt agreement, and the notice on repayment of the principal and interest.  Banks will then check if the repayment volume is within the repayable principal.  There are no specific rules on the remittance of royalties and management fees. Based on guidance for remittance of royalties and management fees, firms shall submit relevant contracts and invoice.  In October 2020, SAFE cut the reserve requirement for foreign currency transactions from 20 percent to zero, reducing the cost of foreign currency transactions as well as easing Renminbi appreciation pressure.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC), which was launched in 2007 to help diversify China’s foreign exchange reserves. CIC is ranked the second largest SWF by total assets by Sovereign Wealth Fund Institute (SWFI). With USD200 billion in initial registered capital, CIC manages over USD1.04 trillion in assets as of 2020 and invests on a 10-year time horizon.  CIC has since evolved into three subsidiaries:

• CIC International was established in September 2011 with a mandate to invest in and manage overseas assets.  It conducts public market equity and bond investments, hedge fund, real estate, private equity, and minority investments as a financial investor.
• CIC Capital was incorporated in January 2015 with a mandate to specialize in making direct investments to enhance CIC’s investments in long-term assets.
• Central Huijin makes equity investments in Chinese state-owned financial institutions.

China also operates other funds that function in part like sovereign wealth funds, including: China’s National Social Security Fund, with an estimated USD372 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated USD10 billion in assets; the SAFE Investment Company, with an estimated USD417.8 billion in assets; and China’s state-owned Silk Road Fund, established in December 2014 with USD40 billion in assets to foster investment in BRI partner countries.  Chinese state-run funds do not report the percentage of their assets that are invested domestically.  However, Chinese state-run funds follow the voluntary code of good practices known as the Santiago Principles and participate in the IMF-hosted International Working Group on SWFs. While CIC affirms that they do not have any formal government guidance to invest funds consistent with industrial policies or designated projects, CIC is still expected to pursue government objectives.

China has approximately 150,000 wholly-owned SOEs, of which 50,000 are owned by the central government, and the remainder by local or provincial governments.  SOEs, both central and local, account for 30 to 40 percent of total gross domestic product (GDP) and about 20 percent of China’s total employment.  Non-financial SOE assets totaled roughly USD30 trillion.  SOEs can be found in all sectors of the economy, from tourism to heavy industries.  State funds are spread throughout the economy and the state may also be the majority or controlling shareholder in an ostensibly private enterprise.  China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.” SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals.  SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt.  A comprehensive, published list of all Chinese SOEs does not exist.

PRC officials have indicated China intends to utilize OECD guidelines to improve the SOEs independence and professionalism, including relying on Boards of Directors that are free from political influence.  Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers who have produced mixed results.  However, analysts believe minor reforms will be ineffective if SOE administration and government policy remain intertwined, and Chinese officials make minimal progress in primarily changing the regulation and business conduct of SOEs.  SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy.  Among central SOEs managed by the State-owned Assets Supervision and Administration Commission (SASAC), senior management positions are mainly filled by senior party members who report directly to the CCP, and double as the company’s party secretary.  SOE executives often outrank regulators in the CCP rank structure, which minimizes the effectiveness of regulators in implementing reforms.  The lack of management independence and the controlling ownership interest of the state make SOEs de facto arms of the government, subject to government direction and interference.  SOEs are rarely the defendant in legal disputes, and when they are, they almost always prevail.  U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs.

Privatization Program

Since 2013, the PRC government has periodically announced reforms to SOEs that included selling SOE shares to outside investors or a mixed ownership model, in which private companies invest in SOEs and outside managers are hired.  The government has tried these approaches to improve SOE management structures, emphasize the use of financial benchmarks, and gradually infuse private capital into some sectors traditionally monopolized by SOEs like energy, finance, and telecommunications.  In practice, however, reforms have been gradual, as the PRC government has struggled to implement its SOE reform vision and often preferred to utilize a SOE consolidation approach.  Recently, Xi and other senior leaders have increasingly focused reform efforts on strengthening the role of the state as an investor or owner of capital, instead of the old SOE model in which the state was more directly involved in managing operations.

Additional Resources

Department of State

Department of Labor

Since 2016, China established an RBC platform but general awareness of RBC standards (including environmental, social, and governance issues) is a relatively new concept, especially for companies that exclusively operate in China’s domestic market.  Chinese laws that regulate business conduct use voluntary compliance, are often limited in scope, and are frequently cast aside when other economic priorities supersede RBC priorities.  In addition, China lacks mature and independent non-governmental organizations (NGOs), investment funds, independent worker unions, and other business associations that promote RBC, further contributing to the general lack of awareness.  The Foreign NGO Law remains a concern for U.S. organizations, including those looking to promote RBC and corporate social responsibility (CSR) best practices, due to restrictions the Law places on their operations in China.  For U.S. investors looking to partner with a Chinese firm or expand operations, finding partners that meet internationally recognized standards in areas like labor rights, environmental protection, and manufacturing best practices can be a significant challenge.  However, the Chinese government has placed greater emphasis on protecting the environment and elevating sustainability as a key priority, resulting in more Chinese companies adding environmental concerns to their CSR initiatives.  As part of these efforts, Chinese ministries have signed several memoranda of understanding with international organizations such as the OECD to cooperate on RBC initiatives.

Since 2012, China has undergone a large-scale anti-corruption campaign, with investigations reaching into all sectors of the government, military, and economy.  CCP General Secretary Xi labeled endemic corruption an “existential threat” to the very survival of the Party.  In 2018, the CCP restructured its Central Commission for Discipline Inspection (CCDI) to become a state organ, calling the new body the National Supervisory Commission-Central Commission for Discipline Inspection (NSC-CCDI). The NSC-CCDI wields the power to investigate any public official.  From 2012 to 2020, the NSC-CCDI claimed it investigated 3.4 million cases. In 2020, the NSC-CCDI investigated 618,000 cases and disciplined 522,000 individuals, of whom 41 were at or above the provincial or ministerial level. Since 2014, the PRC’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 8,350 fugitives suspected of corruption who were living in other countries, including over 2,200 CCP members and government employees. In most cases, the PRC did not notify host countries of these operations.  In 2020, the government reported apprehending 1,421 alleged fugitives and recovering approximately USD457 million through this program.

In June 2020 the CCP passed a law on Administrative Discipline for Public Officials, continuing their effort to strengthen supervision over individuals working in the public sector. The law further enumerates targeted illicit activities such as bribery and misuse of public funds or assets for personal gain. The CCP also issued Amendment 11 to the Criminal Law, which increased the maximum punishment for acts of corruption committed by private entities to life imprisonment, from the previous maximum of 15-year imprisonment. Anecdotal information suggests the PRC’s anti-corruption crackdown is inconsistently and discretionarily applied, raising concerns among foreign companies in China.  For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, the PRC’s health authority issued “blacklists” of firms and agents involved in commercial bribery, including several foreign companies. While central government leadership has welcomed increased public participation in reporting suspected corruption at lower levels, direct criticism of central government leadership or policies remains off-limits and is seen as an existential threat to China’s political and social stability.  China ratified the United Nations Convention against Corruption in 2005 and participates in the Asia-Pacific Economic Cooperation (APEC) and OECD anti-corruption initiatives. China has not signed the OECD Convention on Combating Bribery, although Chinese officials have expressed interest in participating in the OECD Working Group on Bribery meetings as an observer.

Resources to Report Corruption

The following government organization receives public reports of corruption:   Anti-Corruption Reporting Center of the CCP Central Commission for Discipline Inspection and the Ministry of Supervision, Telephone Number:  +86 10 12388.   10. Political and Security Environment

Foreign companies operating in China face a low risk of political violence.  However, the ongoing PRC crackdown on virtually all opposition voices in Hong Kong and continued attempts by PRC organs to intimidate Hong Kong’s judges threatens the judicial independence of Hong Kong’s courts – a fundamental pillar for Hong Kong’s status as an international hub for investment into and out of China.  The CCP also punished companies that expressed support for Hong Kong protesters – most notably, a Chinese boycott of the U.S. National Basketball Association after one team’s general manager expressed his personal view supporting Hong Kong protesters. Apart from Hong Kong, the PRC government has also previously encouraged protests or boycotts of products from countries like the United States, South Korea, Japan, Norway, Canada, and the Philippines, in retaliation for unrelated policy decisions such as the boycott campaigns against Korean retailer Lotte in 2016 and 2017 in response to the South Korean government’s decision to deploy the Terminal High Altitude Area Defense (THAAD); and the PRC’s retaliation against Canadian companies and citizens for Canada’s arrest of Huawei’s Chief Financial Officer Meng Wanzhou. PRC authorities also have broad authority to prohibit travelers from leaving China and have imposed “exit bans” to compel U.S. citizens to resolve business disputes, force settlement of court orders, or facilitate PRC investigations. U.S. citizens, including children, not directly involved in legal proceedings or wrongdoing have also been subject to lengthy exit bans in order to compel family members or colleagues to cooperate with Chinese courts or investigations. Exit bans are often issued without notification to the foreign citizen or without clear legal recourse to appeal the exit ban decision.     11. Labor Policies and Practices

For U.S. companies operating in China, finding, developing, and retaining domestic talent at the management and skilled technical staff levels remain challenging for foreign firms, especially as labor costs, including salaries and inputs continue to rise. Foreign companies also complain of difficulty navigating China’s labor and social insurance laws, including local implementation guidelines. Compounding the complexity, due to ineffective enforcement of labor laws, Chinese domestic employers often hire local employees without contracts, putting foreign firms at a disadvantage.  Without written contracts, workers struggle to prove employment, thus losing basic protections such as severance if terminated.  The All-China Federation of Trade Unions (ACFTU) is the only union recognized under PRC law.  Establishing independent trade unions is illegal.  The law allows for “collective bargaining,” but in practice, focuses solely on collective wage negotiations.  The Trade Union Law gives the ACFTU, a CCP organ chaired by a member of the Politburo, control over all union organizations and activities, including enterprise-level unions.  ACFTU enterprise unions require employers to pay mandatory fees, often through the local tax bureau, equaling a negotiated minimum of 0.5 percent to a standard two percent of total payroll.  While labor laws do not protect the right to strike, “spontaneous” worker protests and work stoppages occur.  Official forums for mediation, arbitration, and other similar mechanisms of alternative dispute resolution often are ineffective in resolving labor disputes.  Even when an arbitration award or legal judgment is obtained, getting local authorities to enforce judgments is problematic.

The PRC has not ratified the International Labor Organization conventions on freedom of association, collective bargaining, or forced labor, but it has ratified conventions prohibiting child labor and employment discrimination. Uyghurs and members of other minority groups are subjected to forced labor in Xinjiang and throughout China via PRC government-facilitated labor transfer programs. In 2020, the U.S. government took additional actions to prevent the importation of products produced by forced labor into the United States, including by issuing a Xinjiang supply chain business advisory that outlined the legal, economic, and reputational risks of forced labor exposure in China-based supply chains. The U.S. Customs and Border Protection bureau issued multiple Withhold Release Orders  barring importation into the United States of products produced in Xinjiang, which were determined to be produced with prison or forced labor in violation of U.S. import laws.  The Commerce Department added Chinese commercial and government entities to its Entity List for their complicity in human rights abuses and the Department of Treasury sanctioned the Xinjiang Production and Construction Corps to hold human rights abusers accountable in Xinjiang. Some PRC firms continued to employ North Korean workers in violation of UN Security Council sanctions.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

* Source for Host Country Data:

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

U.S.  Embassy Beijing Economic Section

55 Anjialou Road, Chaoyang District, Beijing, P.R.  China  +86 10 8531 3000

+86 10 8531 3000

Policies Towards Foreign Direct Investment

Hong Kong is the world’s second-largest recipient of foreign direct investment (FDI), according to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2020, with a significant amount bound for mainland China.  The HKG’s InvestHK encourages inward investment, offering free advice and services to support companies from the planning stage through to the launch and expansion of their business.  U.S. and other foreign firms can participate in government financed and subsidized research and development programs on a national treatment basis.  Hong Kong does not discriminate against foreign investors by prohibiting, limiting, or conditioning foreign investment in a sector of the economy.

Capital gains are not taxed, nor are there withholding taxes on dividends and royalties.  Profits can be freely converted and remitted.  Foreign-owned and Hong Kong-owned company profits are taxed at the same rate – 16.5 percent.  The tax rate on the first USD 255,000 profit for all companies is currently 8.25 percent.  No preferential or discriminatory export and import policies affect foreign investors.  Domestic industries receive no direct subsidies.  Foreign investments face no disincentives, such as quotas, bonds, deposits, or other similar regulations.

According to HKG statistics, 3,983 overseas companies had regional operations registered in Hong Kong in 2020.  The United States has the largest number with 690.  Hong Kong is working to attract more start-ups as it works to develop its technology sector, and about 26 percent of start-ups in Hong Kong come from overseas.

Hong Kong’s Business Facilitation Advisory Committee is a platform for the HKG to consult the private sector on regulatory proposals and implementation of new or proposed regulations.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investors can invest in any business and own up to 100 percent of equity.  Like domestic private entities, foreign investors have the right to engage in all forms of remunerative activity.

The HKG owns virtually all land in Hong Kong, which the HKG administers by granting long-term leases without transferring title.  Foreign residents claim that a 15 percent Buyer’s Stamp Duty on all non-permanent-resident and corporate buyers discriminates against them.

The main exceptions to the HKG’s open foreign investment policy are:

Broadcasting – Voting control of free-to-air television stations by non-residents is limited to 49 percent.  There are also residency requirements for the directors of broadcasting companies.

Legal Services – Foreign lawyers at foreign law firms may only practice the law of their jurisdiction.  Foreign law firms may become “local” firms after satisfying certain residency and other requirements.  Localized firms may thereafter hire local attorneys but must do so on a 1:1 basis with foreign lawyers.  Foreign law firms can also form associations with local law firms.

Other Investment Policy Reviews

Hong Kong last conducted the Trade Policy Review in 2018 through the World Trade Organization (WTO).  https://www.wto.org/english/tratop_e/tpr_e/g380_e.pdf

Business Facilitation

The Efficiency Office under the Innovation and Technology Bureau is responsible for business facilitation initiatives aimed at improving the business regulatory environment of Hong Kong.

The e-Registry (https://www.eregistry.gov.hk/icris-ext/apps/por01a/index) is a convenient and integrated online platform provided by the Companies Registry and the Inland Revenue Department for applying for company incorporation and business registration.  Applicants, for incorporation of local companies or for registration of non-Hong Kong companies, must first register for a free user account, presenting an original identification document or a certified true copy of the identification document.  The Companies Registry normally issues the Business Registration Certificate and the Certificate of Incorporation on the same day for applications for company incorporation.  For applications for registration of a non-Hong Kong company, it issues the Business Registration Certificate and the Certificate of Registration two weeks after submission.

Outward Investment

As a free market economy, Hong Kong does not promote or incentivize outward investment, nor restrict domestic investors from investing abroad.  Mainland China and British Virgin Islands were the top two destinations for Hong Kong’s outward investments in 2019 (based on most recent data available).

Hong Kong has bilateral investment agreements with Australia, Austria, the Belgium-Luxembourg Economic Union, Canada, Chile, Denmark, Finland, France, Germany, Italy, Japan, South Korea, Kuwait, the Netherlands, New Zealand, Sweden, Switzerland, Thailand, the United Arab Emirates, the United Kingdom, and the Association of Southeast Asian Nations (ASEAN).  It has concluded but not yet signed agreements with Bahrain, Myanmar, and Maldives.  Hong Kong has also signed an investment agreement with Mexico, but it is not yet in force.  The HKG is currently negotiating agreements with Iran, Turkey, and Russia.  All such agreements are based on a model text approved by mainland China through the Sino-British Joint Liaison Group.  U.S. firms are generally not at a competitive or legal disadvantage.

Hong Kong has a free trade agreement (FTA) with mainland China, the Closer Economic Partnership Arrangement (CEPA), which provides tariff-free export to mainland China of Hong Kong-origin goods and preferential access for specific services.  CEPA has gradually expanded since its signing in 2003.  Under the CEPA framework, Hong Kong enjoys liberalized trade in services using a “negative list” covering 134 service sectors for Hong Kong and grants national treatment to Hong Kong’s 62 service industries.  Hong Kong also enjoys most-favored nation treatment, with liberalization measures included in FTAs signed by mainland China and other countries automatically extended to Hong Kong.  Hong Kong and mainland China have also signed an investment agreement and an economic and technical cooperation agreement.  The investment agreement includes provision of national treatment and non-services investment using a negative list approach.

Hong Kong also has FTAs with New Zealand, member states of the European Free Trade Association, Chile, Macau, ASEAN, Georgia, the Maldives, and Australia.  These agreements are consistent with the provisions of the WTO.  Hong Kong is exploring FTAs with the Pacific Alliance (Chile, Colombia, Mexico, and Peru) and the United Kingdom.  Hong Kong is keenly interested in joining the Regional Comprehensive Economic Partnership.

The United States does not have a bilateral treaty on the avoidance of double taxation with Hong Kong, but has a Tax Information Exchange Agreement and an Inter-Government Agreement on the Foreign Account Tax Compliance Act with Hong Kong.  As of April 2020, the HKG had Comprehensive Avoidance of Double Taxation Agreements (CDTAs) with 43 tax jurisdictions, and negotiations with 14 tax jurisdictions are underway.  The HKG targets to bring the total number of CDTAs to 50 by the end of 2022.  In September 2018, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters signed by mainland China entered into force for Hong Kong.  Effective January 2021, the number of reportable jurisdictions increased from 75 to 126.

Under the President’s Executive Order on Hong Kong Normalization, which directs the suspension or elimination of special and preferential treatment for Hong Kong, the United States notified the Hong Kong authorities in August 2020 of its suspension of the Reciprocal Tax Exemptions on Income Derived from the International Operation of Ships Agreement.

Transparency of the Regulatory System

Hong Kong’s regulations and policies typically strive to avoid distortions or impediments to the efficient mobilization and allocation of capital and to encourage competition.  Bureaucratic procedures and “red tape” are usually transparent and held to a minimum.

In amending or making any legislation, including investment laws, the HKG conducts a three-month public consultation on the issue concerned which then informs the drafting of the bill.  Lawmakers then discuss draft bills and vote.  Hong Kong’s legal, regulatory, and accounting systems are transparent and consistent with international norms.

Gazette is the official publication of the HKG.  This website https://www.gld.gov.hk/egazette/english/whatsnew/whatsnew.html is the centralized online location where laws, regulations, draft bills, notices, and tenders are published.  All public comments received by the HKG are published at the websites of relevant policy bureaus.

The Office of the Ombudsman, established in 1989 by the Ombudsman Ordinance, is Hong Kong’s independent watchdog of public governance.

Public finances are regulated by clear laws and regulations.  The Basic Law prescribes that authorities strive to achieve a fiscal balance and avoid deficits.  There is a clear commitment by the HKG to publish fiscal information under the Audit Ordinance and the Public Finance Ordinance, which prescribe deadlines for the publication of annual accounts and require the submission of annual spending estimates to the Legislative Council (LegCo).  There are few contingent liabilities of the HKG, with details of these items published about seven months after the release of the fiscal budget.  In addition, LegCo members have a responsibility to enhance budgetary transparency by urging government officials to explain the government’s rationale for the allocation of resources.  All LegCo meetings are open to the public so that the government’s responses are available to the general public.

On March 29, 2021, the Hong Kong Financial Services and Treasury Bureau submitted to Hong Kong’s Legislative Council plans to restrict the public from accessing certain information about executives in the Company Registry.  If passed, companies will be allowed immediately to withhold information on the residential addresses and identification numbers of directors and secretaries.  Corporate governance and financial experts warned that the proposal could enable fraud and further hurt the city’s status as a transparent financial hub.   Media organizations criticized the plan for undermining transparency and freedom of information.

International Regulatory Considerations

Hong Kong is an independent member of the WTO and Asia-Pacific Economic Co-operation (APEC), adopting international norms.  It notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade and was the first WTO member to ratify the Trade Facilitation Agreement (TFA).  Hong Kong has achieved a 100 percent rate of implementation commitments.

Legal System and Judicial Independence

Hong Kong’s common law system is based on the United Kingdom’s, and judges are appointed by the Chief Executive on the recommendation of the Judicial Officers Recommendation Commission.  Regulations or enforcement actions are appealable, and they are adjudicated in the court system.

Hong Kong’s commercial law covers a wide range of issues related to doing business.  Most of Hong Kong’s contract law is found in the reported decisions of the courts in Hong Kong and other common law jurisdictions.

The imposition of the NSL and pressure from the PRC authorities raised serious concerns about the longevity of Hong Kong’s judicial independence.  The NSL authorizes the mainland China judicial system, which lacks judicial independence and has a 99 percent conviction rate, to take over any national security-related case at the request of the Hong Kong government or the Office of Safeguarding National Security.  Under the NSL, the Hong Kong Chief Executive is required to establish a list of judges to handle all cases concerning national security-related offenses.  Although Hong Kong’s judiciary selects the specific judge(s) who will hear any individual case, some commentators argued that this unprecedented involvement of the Chief Executive weakens Hong Kong’s judicial independence.

Media outlets controlled by the PRC central government in both Hong Kong and mainland China repeatedly accused Hong Kong judges of bias following the acquittals of protesters accused of rioting and other crimes.  Some Hong Kong and PRC central government officials questioned the existence of the “separation of powers” in Hong Kong, including some statements that judicial independence is not enshrined in Hong Kong law and that judges should follow “guidance” from the government.

Laws and Regulations on Foreign Direct Investment

Hong Kong’s extensive body of commercial and company law generally follows that of the United Kingdom, including the common law and rules of equity.  Most statutory law is made locally.  The local court system, which is independent of the government, provides for effective enforcement of contracts, dispute settlement, and protection of rights.  Foreign and domestic companies register under the same rules and are subject to the same set of business regulations.

The Hong Kong Code on Takeovers and Mergers (1981) sets out general principles for acceptable standards of commercial behavior.

The Companies Ordinance (Chapter 622) applies to Hong Kong-incorporated companies and contains the statutory provisions governing compulsory acquisitions.  For companies incorporated in jurisdictions other than Hong Kong, relevant local company laws apply.  The Companies Ordinance requires companies to retain accurate and up to date information about significant controllers.

The Securities and Futures Ordinance (Chapter 571) contains provisions requiring shareholders to disclose interests in securities in listed companies and provides listed companies with the power to investigate ownership of interests in its shares.  It regulates the disclosure of inside information by listed companies and restricts insider dealing and other market misconduct.

Competition and Antitrust Laws

The independent Competition Commission (CC) investigates anti-competitive conduct that prevents, restricts, or distorts competition in Hong Kong.  In December 2020, the CC filed Hong Kong’s first abuse of substantial market power case in the Competition Tribunal against Linde HKO and its Germany-based parent company Linde GmbH for leveraging substantial market power in the production and supply of medical oxygen, medical nitrous oxide, Entonox, and medical air to maintain a stranglehold over the downstream maintenance market.

Expropriation and Compensation

The U.S. Consulate General is not aware of any expropriations in the recent past.  Expropriation of private property in Hong Kong may occur if it is clearly in the public interest and only for well-defined purposes such as implementation of public works projects.  Expropriations are to be conducted through negotiations, and in a non-discriminatory manner in accordance with established principles of international law.  Investors in and lenders to expropriated entities are to receive prompt, adequate, and effective compensation.  If agreement cannot be reached on the amount payable, either party can refer the claim to the Land Tribunal.

Dispute Settlement

ICSID Convention and New York Convention

The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) apply to Hong Kong.  Hong Kong’s Arbitration Ordinance provides for enforcement of awards under the 1958 New York Convention.

Investor-State Dispute Settlement

The U.S. Consulate General is not aware of any investor-state disputes in recent years involving U.S. or other foreign investors or contractors and the HKG.  Private investment disputes are normally handled in the courts or via private mediation.  Alternatively, disputes may be referred to the Hong Kong International Arbitration Center.

International Commercial Arbitration and Foreign Courts

The HKG accepts international arbitration of investment disputes between itself and investors and has adopted the United Nations Commission on International Trade Law model law for domestic and international commercial arbitration.  It has a Memorandum of Understanding with mainland China modelled on the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) for reciprocal enforcement of arbitral awards.

Under Hong Kong’s Arbitration Ordinance emergency relief granted by an emergency arbitrator before the establishment of an arbitral tribunal, whether inside or outside Hong Kong, is enforceable.  The Arbitration Ordinance stipulates that all disputes over intellectual property rights may be resolved by arbitration.

The Mediation Ordinance details the rights and obligations of participants in mediation, especially related to confidentiality and admissibility of mediation communications in evidence.

Third party funding for arbitration and mediation came into force on February 1, 2019.

Foreign judgments in civil and commercial matters may be enforced in Hong Kong by common law or under the Foreign Judgments (Reciprocal Enforcement) Ordinance, which facilitates reciprocal recognition and enforcement of judgments based on reciprocity.  A judgment originating from a jurisdiction that does not recognize a Hong Kong judgment may still be recognized and enforced by the Hong Kong courts, provided that all the relevant requirements of common law are met.  However, a judgment will not be enforced in Hong Kong if it can be shown that either the judgment or its enforcement is contrary to Hong Kong’s public policy.

In January 2019, Hong Kong and mainland China signed a new Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the mainland and of Hong Kong to facilitate enforcement of judgments in the two jurisdictions.  The arrangement, which as of February 2021 is still pending implementing legislation, will cover the following key features: contractual and tortious disputes in general; commercial contracts, joint venture disputes, and outsourcing contracts; intellectual property rights, matrimonial or family matters; and judgments related to civil damages awarded in criminal cases.

Bankruptcy Regulations

Hong Kong’s Bankruptcy Ordinance provides the legal framework to enable i) a creditor to file a bankruptcy petition with the court against an individual, firm, or partner of a firm who owes him/her money; and ii) a debtor who is unable to repay his/her debts to file a bankruptcy petition against himself/herself with the court.  Bankruptcy offenses are subject to criminal liability.

The Companies (Winding Up and Miscellaneous Provisions) Ordinance aims to improve and modernize the corporate winding-up regime by increasing creditor protection and further enhancing the integrity of the winding-up process.

The Commercial Credit Reference Agency collates information about the indebtedness and credit history of SMEs and makes such information available to members of the Hong Kong Association of Banks and the Hong Kong Association of Deposit Taking Companies.

Hong Kong’s average duration of bankruptcy proceedings is just under ten months, ranking 45th in the world for resolving insolvency, according to the World Bank’s Doing Business 2020 rankings.

Investment Incentives

Hong Kong imposes no export performance or local content requirements as a condition for establishing, maintaining, or expanding a foreign investment.  There are no requirements that Hong Kong residents own shares, that foreign equity is reduced over time, or that technology is transferred on certain terms.  The HKG does not have a practice of issuing guarantees or jointly financing foreign direct investment projects.

The HKG allows a deduction on interest paid to overseas-associated corporations and provides an 8.25 percent concessionary tax rate derived by a qualifying corporate treasury center.

The HKG offers an effective tax rate of around three to four percent to attract aircraft leasing companies to develop business in Hong Kong.

The HKG has set up multiple programs to assist enterprises in securing trade finance and business capital, expanding markets, and enhancing overall competitiveness.  These support measures are available to any enterprise in Hong Kong, irrespective of origin.

Hong Kong-registered companies with a significant proportion of their research, design, development, production, management, or general business activities located in Hong Kong are eligible to apply to the Innovation and Technology Fund (ITF), which provides financial support for research and development (R&D) activities in Hong Kong.  Hong Kong Science & Technology Parks (Science Park) and Cyberport are HKG-owned enterprises providing subsidized rent and financial support through incubation programs to early-stage startups.

The HKG offers additional tax deductions for domestic expenditure on R&D incurred by firms.  Firms enjoy a 300 percent tax deduction for the first HKD 2 million (USD 255,000) qualifying R&D expenditure and a 200 percent deduction for the remainder.  Since 2017, the Financial Secretary has announced over HKD 120 billion (USD 15.3 billion) in funding to support innovation and technology development in Hong Kong.  These funds are largely directed at supporting and adding programs through the ITF, Science Park, and Cyberport.

In February 2009, HKD 20 billion (USD 2.6 billion) was  earmarked for the Research Endowment Fund, which provides research grants to academics and universities.  In February 2018, another HKD 10 billion (USD 1.3 billion) was set aside to provide financial incentives to foreign universities to partner with Hong Kong universities and establish joint research projects housed in two research clusters in Science Park, one specializing in artificial intelligence and robotics and the other specializing in biotechnology.  In February 2018, another HKD 20 billion (USD 2.6 billion) was appropriated to begin construction on a second, larger Science Park, located on the border with Shenzhen, which is intended to provide a much larger number of subsidized-rent facilities for R&D which are also expected to have special rules allowing mainland residents to work onsite without satisfying normal immigration procedures.

The Technology Talent Admission Scheme provides a fast-track arrangement for eligible technology companies/institutes to admit overseas and mainland technology talent to undertake R&D for them in the areas of biotechnology, artificial intelligence, cybersecurity, robotics, data analytics, financial technologies, and material science are eligible for application.  The Postdoctoral Hub Program provides funding support to recipients of the ITF, as well as incubatees and tenants of Science Park and Cyberport, to recruit up to two postdoctoral talents for R&D. Applicants must have a doctoral degree in a science, technology, engineering, and mathematics-related discipline from either a local university or a well-recognized non-local institution.

In July 2020, the HKG launched a USD 256.4 million Re-industrialization Funding Scheme to subsidize manufacturers, on a matching basis, setting up smart production lines in Hong Kong.

The Pilot Bond Grant Scheme launched by the Hong Kong Monetary Authority (HKMA) in May 2018 is aimed at improving Hong Kong’s competitiveness in the international bond market by enhanced tax concessions for qualifying debt instruments.  The HKG supports first-time issues with a grant of up to 50 percent of the eligible issuance expenses, with a cap of HKD 2.5 million (USD 320,500) for issues with a credit rating from a credit rating agency recognized by the Hong Kong Monetary Authority (HKMA), or a cap of HKD 1.25 million (USD 160,200) for issues that do not have a credit rating and where neither the issuer nor the issue’s guarantor have a credit rating.

In October 2020, the HKG launched a USD 38 million pilot subsidy scheme to encourage the logistics industry to enhance productivity through the application of technology.

Starting from December 2020, a USD 25.6 million Green Tech Fund (GTF) is open for applications.  The GTF provides funding supports to R&D projects which can help Hong Kong decarbonize and enhance environmental protection.  The amount of funding for each project ranges from USD 320,500 to USD 3.9 million, and each project may last up to five years.

In February 2021, the HKG announced a proposal to strengthen Hong Kong’s position as an asset management center.  The HKG planned to introduce in the second quarter of 2021 new legislation to facilitate the re-domicile of foreign investment funds to Hong Kong for registration as Open-ended Fund Companies (OFCs).  The HKG would provide subsidies to cover 70 percent of the expenses (capped at HKD 1 million or USD 125,000) paid to local professional service providers for OFCs set up in or re-domiciled to Hong Kong in the coming three years.

In February 2021, the HKG announced it would consolidate the Pilot Bond Grant Scheme and the Green Bond Grant Scheme into a Green and Sustainable Finance Grant Scheme to subsidize eligible bond issuers and loan borrowers to cover their expenses on bond issuance and external review services.

Foreign Trade Zones/Free Ports/Trade Facilitation

Hong Kong, a free port without foreign trade zones, has modern and efficient infrastructure making it a regional trade, finance, and services center.  Rapid growth has placed severe demands on that infrastructure, necessitating plans for major new investments in transportation and shipping facilities, including a planned expansion of container terminal facilities, additional roadway and railway networks, major residential/commercial developments, community facilities, and environmental protection projects.  Construction on a third runway at Hong Kong International Airport is scheduled for completion by 2023.

Hong Kong and mainland China have a Free Trade Agreement Transshipment Facilitation Scheme that enables mainland-bound consignments passing through Hong Kong to enjoy tariff reductions in the mainland.  The arrangement covers goods traded between mainland China and its trading partners, including ASEAN members, Australia, Bangladesh, Chile, Costa Rica, Iceland, India, New Zealand, Pakistan, Peru, South Korea, Sri Lanka, Switzerland, and Taiwan.

The HKG launched in December 2018 phase one of the Trade Single Window (TSW) to provide a one-stop electronic platform for submitting ten types of trade documents, promoting cross-border customs cooperation, and expediting trade declaration and customs clearance.  Phase two is expected to be implemented in 2023.

The latest version of CEPA has established principles of trade facilitation, including simplifying customs procedures, enhancing transparency, and strengthening cooperation.

Performance and Data Localization Requirements

The HKG does not mandate local employment or performance requirements.  It does not follow a forced localization policy making foreign investors use domestic content in goods or technology.

Foreign nationals normally need a visa to live or work in Hong Kong.  Short-term visitors are permitted to conduct business negotiations and sign contracts while on a visitor’s visa or entry permit.  Companies employing people from overseas must show that a prospective employee has special skills, knowledge, or experience not readily available in Hong Kong.

Hong Kong allows free and uncensored flow of information, though the imposition of the NSL created certain limits on freedom of expression and content, especially those that may be viewed as politically-sensitive such as advocating for Hong Kong’s independence from mainland China.  The freedom and privacy of communication is enshrined in Basic Law Article 30.  The HKG has no requirements for foreign IT providers to turn over source code and does not interfere with data center operations.  However, the NSL introduced a heightened risk of PRC and Hong Kong authorities using expanded legal authorities to collect data from businesses and individuals in Hong Kong for actions that may violate “national security.” For more information, please refer to the Hong Kong business advisory released jointly by the Department of State, along with the Department of the Treasury, the Department of Commerce, and the Department of Homeland Security on July 16, 2021.

The NSL grants Hong Kong police broad authorities to conduct wiretaps or electronic surveillance without warrants in national security-related cases.  The NSL also empowers police to conduct searches, including of electronic devices, for evidence in national security cases.  Police can also require Internet service providers to provide or delete information relevant to these cases.  In January 2021, the organizer of an online platform alleged that local Internet providers have made the site inaccessible for users in Hong Kong following requests from the Hong Kong government.  One ISP subsequently confirmed that they it blocked a website “in compliance with the requirement issued under the National Security Law.”

Hong Kong does not currently restrict transfer of personal data outside the SAR, but the dormant Section 33 the Personal Data (Privacy) Ordinance would prohibit such transfers unless the personal data owner consents or other specified conditions are met.  The Privacy Commissioner is authorized to bring Section 33 into effect at any time, but it has been dormant since 1995.

In January 2020, the HKG introduced a discussion paper to the LegCo and proposed certain changes to the Personal Data (Privacy) Ordinance with the aim of strengthening data protection in Hong Kong.  One of the amendments proposed was to require data users to formulate a clear data retention policy which specified a retention period for the personal data collected.  Feedback from the LegCo on this discussion paper formed the basis of further consultations with stakeholders and more concrete legislative amendment proposals.  There is no indication on the timeline of any legislative amendments to the Ordinance.

In December 2020, Hong Kong’s Securities and Futures Commission (SFC) required licensed corporations in Hong Kong to seek the SFC’s approval before using the following for storing regulatory records: 1) premises controlled exclusively by an external data storage provider(s) located inside or outside Hong Kong, such as cloud service providers like Google Cloud, Microsoft Azure or Amazon AWS; or 2) server(s) for data storage at data centers located inside or outside Hong Kong.

Real Property

The Basic Law ensures protection of leaseholders’ rights in long-term leases that are the basis of the SAR’s real property system.  The Basic Law also protects the lawful traditional rights and interests of the indigenous inhabitants of the New Territories.  The real estate sector, one of Hong Kong’s pillar industries, is equipped with a sound banking mortgage system.  HK ranked 51st for ease of registering property, according to the World Bank’s Doing Business 2020 rankings.

Land transactions in Hong Kong operate on a deeds registration system governed by the Land Registration Ordinance.  The Land Titles Ordinance provides greater certainty on land title and simplifies the conveyancing process.

Intellectual Property Rights

Hong Kong generally provides strong intellectual property rights (IPR) protection and enforcement and for the most part has instituted an IP regime consistent with international standards.  Hong Kong has effective IPR enforcement capacity, and a judicial system that supports enforcement efforts with an effective public outreach program that discourages IPR-infringing activities.   Despite the robustness of Hong Kong’s IP system, challenges remain, particularly in copyright infringement and effective enforcement against the heavy, bi-directional flow of counterfeit goods.

Hong Kong’s commercial and company laws provide for effective enforcement of contracts and protection of corporate rights.  Hong Kong has filed its notice of compliance with the Trade-Related Aspects of Intellectual Property Rights (TRIPs) requirements of the WTO.  The Intellectual Property Department, which includes the Trademarks and Patents Registries, is the focal point for the development of Hong Kong’s IP regime.  The Customs and Excise Department (CED) is the sole enforcement agency for intellectual property rights (IPR).  Hong Kong has acceded to the Paris Convention for the Protection of Industrial Property, the Bern Convention for the Protection of Literary and Artistic Works, and the Geneva and Paris Universal Copyright Conventions.  Hong Kong also continues to participate in the World Intellectual Property Organization as part of mainland China’s delegation; the HKG has seconded an officer from CED to INTERPOL in Lyon, France to further collaborate on IPR enforcement.

The HKG devotes significant resources to IPR enforcement.  Hong Kong courts have imposed longer jail terms than in the past for violations of Hong Kong’s Copyright Ordinance.  CED works closely with foreign customs agencies and the World Customs Organization to share best practices and to identify, disrupt, and dismantle criminal organizations engaging in IP theft that operate in multiple countries.  The government has conducted public education efforts to encourage respect for IPR.  Pirated and counterfeit products remain available on a small scale at the retail level throughout Hong Kong.

Other IPR challenges include end-use piracy of software and textbooks, internet peer-to-peer downloading, and the illicit importation and transshipment of pirated and counterfeit goods from mainland China and other places in Asia.  Hong Kong authorities have taken steps to address these challenges by strengthening collaboration with mainland Chinese authorities, prosecuting end-use software piracy, and monitoring suspect shipments at points of entry.  It has also established a task force to monitor and crack down on internet-based peer-to-peer piracy.

The Drug Office of Hong Kong imposes a drug registration requirement that requires applicants for new drug registrations to make a non-infringement patent declaration.  The Copyright Ordinance protects any original copyrighted work created or published anywhere in the world and criminalizes copying and distribution of protected works .  The Ordinance also provides rental rights for sound recordings, computer programs, films, and comic books and includes enhanced penalty provisions and other legal tools to facilitate enforcement.  The law defines possession of an infringing copy of computer programs, movies, TV dramas, and musical recordings (including visual and sound recordings) for use in business as an offense but provides no criminal liability for other categories of works.  In June 2020, an amendment bill to implement the Marrakesh Treaty came into effect.

The HKG has consulted unsuccessfully with internet service providers and content user representatives on a voluntary framework for IPR protection in the digital environment.  It has also failed to pass amendments to the Copyright Ordinance that would enhance copyright protection against online piracy.  As of February 2021, the Infringing Website List Scheme (IWLS) established by the Hong Kong Creative Industries Association to clamp down on websites that display pirated content reportedly included 137 infringing websites in the portal.  In addition, 27 HKG agencies have been assigned with an individual password for checking with the IWLS before placing digital advertisements and tenders.

The Patent Ordinance allows for granting an independent patent in Hong Kong based on patents granted by the United Kingdom and mainland China.  Patents granted in Hong Kong are independent and capable of being tested for validity, rectified, amended, revoked, and enforced in Hong Kong courts.  Hong Kong’s Original Grant Patent system, which came into operation in December 2019, takes into account the patent systems generally established in regional and international patent treaties, while maintaining the re-registration system for the granting of standard patents.

The Registered Design Ordinance is modeled on the EU design registration system.  To be registered, a design must be new, and the system requires no substantive examination.  The initial period of five years protection is extendable for four periods of five years each, up to 25 years.

Hong Kong’s trademark law is TRIPS-compatible and allows for registration of trademarks relating to services.  All trademark registrations originally filed in Hong Kong are valid for seven years and renewable for 14-year periods.  Proprietors of trademarks registered elsewhere must apply anew and satisfy all requirements of Hong Kong law.  When evidence of use is required, such use must have occurred in Hong Kong.  In June 2020, Hong Kong implemented the Madrid Protocol.  The HKG will liaise with mainland China to seek application of the Madrid Protocol to Hong Kong beginning in 2022.

Hong Kong has no specific ordinance to cover trade secrets; however, the government has a duty under the Trade Descriptions Ordinance to protect information from being disclosed to other parties.  The Trade Descriptions Ordinance prohibits false trade descriptions, forged trademarks, and misstatements regarding goods and services supplied during trade.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Capital Markets and Portfolio Investment

There are no impediments to the free flow of financial resources.  Non-interventionist economic policies, complete freedom of capital movement, and a well-understood regulatory and legal environment make Hong Kong a regional and international financial center.  It has one of the most active foreign exchange markets in Asia.

Assets and wealth managed in Hong Kong posted a record high of USD 3.7 trillion in 2019 (the latest figure available), with two-thirds of that coming from overseas investors.  To enhance the competitiveness of Hong Kong’s fund industry, OFCs as well as onshore and offshore funds are offered a profits tax exemption.

The HKMA’s Infrastructure Financing Facilitation Office (IFFO) provides a platform for pooling the efforts of investors, banks, and the financial sector to offer comprehensive financial services for infrastructure projects in emerging markets.  IFFO is an advisory partner of the World Bank Group’s Global Infrastructure Facility.

Under the Insurance Companies Ordinance, insurance companies are authorized by the Insurance Authority to transact business in Hong Kong.  As of February 2021, there were 165 authorized insurance companies in Hong Kong, 70 of them foreign or mainland Chinese companies.

The Hong Kong Stock Exchange’s total market capitalization surged by 24.0 percent to USD 6.1 trillion in 2020, with 2,538 listed firms at year-end.  Hong Kong Exchanges and Clearing Limited, a listed company, operates the stock and futures exchanges.  The Securities and Futures Commission (SFC), an independent statutory body outside the civil service, has licensing and supervisory powers to ensure the integrity of markets and protection of investors.

No discriminatory legal constraints exist for foreign securities firms establishing operations in Hong Kong via branching, acquisition, or subsidiaries.  Rules governing operations are the same for all firms.  No laws or regulations specifically authorize private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation, or control.

In 2020, a total of 291 Chinese enterprises had “H” share listings on the stock exchange, with combined market capitalization of USD 906 billion.  The Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects allow individual investors to cross trade Hong Kong and mainland stocks.  In December 2018, the ETF Connect, which was planned to allow international and mainland investors to trade in exchange-traded fund products listed in Hong Kong, Shanghai, and Shenzhen, was put on hold indefinitely due to “technical issues.” However, China approved two cross-listings of ETFs between Shanghai Stock exchange and the Tokyo Stock Exchange in June 2019, and between Shenzhen Stock Exchange and Hong Kong Stock Exchange in October 2020.

By the end of 2020, 50 mainland mutual funds and 29 Hong Kong mutual funds were allowed to be distributed in each other’s markets through the mainland-Hong Kong Mutual Recognition of Funds scheme. Hong Kong also has mutual recognition of funds programs with Switzerland, Thailand, Ireland, France, the United Kingdom, and Luxembourg.

Hong Kong has developed its debt market with the Exchange Fund bills and notes program.  Hong Kong Dollar debt stood at USD 292 billion by the end of 2020.  As of November 2020, RMB 1,203.5 billion (USD 180.5 billion) of offshore RMB bonds were issued in Hong Kong.  Multinational enterprises, including McDonald’s and Caterpillar, have also issued debt.  The Bond Connect, a mutual market access scheme, allows investors from mainland China and overseas to trade in each other’s respective bond markets through a financial infrastructure linkage in Hong Kong.  In the first eight months of 2020, the Northbound trading of Bond Connect accounted for 52 percent of foreign investors’ total turnover in the China Interbank Bond Market.  In December 2020, the HKMA and the People’s Bank of China (PBoC) set up a working group to drive the initiative of Southbound trading, with the target of launching it within 2021.

In June 2020, the PBoC, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the State Administration of Foreign Exchange, the HKMA and the Monetary Authority of Macau announced that they decided to implement a cross-boundary Wealth Management Connect pilot scheme in the Greater Bay Area (GBA), an initiative to economically integrate Hong Kong and Macau with nine cities in Guangdong Province.  Under the scheme, residents in the GBA can carry out cross-boundary investment in wealth management products distributed by banks in the GBA.  These authorities are still working on the implementation details for the scheme.

In December 2020, the SFC concluded its consultation on proposed customer due diligence requirements for OFCs.  The new requirements will enhance the anti-money laundering and counter-financing of terrorism measures with respect to OFCs and better align the requirements for different investment vehicles for funds in Hong Kong.  Upon the completion of the legislative process, the new requirements will come into effect after a six-month transition period.

In February 2021, the HKG announced it would issue green bonds regularly and expand the scale of the Government Green Bond Program to USD 22.5 billion within the next five years.

The HKG requires workers and employers to contribute to retirement funds under the Mandatory Provident Fund (MPF) scheme.  Contributions are expected to channel roughly USD five billion annually into various investment vehicles.  By September of 2020, the net asset values of MPF funds amounted to USD 131 billion.

Money and Banking System

Hong Kong has a three-tier system of deposit-taking institutions: licensed banks (161), restricted license banks (17), and deposit-taking companies (12).  HSBC is Hong Kong’s largest banking group.  With its majority-owned subsidiary Hang Seng Bank, HSBC controls more than 50.9 percent of Hong Kong Dollar (HKD) deposits.  The Bank of China (Hong Kong) is the second-largest banking group, with 15.4 percent of HKD deposits throughout 200 branches.  In total, the five largest banks in Hong Kong had more than USD 2 trillion in total assets at the end of 2019.  Thirty-five U.S. “authorized financial institutions” operate in Hong Kong, and most banks in Hong Kong maintain U.S. correspondent relationships.  Full implementation of the Basel III capital, liquidity, and disclosure requirements completed in 2019.

Credit in Hong Kong is allocated on market terms and is available to foreign investors on a non-discriminatory basis.  The private sector has access to the full spectrum of credit instruments as provided by Hong Kong’s banking and financial system.  Legal, regulatory, and accounting systems are transparent and consistent with international norms.  The HKMA, the de facto central bank, is responsible for maintaining the stability of the banking system and managing the Exchange Fund that backs Hong Kong’s currency.  Real Time Gross Settlement helps minimize risks in the payment system and brings Hong Kong in line with international standards.

Banks in Hong Kong have in recent years strengthened anti-money laundering and counterterrorist financing controls, including the adoption of more stringent customer due diligence (CDD) process for existing and new customers.  The HKMA stressed that “CDD measures adopted by banks must be proportionate to the risk level and banks are not required to implement overly stringent CDD processes.”

In November 2020, the HKG launched a three-month public consultation on its proposed amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.  Among other proposed changes, the HKG suggested introducing a licensing regime for virtual asset services providers and a two-tier registration regime for precious assets dealers.  The HKG will analyze feedback from the public before introducing a draft bill to the LegCo.

The NSL granted police authority to freeze assets related to national security-related crimes.  In October 2020, the HKMA advised banks in Hong Kong to report any transactions suspected of violating the NSL, following the same procedures as for money laundering.  Hong Kong authorities reportedly asked financial institutions to freeze bank accounts of former lawmakers, civil society groups, and other political targets who appear to be under investigation for their pro-democracy activities.

The HKMA welcomes the establishment of virtual banks, which are subject to the same set of supervisory principles and requirements applicable to conventional banks.  The HKMA has granted eight virtual banking licenses by the end of January 2021.

The HKMA’s Fintech Facilitation Office (FFO) aims to promote Hong Kong as a fintech hub in Asia.  FFO has launched the faster payment system to enable bank customers to make cross-bank/e-wallet payments easily and created a blockchain-based trade finance platform to reduce errors and risks of fraud.  The HKMA has signed nine fintech co-operation agreements with the regulatory authorities of Brazil, Dubai, France, Poland, Singapore, Switzerland, Thailand, the United Arab Emirates, and the United Kingdom.

Foreign Exchange and Remittances

Foreign Exchange

Conversion and inward/outward transfers of funds are not restricted.  The HKD is a freely convertible currency linked via de facto currency board to the U.S. dollar.  The exchange rate is allowed to fluctuate in a narrow band between HKD 7.75 – HKD 7.85 = USD 1.

Remittance Policies

There are no recent changes to or plans to change investment remittance policies.  Hong Kong has no restrictions on the remittance of profits and dividends derived from investment, nor reporting requirements on cross-border remittances.  Foreign investors bring capital into Hong Kong and remit it through the open exchange market.

Hong Kong has anti-money laundering (AML) legislation allowing the tracing and confiscation of proceeds derived from drug-trafficking and organized crime.  Hong Kong has an anti-terrorism law that allows authorities to freeze funds and financial assets belonging to terrorists.  Travelers arriving in Hong Kong with currency or bearer negotiable instruments (CBNIs) exceeding HKD 120,000 (USD 15,385) must make a written declaration to the CED.  For a large quantity of CBNIs imported or exported in a cargo consignment, an advanced electronic declaration must be made to the CED.

Sovereign Wealth Funds

The Future Fund, Hong Kong’s wealth fund, was established in 2016 with an endowment of USD 28.2 billion.  The fund seeks higher returns through long-term investments and adopts a “passive” role as a portfolio investor.  About half of the Future Fund has been deployed in alternative assets, mainly global private equity and overseas real estate, over a three-year period.  The rest is placed with the Exchange Fund’s Investment Portfolio, which follows the Santiago Principles, for an initial ten-year period.  In February 2020, the HKG announced that it will deploy 10 percent of the Future Fund to establish a new portfolio, which is called the Hong Kong Growth Portfolio (HKGP), focusing on domestic investments to lift the city’s competitiveness in financial services, commerce, aviation, logistics and innovation.  Between December 2020 and January 2021, the HKMA conducted a market survey to better understand the profiles of private equity firms with interest to become a general partner for the HKGP.

Hong Kong has several major HKG-owned enterprises classified as “statutory bodies.” Hong Kong is party to the Government Procurement Agreement (GPA) within the framework of WTO.  Annex 3 of the GPA lists as statutory bodies the Housing Authority, the Hospital Authority, the Airport Authority, the Mass Transit Railway Corporation Limited, and the Kowloon-Canton Railway Corporation, which procure in accordance with the agreement.

The HKG provides more than half the population with subsidized housing, along with most hospital and education services from childhood through the university level.  The government also owns major business enterprises, including the stock exchange, railway, and airport.

Conflicts occasionally arise between the government’s roles as owner and policymaker.  Industry observers have recommended that the government establish a separate entity to coordinate its ownership of government-held enterprises and initiate a transparent process of nomination to the boards of government-affiliated entities.  Other recommendations from the private sector include establishing a clear separation between industrial policy and the government’s ownership function and minimizing exemptions of government-affiliated enterprises from general laws.

The Competition Law exempts all but six of the statutory bodies from the law’s purview.  While the government’s private sector ownership interests do not materially impede competition in Hong Kong’s most important economic sectors, industry representatives have encouraged the government to adhere more closely to the Guidelines on Corporate Governance of State-owned Enterprises of the Organization for Economic Cooperation and Development (OECD).

Privatization Program

All major utilities in Hong Kong, except water, are owned and operated by private enterprises, usually under an agreement framework by which the HKG regulates each utility’s management.

The Hong Kong Stock Exchange adopts a higher standard of disclosure – ‘comply or explain’ – about its environmental key performance indicators for listed companies.  Results of a consultation process to review its environmental, social, and governance (ESG) reporting guidelines indicate strong support for enhancing the ESG reporting framework.  It has implemented proposals from the consultation process since July 2020.  Because Hong Kong is not a member of the OECD, OECD Guidelines for Multinational Enterprises are not applicable to Hong Kong companies.  The HKG, however, commends enterprises for fulfilling their social responsibility.  Hong Kong is not a signatory of the Montreux Document on Private Military and Security Companies.  Under the Security Bureau, the Security and Guarding Services Industry Authority is responsible for formulating issuing criteria and conditions for security company licenses and security personnel permits and determining applications for security company licenses.

Additional Resources

Department of State

• Country Reports on Human Rights Practices (https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);
• Trafficking in Persons Report (https://www.state.gov/trafficking-in-persons-report/);
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities (https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;
• North Korea Sanctions & Enforcement Actions Advisory (https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf)

Department of Labor

• Findings on the Worst forms of Child Labor Report (https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings ) and;
• List of Goods Produced by Child Labor or Forced Labor (https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods).
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World (https://www.dol.gov/general/apps/ilab) and;
• Comply Chain (https://www.dol.gov/ilab/complychain/).

Mainland China ratified the United Nations Convention Against Corruption in January 2006, and it was extended to Hong Kong in February 2006.  The Independent Commission Against Corruption (ICAC) is responsible for combating corruption and has helped Hong Kong develop a track record for combating corruption.  U.S. firms have not identified corruption as an obstacle to FDI.  A bribe to a foreign official is a criminal act, as is the giving or accepting of bribes, for both private individuals and government employees.  Offenses are punishable by imprisonment and large fines.

The Hong Kong Ethics Development Center (HKEDC), established by the ICAC, promotes business and professional ethics to sustain a level-playing field in Hong Kong.  The International Good Practice Guidance – Defining and Developing an Effective Code of Conduct for Organizations of the Professional Accountants in Business Committee published by the International Federation of Accountants (IFAC) and is in use with the permission of IFAC.

Resources to Report Corruption

Simon Peh, Commissioner
Independent Commission Against Corruption
303 Java Road, North Point, Hong Kong
+852-2826-3111
Email: com-office@icac.org.hk

Beijing’s imposition of the National Security Law (NSL) on June 30, 2020 has introduced heightened uncertainties for companies operating in Hong Kong.  As a result, U.S. citizens traveling through or residing in Hong Kong may be subject to increased levels of surveillance, as well as arbitrary enforcement of laws and detention for purposes other than maintaining law and order.

As of March 2021, police have carried out at least 100 arrests of opposition politicians and activists under the NSL, including one U.S. citizen, in an effort to suppress all pro-democracy views and political activity in the city.  Police have also reportedly issued arrest warrants under the NSL for approximately thirty individuals residing abroad, including U.S. citizens.  Since June 2019, police have arrested over 10,000 people on various charges in connection with largely peaceful protests against government policies.

Please see the July 16, 2021 business advisory issued by the Department of State, along with the Department of the Treasury, the Department of Commerce, and the Department of Homeland Security.

The Department of State assesses that Hong Kong does not maintain a sufficient degree of autonomy under the “one country, two systems” framework to justify continued special treatment by the United States for bilateral agreements and programs per the Hong Kong Policy Act.  As a result of Hong Kong’s lack of autonomy from China, the Department of Commerce ended Hong Kong’s treatment as a separate trade entity from China, including the removal of many of Department of Commerce’s License Exceptions.  U.S. Customs and Borders Protection (CBP) requires goods produced in Hong Kong to be marked to show China, rather than Hong Kong, as their country of origin.  This requirement took effect November 9, 2020.  It does not affect country of origin determinations for purposes of assessing ordinary duties or temporary or additional duties.  Hong Kong has requested World Trade Organization dispute consultations to examine the issue.  As of March 2021, the Department of Treasury has sanctioned 35 former and current Hong Kong and mainland Chinese government officials and 44 Chinese-military companies identified by the Department of Defense.

The PRC government does not recognize dual nationality.  In January 2021, the Hong Kong government moved to enforce existing provisions of the Nationality Law of the People’s Republic of China in place since 1997, effectively ending its longstanding recognition of dual citizenship in Hong Kong.  The action ended consular access to two detained U.S. citizens as of March 2021 and potentially removed consular protection from about half of the estimated 85,000 U.S. citizens in Hong Kong.  U.S.-PRC, U.S.-Hong Kong and U.S. citizens of Chinese heritage may be subject to additional scrutiny and harassment, and the PRC government may prevent the U.S. Embassy or U.S. Consulate from providing consular services.

Hong Kong financial regulators have conducted outreach to stress the importance of robust anti-money laundering (AML) controls and highlight potential criminal sanctions implications for failure to fulfill legal obligations under local AML laws.  However, Hong Kong has a low number of prosecutions and convictions compared to the number of cases investigated.

Under the President’s Executive Order on Hong Kong Normalization, which directs the suspension or elimination of special and preferential treatment for Hong Kong, the United States notified the Hong Kong authorities in August 2020 of its suspension of the Surrender of Fugitive Offenders Agreement and the Transfer of Sentenced Persons Agreement.  The Reciprocal Tax Exemptions on Income Derived from the International Operation of Ships Agreement was also suspended.  In response, the Hong Kong government suspended the Agreement Between the Government of the United States of America and the Government of Hong Kong on Mutual Legal Assistance in Criminal Affairs, which entered into force in 2000.

Hong Kong’s unemployment rate stood at 6.6 percent in the fourth quarter of 2020, with the unemployment rate of youth aged 15-19 rising to 17.6 percent.  In 2020, skilled personnel working as administrators, managers, professionals, and associate professionals accounted for 40.6 percent of the total working population.  At the end of 2019, there were about 399,320 foreign domestic helpers working in Hong Kong.  In 2020, about 8,842 foreign professionals came to work in the city, more than 10,089 fewer than the previous year.  The Employees Retraining Board provides skills re-training for local employees.  To address a shortage of highly skilled technical and financial professionals, the HKG seeks to attract qualified foreign and mainland Chinese workers.

The Employment Ordinance (EO) and the Employees’ Compensation Ordinance prohibit the termination of employment in certain circumstances: 1) Any pregnant employee who has at least four weeks’ service and who has served notice of her pregnancy; 2) Any employee who is on paid statutory sick leave and; 3) Any employee who gives evidence or information in connection with the enforcement of the EO or relating to any accident at work, cooperates in any investigation of his employer, is involved in trade union activity, or serves jury duty may not be dismissed because of those circumstances. Breach of these prohibitions is a criminal offense.

According to the EO, someone employed under a continuous contract for not less than 24 months is eligible for severance payment if: 1) dismissed by reason of redundancy; 2) under a fixed term employment contract that expires without being renewed due to redundancy; or 3) laid off.

Unemployment benefits are income- and asset-tested on an individual basis if living alone; if living with other family members, the total income and assets of all family members are taken into consideration for eligibility.  Recipients must be between the ages of 15-59, capable of work, and actively seeking full-time employment.

Parties in a labor dispute can consult the free and voluntary conciliation service offered by the Labor Department (LD).  A conciliation officer appointed by the LD will help parties reach a contractually binding settlement.  If there is no settlement, parties can start proceedings with the Labor Tribunal (LT), which can then be raised to the Court of First Instance and finally the Court of Appeal for leave to appeal.  The Court of Appeal can grant leave only if the case concerns a question of law of general public importance.

Local law provides for the rights of association and of workers to establish and join organizations of their own choosing.  The government does not discourage or impede the formation of unions.  As of 2019, Hong Kong’s 866 registered unions had 923,239 members, a participation rate of about 25.7 percent.  In 2020, 491 new worker unions formed to improve chances of winning seats in the legislature.  Hong Kong’s labor legislation is in line with international laws.  Hong Kong has implemented 41 conventions of the International Labor Organization in full and 18 others with modifications.  Workers who allege discrimination against unions have the right to a hearing by the Labor Relations Tribunal.  Legislation protects the right to strike.  Collective bargaining is not protected by Hong Kong law; there is no obligation to engage in it; and it is not widely used.  For more information on labor regulations in Hong Kong, please visit the following website: http://www.labour.gov.hk/eng/legislat/contentA.htm (Chapter 57 “Employment Ordinance”).

The LT has the power to make an order for reinstatement or re-engagement without securing the employer’s approval if it deems an employee has been unreasonably and unlawfully dismissed.  If the employer does not reinstate or re-engage the employee as required by the order, the employer must pay to the employee a sum amounting to three times the employee’s average monthly wages up to USD 9,300.  The employer commits an offense if he/she willfully and without reasonable excuse fails to pay the additional sum.

Starting from January 2019, male employees are entitled to five days’ paternity leave (increased from three days).

Starting from December 2020,  the statutory maternity leave increases to 14 weeks from ten weeks.

Effective May 1, 2019, the statutory minimum hourly wage rate increases from USD 4.4 to USD 4.8.

In February 2020, about 2,500 medical workers of the Hospital Authority took part in an industrial action, demanding the HKG close its border to mainland China to prevent the spread of  COVID-19.  They ended the strike a few days later without getting their demands realized.

As a developed economy, there is little potential for the DFC to operate in Hong Kong.  However, there is scope for cooperation between companies based in Hong Kong with regional operations to work with the DFC.  Hong Kong is a member of the World Bank Group’s Multilateral Investment Guarantee Agency.

* Source for Host Country Data: Hong Kong Census and Statistics Department 

Eveline Tseng, Consul, Economic Affairs
U.S. Consulate General Hong Kong and Macau
26 Garden Road, Central

Policies Towards Foreign Direct Investment

Pakistan seeks inward investment in order to boost economic growth, particularly in the energy, agribusiness, information and communications technology, and industrial sectors.  Since 1997, Pakistan has established and maintained a largely open investment regime.  Pakistan introduced an Investment Policy in 2013 that further liberalized investment policies in most sectors to attract foreign investment and signed an economic co-operation agreement with China, the China-Pakistan Economic Corridor (CPEC), in April 2015.  CPEC Phase I, which concluded in late 2019, focused primarily on infrastructure and energy production.  CPEC Phase II, which is ongoing, is pivoting away from infrastructure development to mainly focus on promoting Pakistan’s industrial growth by establishing special economic zones throughout the country.  The PRC has also pledged to provide $1 billion in socio-economic initiatives focused on agriculture, health, education, poverty alleviation, and vocational training by 2024.  However, progress on Phase II is significantly delayed due to the COVID pandemic, fiscal constraints, and regulatory issues including the government’s inability so far to pass legislation formalizing the CPEC Authority (a centralized federal body charged with CPEC implementation across the country).  Some opportunities are only open to approved Chinese companies, and CPEC has ensured those projects and their investors receive the authorities’ attention.

To support its Investment Policy, Pakistan also has implemented sectoral policies designed to provide additional incentives to investors in those specific sectors.  The Automotive Policy 2016, Strategic Trade Policy Framework (STPF) 2015-18, Export Enhancement Package 2019, Alternative and Renewable Energy Policy 2019, Merchant Marine Shipping Policy 2019 with 2020 updates, the Electric Vehicle Policy 2020-2025, and the Textile Policy 2021 (still awaiting final approval) are a few examples of sector-specific incentive schemes.  Sector-specific incentives typically include tax breaks, tax refunds, tariff reductions, the provision of dedicated infrastructure, and investor facilitation services.  A new STPF 2020-25 and the Textile Policy 2021 have been approved by the Prime Minister but are still awaiting final Cabinet approvals.

In the absence of the new STPF 2020-2025, incentives introduced through STPF 2015-18 remain in place.  Nonetheless, foreign investors continue to advocate for Pakistan to improve legal protections for foreign investments, protect intellectual property rights, and establish clear and consistent policies for upholding contractual obligations and settlement of tax disputes.

The Foreign Private Investment Promotion and Protection Act (FPIPPA), 1976, and the Furtherance and Protection of Economic Reforms Act, 1992, provide legal protection for foreign investors and investment in Pakistan.  The FPIPPA stipulates that foreign investments will not be subject to higher income taxes than similar investments made by Pakistani citizens.  All sectors and activities are open for foreign investment unless specifically prohibited or restricted for reasons of national security and public safety.  Specified restricted industries include arms and ammunitions; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol.  There are no restrictions or mechanisms that specifically exclude U.S. investors.

Pakistan’s investment promotion agency is the Board of Investment (BOI).  BOI is responsible for attracting investment, facilitating local and foreign investor implementation of projects, and enhancing Pakistan’s international competitiveness.  BOI assists companies and investors who seek to invest in Pakistan and facilitates the implementation and operation of their projects.  BOI is not a one-stop shop for investors, however.

Pakistan prioritizes investment retention through “business dialogues” (virtual or in-person engagements) with existing and potential investors.  BOI plays the leading role in initiating and managing such dialogues.  However, Pakistan does not have an Ombudsman’s office focusing on investment retention.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreigners, except Indian and Israeli citizens/businesses, can establish, own, operate, and dispose of interests in most types of businesses in Pakistan, except those involved in arms and ammunitions; high explosives; radioactive substances; securities, currency and mint; and consumable alcohol.  There are no restrictions or mechanisms that specifically exclude U.S. investors.  There are no laws or regulations authorizing domestic private entities to adopt articles of incorporation discriminating against foreign investment.

Pakistan does not place any limits on foreign ownership or control.  The 2013 Investment Policy eliminated minimum initial capital requirements across sectors so that there is no minimum investment requirement or upper limit on the allowed share of foreign equity, with the exception of investments in the airline, banking, agriculture, and media sectors.  Foreign investors in the services sector may retain 100 percent equity, subject to obtaining permission, a “no objection certificate,” and license from the concerned agency, as well as fulfilling the requirements of the respective sectoral policy.  In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed, while in the agriculture sector, the threshold is 60 percent, with an exception for corporate agriculture farming, where 100 percent ownership is allowed.  Small-scale mining valued at less than PKR 300 million (roughly $1.9 million) is restricted to Pakistani investors.

Foreign banks may establish locally incorporated subsidiaries and branches, provided they have $5 billion in paid-up capital or belong to one of the regional organizations or associations to which Pakistan is a member (e.g., Economic Cooperation Organization (ECO) or the South Asian Association for Regional Cooperation (SAARC).  Absent these requirements, foreign banks are limited to a 49-percent maximum equity stake in locally incorporated subsidiaries.

There are no restrictions on payments of royalties and technical fees for the manufacturing sector, but there are restrictions on other sectors, including a $100,000 limit on initial franchise investments and a cap on subsequent royalty payments of 5 percent of net sales for five years.  Royalties and technical payments are subject to remittance restrictions listed in Chapter 14, Section 12 of the SBP Foreign Exchange Manual (http://www.sbp.org.pk/fe_manual/index.htm).

Pakistan maintains investment screening mechanisms for inbound foreign investment.  The BOI is the lead organization for such screening.  Pakistan blocks foreign investments where the screening process determines the investment could negatively affect Pakistan’s national security.

Other Investment Policy Reviews

Pakistan has not undergone any third-party investment policy reviews over the past three years.

Business Facilitation

The government utilizes the World Bank’s “Doing Business” criteria to guide its efforts to improve Pakistan’s business climate.  The government has simplified pre-registration and registration facilities and automated land records to simplify property registration, eased requirements for obtaining construction permits and utilities, introduced online/electronic tax payments, and facilitated cross-border trade by expanding electronic submissions and processing of trade documents.  Starting a business in Pakistan normally involves five procedures and takes at least 16.5 days – as compared to an average of 7.1 procedures and 14.5 days for the group of countries comprising the World Bank’s South Asia cohort.  Pakistan ranked 72 out of 190 countries in the Doing Business 2020 report’s “Starting a Business” category.  Pakistan ranked 28 out of 190 for protecting minority investors.  (Note: the 2020 Doing Business Report is the last available report.  End Note.)

The Securities and Exchange Commission of Pakistan (SECP) manages company registration, which is available to both foreign and domestic companies.  Companies first provide a company name and pay the requisite registration fee to the SECP.  They then supply documentation on the proposed business, including information on corporate offices, location of company headquarters, and a copy of the company charter.  Both foreign and domestic companies must apply for national tax numbers with the Federal Board of Revenue (FBR) to facilitate payment of income and sales taxes.  Industrial or commercial establishments with five or more employees must register with Pakistan’s Federal Employees Old-Age Benefits Institution (EOBI) for social security purposes.  Depending on the location, registration with provincial governments may also be required.  The SECP website (www.secp.gov.pk) offers a Virtual One Stop Shop (OSS) where companies can register with the SECP, FBR, and EOBI simultaneously.  The OSS can be used by foreign investors.

Outward Investment

Pakistan does not promote nor incentivize outward investment.  Pakistan does not explicitly restrict domestic investors from investing abroad.  However, cumbersome and time consuming approval processes, involving multiple entities such as the SBP, SECP, and the Ministries of Finance, Economic Affairs, and Foreign Affairs, generally discourage outward investors.  Despite the cumbersome processes, larger Pakistani corporations have made investments in the United States in recent years.

Pakistan has signed Bilateral Investment Treaties (BITs) with 49 countries, although only 27 have entered into force.  U.S.-Pakistan BIT negotiations began in 2004 and the text closed in 2012; however, the agreement has not been signed.  The government has declared its intention to pull out of BITs currently in force.

Pakistan has a Trade and Investment Framework Agreement (TIFA) in place with the United States.  Pakistan has free or preferential trade agreements with China, Malaysia, Sri Lanka, Iran, Mauritius, and Indonesia.  It is also a signatory of the South Asian Free Trade Agreement (SAFTA) and the Afghanistan Pakistan Transit Trade Agreement (APTTA).  A revised  China-Pakistan Free Trade Agreement entered into force January 1, 2020.  Pakistan is negotiating free trade agreements with Turkey and Thailand.

A U.S.-Pakistan bilateral tax treaty was signed in 1959.  Pakistan has double taxation agreements with 63 other countries.  A multilateral tax treaty between the SAARC countries (Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka) came into force in 2011 and provides additional provisions for the administration of taxes.  In 2018, Pakistan updated its tax treaty with Switzerland.

Pakistan relies heavily on multinational corporations for a significant portion of its tax collections (up to one-third of revenue collected by the FBR, according to reports by the Overseas Investors Chamber of Commerce and Industry.)  Foreign investors in Pakistan regularly report that both federal and provincial tax regulations are difficult to navigate, and tax assessments are non-transparent.  Since 2013, the government has requested advance tax payments from companies, complicating businesses’ operations as the government intentionally delays tax refunds.  The World Bank’s Doing Business 2020 report notes that companies pay 34 different taxes, compared to an average of 26.8 in other South Asian countries.  On average, according to the 2020 Doing Business report, businesses spend over 283 hours per year calculating these payments.

In 2016, Pakistan signed the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters.  The Convention will help Pakistan exchange banking details with the other 80 signatory countries to locate untaxed money in foreign banks.  Pakistan is a member of the Base Erosion and Profit Shifting (BEPS) framework and will automatically exchange country-by-country reporting as required by the BEPS package.

Transparency of the Regulatory System

Pakistan generally lacks transparency and effective policies and laws that foster market-based competition in a non-discriminatory manner.  The Competition Commission of Pakistan has a mandate to ensure market-based competition.  In spite of this, however, the “rules of the game” in Pakistan are opaque and variable, and sometimes applied to benefit domestic businesses.

All businesses in Pakistan are required to adhere to certain regulatory processes managed by the chambers of commerce and industry.  Rules, for example on the requirement for importers or exporters to register with a chamber, are equally applicable to domestic and foreign firms.  To date, Post is not aware of any incidents where such rules have been used to discriminate against foreign investors in general or U.S. investors specifically.

The Pakistani government is responsible for establishing and implementing legal rules and regulations, but sub-national governments have a role as well depending on the sector.  Prior to implementation, non-government actors and private sector associations can provide feedback to the government on regulations and policies, but governmental authorities are not bound to follow their input.  Regulatory authorities are required to conduct in-house post-implementation reviews of regulations in consultation with relevant stakeholders.  However, these assessments are not made publicly available.  Since the 2010 introduction of the 18th amendment to Pakistan’s constitution, which delegated significant authorities to provincial governments, foreign companies must comply with provincial, and sometimes local, laws in addition to federal law.  Foreign businesses complain about the inconsistencies in the application of laws and policies from different regulatory authorities.  There are no rules or regulations in place that discriminate specifically against U.S. firms or investors, however.

The SECP is the main regulatory body for foreign companies operating in Pakistan, but it is not the sole regulator.  Company financial transactions are regulated by the State Bank of Pakistan (SBP), labor by Social Welfare or the Employee Old-Age Benefits Institution (EOBI), and specialized functions in the energy sector are administered by bodies such as the National Electric Power Regulatory Authority (NEPRA), the Oil and Gas Regulatory Authority (OGRA), and Alternate Energy Development Board (AEDB).  Each body has independent management but all must submit draft regulatory or policy changes through the Ministry of Law and Justice before any proposed rules or regulations may be submitted to parliament or, in some cases, the executive branch.

The SECP is authorized to establish accounting standards for companies in Pakistan, however, execution and implementation of those standards is poor.  Pakistan has adopted most, though not all, International Financial Reporting Standards.  Though most of Pakistan’s legal, regulatory, and accounting systems are transparent and consistent with international norms, execution and implementation is inefficient and opaque.

Most draft legislation is made available for public comment but there is no centralized body to collect public responses.  The relevant authorities, usually the ministry under which a law may fall, gathers public comments, if it deems it necessary; otherwise legislation is directly submitted by the government to the legislative branch.  For business and investment laws and regulations, the Ministry of Commerce relies on stakeholder feedback obtained from local chambers and associations – such as the American Business Council (ABC) and Overseas Investors Chamber of Commerce and Industry (OICCI) – rather than publishing regulations online for public review.

There is no centralized online location where key regulatory actions are published.  Different regulators publish their regulations and implementing actions on their respective websites.  However, in most cases, regulatory implementing actions are not published online.

Businesses impacted by non-compliance with government regulations may seek relief from the judiciary, Ombudsman’s offices, and the Parliamentary Public Account Committee.  These forums are designed to ensure the government follows required administrative processes.

Pakistan did not announce any enforcement reforms during the last year.  Pakistan is in the process of fully implementing IPR Customs rules to improve IPR enforcement.  However, delayed legislative amendments in IP laws restricts full and effective implementation of such rules.

If fully implemented, IPR Customs rules will improve IPR enforcement and will boost foreign innovators’ confidence in introducing their innovations in Pakistan.

Enforcement processes are legally reviewable – initially by specialized IP Tribunals, but also through the High and Supreme Courts of Pakistan.

The government publishes limited debt obligations in the budget document in two broad categories: capital receipts and public debt, which are published in the “Explanatory Memorandum on Federal Receipts.”  These documents are available at http://www.finance.gov.pk, http://www.fbr.gov.pk, and http://www.sbp.org.pk/edocata.  The government does not publicly disclose the terms of bilateral debt obligations.

International Regulatory Considerations

Pakistan is a member of the South Asian Association for Regional Cooperation (SAARC), the Central Asia Regional Economic Cooperation (CAREC), and Economic Cooperation Organization (ECO).  However, there is no regional cooperation between Pakistan and other member nations on regulatory development or implementation.

Pakistan’s judicial system incorporates British standards.  As such, most of Pakistan’s regulatory systems use British norms to meet international standards.

Pakistan has been a World Trade Organization (WTO) member since January 1, 1995, and provides most favored nation (MFN) treatment to all member states, except India and Israel.  In October 2015, Pakistan ratified the WTO’s Trade Facilitation Agreement (TFA).  Pakistan is one of 23 WTO countries negotiating the Trade in Services Agreement.  Pakistan notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade, albeit at times with significant delays.

Legal System and Judicial Independence

Most international norms and standards incorporated in Pakistan’s regulatory system, including commercial matters, are influenced by British law.  Laws governing domestic or personal matters are strongly influenced by Islamic Sharia law.  Regulations and enforcement actions may be appealed through the court system.  The Supreme Court is Pakistan’s highest court and has jurisdiction over the provincial courts, referrals from the federal government, and cases involving disputes among provinces or between a province and the federal government.  Decisions by the courts of the superior judiciary (the Supreme Court, the Federal Sharia Court, and five High Courts (Lahore High Court, Sindh High Court, Balochistan High Court, Islamabad High Court, and Peshawar High Court) have national standing.  The lower courts are composed of civil and criminal district courts, as well as various specialized courts, including courts devoted to banking, intellectual property, customs and excise, tax law, environmental law, consumer protection, insurance, and cases of corruption.  Pakistan’s judiciary is influenced by the government and other stakeholders.  The lower judiciary is influenced by the executive branch and seen as lacking competence and fairness.  It currently faces a significant backlog of unresolved cases.

Pakistan’s Contract Act of 1872 is the main law that regulates contracts with Pakistan.  British legal decisions, under some circumstances, are also been cited in court rulings.  While Pakistan’s legal code and economic policy do not discriminate against foreign investments, enforcement of contracts remains problematic due to a weak and inefficient judiciary.

Theoretically, Pakistan’s judicial system operates independently of the executive branch.  However, the reality is different, as the military wields significant influence over the judicial branch.  As a result, there are doubts concerning the competence, fairness, and reliability of Pakistan’s judicial system.  However, fear of contempt of court proceedings inhibit businesses and the public generally from reporting on perceived weaknesses of the judicial process.

Regulations and enforcement actions are appealable.  Specialized tribunals and departmental adjudication authorities are the primary forum for such appeals.  Decisions made by a tribunal or adjudication authority may be appealed to a high court and then to the Supreme Court.

Laws and Regulations on Foreign Direct Investment

Pakistan’s investment and corporate laws permit wholly-owned subsidiaries with 100 percent foreign equity in most sectors of the economy.  In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed.  In the agricultural sector, the threshold is 60 percent, with an exception for corporate agriculture farming, where 100 percent ownership is allowed.

A majority of foreign companies operating in Pakistan are “private limited companies,” which are incorporated with a minimum of two shareholders and two directors registered with the SECP.  While there are no regulatory requirements on the residency status of company directors, the chief executive must reside in Pakistan to conduct day-to-day operations.  If the chief executive is not a Pakistani national, she or he is required to obtain a multiple-entry work visa.  Corporations operating in Pakistan are statutorily required to retain full-time audit services and legal representation.  Corporations must also register any changes to the name, address, directors, shareholders, CEO, auditors/lawyers, and other pertinent details to the SECP within 15 days of the change.  To address long process delays, in 2013, the SECP introduced the issuance of a provisional “Certificate of Incorporation” prior to the final issuance of a “No Objection Certificate” (NOC).  The certificate of incorporation includes a provision noting that company shares will be transferred to another shareholder if the foreign shareholder(s) and/or director(s) fails to obtain a NOC.

No new law, regulation, or judicial decision was announced or went into effect during the last year which would be significant to foreign investors.

There is no “single window” website for investment in Pakistan which provides direct access to all relevant laws, rules and reporting requirements for investors.

Competition and Antitrust Laws

Established in 2007, the Competition Commission of Pakistan (CCP) is designed to ensure private and public sector organizations are not involved in any anti-competitive or monopolistic practices.  Complaints regarding anti-competitive practices can be lodged with CCP, which conducts the investigation and is legally empowered to impose penalties; complaints are reviewable by the CCP appellate tribunal in Islamabad and the Supreme Court of Pakistan.  The CCP appellate tribunal is required to issue decisions on any anti-competitive practice within six months from the date in which it becomes aware of the practice.

The CCP is currently investigating a cement sector cartel.  While the CCP has found that cement manufacturers in Pakistan established a cartel and kept prices at an artificially high level raising excess revenues worth $250 million, a review is not yet final.  The CCP also conducted a recent inquiry into sugar prices and submitted a report to the prime minister’s office.  That report has not yet been made public and no action has been taken on the report’s findings.  The CCP generally adheres to transparent norms and procedures.

Expropriation and Compensation

Two Acts, the Protection of Economic Reforms Act 1992 and the Foreign Private Investment Promotion and Protection Act 1976, protect foreign investment in Pakistan from expropriation, while the 2013 Investment Policy reinforced the government’s commitment to protect foreign investor interests.  Pakistan does not have a strong history of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Pakistan is a member of the International Center for the Settlement of Investment Disputes (ICSID).  Pakistan ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 2011 under its “Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act.”

Investor-State Dispute Settlement

Pakistan has Bilateral Investment Treaties (BIT) with 32 countries.  The BITs include binding international arbitration of investment disputes.  Since foreign investors generally distrust Pakistan’s domestic courts to enforce commercial contracts, they often include clauses requiring binding international arbitration of investment disputes in contracts with the Government of Pakistan.

Pakistan does not have a BIT or FTA with the United States.

A U.S. industrial services company has an ongoing issue regarding the re-possession of its property – three gas compressors – which remain at Pakistan’s Bhikhi power grid station and have an estimated worth of $2 million.  The company entered into a three-year lease agreement with Pakistan Power Resources (PPR) LLC whereby the three compressors were installed at the Bhikki Rental Power Plant on November 1, 2007.  PPR had entered into a contract with Pakistan’s Water and Power Development Authority (WAPDA) to supply 136MW of electricity under a Government of Pakistan rental power project scheme.  The compressors, with WAPDA identified as the importing entity, were brought in under a “temporary import” scheme of Pakistan’s Federal Bureau of Revenue (FBR), which allowed for lower assessed import duties on the compressors with the understanding that the compressors would be re-exported within a pre-defined time period.  To date, WAPDA has not released the compressors due to outstanding penalties/duties assessed by the FBR for the company’s alleged failure to comply with “temporary import” rules.  The FBR has not granted a requested waiver from the parties, continuing to bar their export.

A California-based information technology company responded to the Capital Development Authority (CDA)’s Expression of Interest for the construction, development, and management of an information technology university in Islamabad in 2008.  According to the Expression of Interest, the CDA would provide the land on a 99-year lease to the highest bidder, on agreed yearly payments.  The company was selected, entered into a lease agreement for approximately 200,000 square yards, and made regular payments to CDA.  Upon taking possession of the land, the company determined that the land area was less than the area agreed in the lease contract.  CDA was unsuccessful in clearing access to the leased land due to unlawful encroachment by local dwellers.  Since 2015, the company has attempted to have CDA either clear the land or reimburse the company its lease payments with interest.

A large U.S. insurance company has sought U.S. support to repatriate approximately $4 million (approximate value based on the dollar-rupee exchange rate) from the sale of its shares in its former Pakistani operations.  The company purchased the Pakistani operations in 2010, which included business entities in the U.S. and Pakistan, and sold its Pakistani interest (worth 81 percent of the Pakistani business) in two tranches in 2014 and 2015.  The company has requested the State Bank of Pakistan (SBP) and Ministry of Finance permit the repatriation of the proceeds.  In the past, the Finance Ministry has held that proceeds from the sale of its Pakistani interests could not be repatriated because they were earned prior to the liberalization of the foreign exchange regime in 1997.

Local courts do not recognize and enforce foreign arbitral awards issued against the government.  Any award involving domestic enforcement component needs an additional affirmative ruling from a local court.

There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Arbitration and special judicial tribunals do exist as alternative dispute resolution (ADR) mechanisms for settling disputes between two private parties.  Pakistan’s Arbitration Act of 1940 provides guidance for arbitration in commercial disputes, but cases typically take years to resolve.  To mitigate such risks, most foreign investors include contract provisions that provide for international arbitration.

Pakistan’s judicial system also allows for specialized tribunals as a means of alternative dispute resolution.  Special tribunals are able to address taxation, banking, labor, and IPR enforcement disputes.  However, foreign investors lament the lack of clear, transparent, and timely investment dispute mechanisms.  Protracted arbitration cases are a major concern.  Pakistani courts have not upheld some international arbitration awards.

Pakistan’s local courts do not recognize and enforce foreign arbitral awards.  Any such award, involving local enforcement, requires direction from a local court.  The Reko Diq mining dispute is an example where an international arbitral award against Pakistan was not enforced by local Pakistani courts and remains unresolved.

Generally, domestic courts favor SOEs for their investment disputes against foreign entities on the basis of “public interest.”  However, there has not been a relevant case in the past ten years.  In the 2006 Pakistan Steel Case, the Supreme Court struck down the contract between the Privatization Commission of Pakistan and the foreign investor who won the bid.  The Supreme Court decided the bidder should have furnished a guarantee that it would  make future investments to raise production capacity.  Despite the fact that this was not a condition specified in the bid documents, the Supreme Court invalidated the contract.  Since then, the government has not been able to find a serious investor/buyer for Pakistan Steel.

Bankruptcy Regulations

Pakistan does not have a single, comprehensive bankruptcy law.  Foreclosures are governed under the Companies Act 2017 and administered by the SECP, while the Banking Companies Ordinance of 1962 governs liquidations of banks and financial institutions.  Court-appointed liquidators auction bankrupt companies’ property and organize the actual bankruptcy process, which can take years to complete.  On average, Pakistan requires 2.6 years to resolve insolvency issues and has a recovery rate of 42.8 percent.  Pakistan was ranked 58 of 190 for ease of “resolving insolvency” rankings in the World Bank’s Doing Business 2020 report.

The Companies Act 2017 regulates mergers and acquisitions.  Mergers are allowed between international companies, as well as between international and local companies.  In 2012, the government enacted legislation for friendly and hostile takeovers.  The law requires companies to disclose any concentration of share ownership over 25 percent.

Pakistan has no dedicated credit monitoring authority.  However, SBP has authority to monitor and investigate the quality of the credit commercial banks extend.

Investment Incentives

The government’s investment policy provides both domestic and foreign investors the same incentives, concessions, and facilities for industrial development.  Though some incentives are included in the federal budget, the government relies on Statutory Regulatory Orders (SROs) – ad hoc arrangements implemented through executive order – for industry specific taxes or incentives.  The government does not offer research and development incentives.  Nonetheless, certain technology-focused industries, including information technology and solar energy, benefit from a wide range of fiscal incentives.  Pakistan currently does not provide any formal investment incentives such as grants, tax credits or deferrals, access to subsidized loans, or reduced cost of land to individual foreign investors.

In general, the government does not issue guarantees or jointly finance foreign direct investment projects.  The government made an exception for CPEC-related projects and provided sovereign guarantees for the investment and returns, along with joint financing for specific projects.

To encourage use of electrical vehicles (EV), the Government of Pakistan incentivized imports of EVs via the Electric Vehicles Policy 2020-2025 as completely built up (CBU)/finished vehicles and EV specific parts in complete knock down (CKD)/unassembled vehicles.  Incentives include rebates on customs duties, regulatory duties, exemptions from sales tax, and lower tariff rates.  (Note: sector contacts state that implementation of the EV policy is delayed as the government has yet to finalize the draft finance bill to introduce the duty exemptions.  Full implementation is expected in 3Q 2021.  End Note.)

Foreign Trade Zones/Free Ports/Trade Facilitation

To boost exports, the government established fiscal and institutional incentives for export-oriented industries who located operations in Export Processing Zones (EPZ), the first of which was established in Karachi in 1989.  Subsequently, EPZs were established in Risalpur, Gujranwala, Sialkot, Saindak, Gwadar, Reko Diq, and Duddar. However, today, only Karachi, Risalpur, Sialkot, and Saindak EPZs remain operational.  These zones offer investors tax and duty exemptions on equipment, machinery, and materials (including components, spare parts, and packing material); indefinite loss carry-forward; and access to the EPZ Authority (EPZA) “Single Window,” which facilitates import and export authorizations.

The 2012 Special Economic Zones (SEZ) Act, amended in 2016, allows both domestically focused and export-oriented enterprises to establish companies and public-private partnerships within SEZs.  According to the Pakistan’s 2013 Investment Policy, any manufacturer that introduces technologies that are unavailable in Pakistan can receive the same incentives available to companies operating in Pakistan’s SEZs.

Pakistan has a total of 23 designated SEZs.  All investors in SEZs are offered a number of incentives, including a ten-year tax holiday, one-time waiver of import duties on plant materials and machinery, and streamlined utilities connections.  Despite these benefits to both foreign and domestic firms, Pakistan’s SEZs have struggled to attract investment due their lack of basic infrastructure.  Khyber Pakhtunkhwa’s Peshawar Economic Zone Office opened in 2020 an Industrial Facilitation Center to provide potential investors with a one-stop shop for existing and new foreign investors.  Pakistan also intends to establish nine SEZs under CPEC.  Most CPEC SEZs remain in nascent stages of development and currently lack basic infrastructure.

Apart from SEZ-related incentives, the government offers special incentives for Export-Oriented Units (EOUs) – a stand-alone industrial entity exporting 100 percent of its production.  EOU incentives include duty and tax exemptions for imported machinery and raw materials, as well as the duty-free import of vehicles.  EOUs are allowed to operate anywhere in the country.  Pakistan provides the same investment opportunities to foreign investors and local investors.

Performance and Data Localization Requirements

Foreign businesspeople often struggle to obtain business visas for travel to Pakistan.  When visas are issued, they are typically only single-entry visas with short-duration validity.  Technical and managerial personnel working in sectors that are open to foreign investment are typically not required to obtain separate work permits.  While Pakistan announced in 2019 its visa and no objection certification (NOC) policies would be changed to attract foreign tourists and businesspeople, the new visa policies do not apply to U.S. passport holders.  In February 2021, Pakistan shifted to a 100-percent e-visa policy to facilitate business (and tourism) travel.  Pakistan also started a 30-day single entry “Business Visa in Your Inbox” Electronic Travel Authorization that allows visa on arrival.

Foreign investors are allowed to sign technical agreements with local investors without disclosing proprietary information.  Foreign investors are not required to use domestic content in goods or technology or hire Pakistani nationals, either as laborers or as representatives on the company’s board of directors.  Likewise, there are no specific performance requirements for foreign entities operating in the country.  Similarly, there are no special performance requirements on the basis of origin of the investment.  However, onerous requirements exist for foreign citizen board members of Pakistani companies, including additional documents required by the SECP as well as vetting by the Ministry of Interior.  Such requirements discourage foreign nationals from becoming board members of Pakistani companies.

There are currently no requirements for foreign IT providers to turn over source code or provide access to encryption.  However, the Government of Pakistan has plans to introduce regulations requiring this.

Currently Pakistan does not restrict data transfer outside of the economy or country’s territory except when involving the banking industry.  State Bank of Pakistan (SBP) requires financial institutions to have local data storage and any transfer of data outside of Pakistan requires formal approval from SBP.

Currently, Pakistan is in the process of approving a “personal data protection” bill and in 2020 approved the “Removal and Blocking of Unlawful Content Rules.”   Each requires data localization and requires platforms with more than 500,000 Pakistani users to register with the Pakistan Telecommunication Authority (PTA) and establish a physical office in Pakistan within nine months of the implementation of the rules.  Within three months of the local office’s establishment, a person must be appointed for coordination, and a data server system must be set up within 18 months.  The rules are also slated to be applied to internet service providers.  All companies and providers are instructed to restrict content contrary to the “security, prestige, and defense of the country.”

The government agencies involved are: the State Bank of Pakistan, the Ministry of Information Technology and Telecommunications, and the Pakistan Telecommunication Authority.

Real Property

Although Pakistan’s legal system includes the enforcement of property rights and both local and foreign owner interests, it offers incomplete protection for the acquisition and disposition of real property.  There is no data with respect to the percentage of land with clear title and land title issues are common.  With the exception of the agricultural sector, where foreign ownership is limited to 60 percent, no specific regulations regarding the leasing of land or acquisition by foreign or non-resident investors exists.  Corporate farming by foreign-controlled companies is permitted if the subsidiaries are incorporated in Pakistan.  There are no limits on the size of corporate farmland holdings, and foreign companies can lease farmland for up to 50 years, with renewal options.

The 1979 Industrial Property Order safeguards industrial property in Pakistan against government use of eminent domain without sufficient compensation for both foreign and domestic investors.  The 1976 Foreign Private Investment Promotion and Protection Act guarantees the remittance of profits earned through the sale or appreciation in value of property.

Though protections for legal purchasers of land are provided, even if unoccupied, land titles remains a challenge.  Improvements to land titling have been made by the Punjab, Sindh, and Khyber Pakhtunkhwa provincial governments who have dedicated significant resources to digitizing land records.  In the newly merged tribal districts of Khyber Pakhtunkhwa, land rights are held collectively by the tribes, not privately by individuals and there are functionally no ownership records.  However, the provincial government is currently undertaking a long-term land registration process in the newly merged districts for tribally owned land.

In urban centers, undocumented possession of unoccupied land, squatting, is a continuing issue.  However, if it can be proven that the land was acquired legally, government agencies are supportive of the legal owner taking possession of their property.

Intellectual Property Rights

The Government of Pakistan has identified protecting intellectual property (IP) rights  as a reform priority and has taken concrete steps over the last two decades to strengthen its IP regime.  In 2005, Pakistan created the Intellectual Property Office (IPO) to consolidate government control over trademarks, patents, and copyrights.  IPO’s mission also includes coordinating and monitoring the enforcement and protection of IPR through law enforcement agencies.  Enforcement agencies include the local police, the Federal Investigation Agency (FIA), customs officials at the FBR, the CCP, the SECP, the Drug Regulatory Authority of Pakistan (DRAP), and the Print and Electronic Media Regulatory Authority (PEMRA).

Although the creation of IPO consolidated policy-making, confusion surrounding enforcement agencies’ roles still constrains performance on IP enforcement, leaving IP rights holders struggling to elicit action to address IP infringement.  Although IPO established ten enforcement coordination committees to improve IP enforcement, and has signed an MOU with the FBR, CCP, Collective Management Office, Pakistan Agricultural Research Council, and SECP to share information, the agency labors to coordinate disparate bodies under current laws.  Weak penalties and the agencies’ redundancies allow counterfeiters to evade punishment, while companies struggle to identify the correct forum in which to file a complaint.

The Intellectual Property Office as an institution has historically suffered from leadership turnover, limited resources, and a lack of government attention.  Since 2016, the Government of Pakistan has taken steps to improve the IPO’s effectiveness, starting with bringing IPO under the administrative responsibility of the Ministry of Commerce.  The IPO Act 2012 stipulates a three-year term, 14-person policy board with at least five seats dedicated to the private sector.  Section 8(2) of the IPO Act also stipulates, “the board shall meet not less than two times in a calendar year.”  2020 was a challenging year due to complications from the COVID-19 pandemic and resultant lockdowns.  As a result, no policy board meeting was held during the year.  IPO is severely under-resourced in human capital, currently working at only 52 percent of its approved staffing.  New hiring rules await final approval from the Ministry of Law.  IPO aims to start recruiting new staff once these rules are approved by the Ministry of Law.

The Intellectual Property Office is also charged with increasing public awareness of IP rights through collaboration with the private sector.  COVID-19 slowed IPO’s momentum in this area with only 20 webinars and virtual interactions concluded during 2020 (down from more than 100 in 2019) – a significant portion of which focused on Pakistan’s new Geographical Indication (GI) Law.  Academics and private attorneys have noted that the creation of the IPO has improved public awareness, albeit slowly.  While difficult to quantify, contacts have also observed increased local demand for IPR protections, including from small businesses and startups.  Private and public sector contacts highlight that the educational system is a “missing link” in IPR awareness and enforcement.  Pakistani educational institutions, including law schools, have rarely included IPR issues in their curricula and do not have a culture of commercializing innovations.  However, the International Islamic University now includes an IP rights-specific course in its curriculum and Lahore University of Management Sciences has content-specific courses as part of its MBA program.  IPO officials have expressed interest in collaborating with Pakistani universities to increase IPR awareness.  IPO is working with the Higher Education Commission to offer IPR curricula at other universities but has achieved limited traction.  In collaboration with the World Intellectual Property Organization (WIPO), Technology Innovation Support Centers have been established at 47 different universities in Pakistan.

In 2016, Pakistan established three specialized IP tribunals: in Karachi covering Sindh and Balochistan, in Lahore covering Punjab, and in Islamabad covering Islamabad and Khyber Pakhtunkhwa.  IPO had initiated a plan to create additional tribunals in 2019, however, the proposal is still awaiting approval from the Ministry of Law.  These tribunals have not been a priority in terms of assigning judges.  They have experienced high turnover, and the assigned judges do not receive any specialized technical training in IP law.

Pakistan’s IPR legal framework remains inadequate, consisting of 40-year-old subordinate IP laws on copyright, patents, and trademarks alongside the 2012 IPO Act.  The IPO Act provides the overall legal basis for IP licensing and enforcement while subordinate laws apply to specific IP fields, but inconsistencies in the laws make IP enforcement difficult.  Since 2000, Pakistan has made piecemeal updates to IPR laws in an incomplete bid to bring consistency to IPR treatment within the legal system.  With the help of Mission Pakistan, CLDP, and the U.S. Patent and Trademark Office (USPTO), IPO is updating Pakistan’s IPR laws to minimize inconsistencies and improve enforcement, but progress has been slow.

In February 2021, Pakistan acceded to the Madrid Protocol on Trademarks.

The U.S. Mission in Pakistan, with the support of USTR, the Department of Commerce, and USPTO, has engaged with the Government of Pakistan over several years seeking resolution of long-standing software licensing and IP infringements committed by offices within the Government of Pakistan which undermine Pakistan’s credibility with respect to IP enforcement.  In early 2021, several U.S. agencies, including the Commercial Law Development Program, United States Patent and Trademark Office, USAID, and the U.S. Food & Drug Administration, launched a six-month, 16-part capacity building series with Pakistani IP enforcement and relevant officials focused on curbing the flow of counterfeit pharmaceuticals within and through Pakistan.  The program provides instruction on forensic tools, pharmaceutical supply chain integrity, cyber intelligence, and the identification of transnational criminal organizations exploiting trade routes.  The program seeks to address intellectual property rights enforcement issues while protecting public health and safety.

Pakistan is currently on the Special 301 report Watch List.

Pakistan does not track and report on its seizures of counterfeit goods.

Resources for Intellectual Property Rights Holders:

John Cabeca
Intellectual Property Counselor for South Asia
U.S. Patent and Trademark Office
Foreign Commercial Service
email: john.cabeca@trade.gov
website: https://www.uspto.gov/ip-policy/ip-attache-program
tel: +91-11-2347-2000

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Capital Markets and Portfolio Investment

Pakistan’s three stock exchanges (Lahore, Islamabad, and Karachi) merged to form the Pakistan Stock Exchange (PSX) in January 2016.  As a member of the Federation of Euro-Asian Stock Exchanges and the South Asian Federation of Exchanges, PSX is also an affiliated member of the World Federation of Exchanges and the International Organization of Securities Commissions.  Per the Foreign Exchange Regulations, foreign investors can invest in shares and securities listed on the PSX and can repatriate profits, dividends, or disinvestment proceeds.  The investor must open a Special Convertible Rupee Account with any bank in Pakistan in order to make portfolio investments.  In 2017, the government modified the capital gains tax and imposed a 15 percent tax on stocks held for less than 12 months, 12.5 percent on stocks held for more than 12 but less than 24 months, and 7.5 percent on stocks held for more than 24 months. The 2012 Capital Gains Tax Ordinance appointed the National Clearing Company of Pakistan Limited to compute, determine, collect, and deposit the capital gains tax.

The SBP and SECP provide regulatory oversight of financial and capital markets for domestic and foreign investors.  Interest rates depend on the reverse repo rate (also called the policy rate).

Pakistan has adopted and adheres to international accounting and reporting standards – including IMF Article VIII, with comprehensive disclosure requirements for companies and financial sector entities.

Foreign-controlled manufacturing, semi-manufacturing (i.e. goods that require additional processing before marketing), and non-manufacturing concerns are allowed to borrow from the domestic banking system without regulated limits.  Banks are required to ensure that total exposure to any domestic or foreign entity should not exceed 25 percent of a bank’s equity.  Foreign-controlled (minimum 51 percent equity stake) semi-manufacturing concerns (i.e., those producing goods that require additional processing for consumer marketing) are permitted to borrow up to 75 percent of paid-up capital, including reserves.  For non-manufacturing concerns, local borrowing caps are set at 50 percent of paid-up capital.  While there are no restrictions on private sector access to credit instruments, few alternative instruments are available beyond commercial bank lending.  Pakistan’s domestic corporate bond, commercial paper and derivative markets remain in the early stages of development.

Money and Banking System

The State Bank of Pakistan (SBP) is the central bank of Pakistan.

According to the most recent statistics published by the SBP (2021), only 24 percent of the adult population uses formal banking channels to conduct financial transactions while 25 percent are informally served by the banking sector; women are financially excluded at higher rates than men.  The remaining 51 percent of the adult population do not utilize formal financial services.

Pakistan’s financial sector has been described by international banks and lenders as performing well in recent years.  According to the latest review of the banking sector conducted by SBP in July 2020, improving asset quality, stable liquidity, robust solvency, and slow pick-up in private sector advances were noted.  The asset base of the banking sector expanded by 7.8 percent during 2020 due to a surge in banks’ investments, which increased by 22.8 percent (or PKR 2 trillion).  The five largest banks, one of which is state-owned, control 50.4 percent of all banking sector assets.

SBP conducted the 6th wave of the Systemic Risk Survey in August-2020.  The survey results indicated respondents perceived key risks for the financial system to be mostly exogenous and global in nature.  Importantly, the policy measures rolled out by SBP to mitigate the effects of COVID-19 have been very well received by the stakeholders.

The risk profile of the banking sector remained satisfactory and moderation in profitability and asset quality improved as non-performing loans as a percentage of total loans (infection ratio) was recorded at 9.7 percent at the end of FY 2020 (June 30, 2020).  In 2020, total assets of the banking industry were estimated at $151.9 billion and net non-performing bank loans totaled approximately $1 billion– 1.9 percent of net total loans.

The penetration of foreign banks in Pakistan is low, making a small contribution to the local banking industry and the overall economy.  According to a study conducted by the World Bank Group in 2018, (the latest data available) the share of foreign bank assets to GDP stood at 3.5 percent while private credit by deposit to GDP stood at 15.4 percent.  Foreign banks operating in Pakistan include Citibank, Standard Chartered Bank, Deutsche Bank, Samba Bank, Industrial and Commercial Bank of China, Bank of Tokyo, and the Bank of China.  International banks are primarily involved in two types of international activities: cross-border flows, and foreign participation in domestic banking systems through brick-and-mortar operations.  SBP requires foreign banks to hold at minimum $300 million in capital reserves at their Pakistani flagship location, and maintain at least an 8 percent capital adequacy ratio.  In addition, foreign banks are required to maintain the following minimum capital requirements, which vary based on the number of branches they are operating:

• 1 to 5 branches: $28 million in assigned capital;
• 6 to 50 branches: $56 million in assigned capital;
• Over 50 branches: $94 million in assigned capital.

Foreigners require proof of residency – a work visa, company sponsorship letter, and valid passport – to establish a bank account in Pakistan.  There are no other restrictions to prevent foreigners from opening and operating a bank account.

Foreign Exchange and Remittances

Foreign Exchange

As a prior action of its July 2019 IMF program, Pakistan agreed to adopt a flexible market-determined exchange rate.  The SBP regulates the exchange rate and monitors foreign exchange transactions in the open market, with interventions limited to safeguarding financial stability and preventing disorderly market conditions.  However, other government entities can influence SBP decisions through their membership on the SBP’s board; the finance secretary and the Board of Investment chair currently sit on the board.

Banks are required to report and justify outflows of foreign currency.  Travelers leaving or entering Pakistan are allowed to physically carry a maximum of $10,000 in cash.  While cross-border payments of interest, profits, dividends, and royalties are allowed without submitting prior notification, banks are required to report loan information so SBP can verify remittances against repayment schedules.  Although no formal policy bars profit repatriation, U.S. companies have faced delays in profit repatriation due to unclear policies and coordination between the SBP, the Ministry of Finance and other government entities.  Mission Pakistan has provided advocacy for U.S. companies which have struggled to repatriate their profits.  Exchange companies are permitted to buy and sell foreign currency for individuals, banks, and other exchange companies, and can also sell foreign currency to incorporated companies to facilitate the remittance of royalty, franchise, and technical fees.

There is no clear policy on convertibility of funds associated with investment in other global currencies.  The SBP opts for an ad-hoc approach on a case-by-case basis.

Remittance Policies

The 2001 Income Tax Ordinance of Pakistan exempts taxes on any amount of foreign currency remitted from outside Pakistan through normal banking channels.  Remittance of full capital, profits, and dividends over $5 million are permitted while dividends are tax-exempt.  No limits exist for dividends, remittance of profits, debt service, capital, capital gains, returns on intellectual property, or payment for imported equipment in Pakistani law.  However, large transactions that have the potential to influence Pakistan’s foreign exchange reserves require approval from the government’s Economic Coordination Committee.  Similarly, banks are required to account for outflows of foreign currency.  Investor remittances must be registered with the SBP within 30 days of execution and can only be made against a valid contract or agreement.

In September 2020, Prime Minister Imran Khan launched the Roshan Digital Account (RDA) project aimed at providing digital banking facilities to overseas Pakistanis.  Customers can use  both PKR and USD for transactions and the accounts receive special tax treatment.

Sovereign Wealth Funds

Pakistan does not have its own sovereign wealth fund (SWF) and no specific exemptions for foreign SWFs exist in Pakistan’s tax law.  Foreign SWFs are taxed like any other non-resident person unless specific concessions have been granted under an applicable tax treaty to which Pakistan is a signatory.

Pakistan has 197 state-owned enterprises (SOEs) in the power, oil and gas, banking and finance, insurance, and transportation sectors.  They provide stable employment and other benefits for more than 420,000 workers, but a number require annual government subsidies to cover their losses.

Three of the country’s largest SOEs include:  Pakistan Railways (PR), Pakistan International Airlines (PIA), and Pakistan Steel Mills (PSM).  According to the IMF, the total debt of SOEs now amounts to 2.3 percent of GDP – just over $7 billion in 2019.  Note: IMF and WB data for 2020 regarding SOEs is not yet available, however, according to SBP provisional data from December 2020, the total debt of Pakistani SOEs is $14.62 billion.  End Note.  The IMF required audits of PIA and PSM by December 2019 as part of Pakistan’s IMF Extended Fund Facility.  PR is the only provider of rail services in Pakistan and the largest public sector employer with approximately 90,000 employees.  PR has received commitments for $8.2 billion in CPEC loans and grants to modernize its rail lines.  PR relies on monthly government subsidies of approximately $2.8 million to cover its ongoing obligations.  In 2019, government payments to PR totaled approximately $248 million.  The government provided a $37.5 million bailout package to PR in 2020.  In 2019, the Government of Pakistan extended bailout packages worth $89 million to PIA.  Established to avoid importing foreign steel, PSM has accumulated losses of approximately $3.77 billion per annum.  The government has provided $562 million to PSM in bailout packages since 2008.  The company loses $5 million a week, and has not produced steel since June 2015, when the national gas company shut off supplies to PSM facilities due to its greater than $340 million in outstanding unpaid utility bills.

SOEs competing in the domestic market receive non-market based advantages from the host government.  Two examples include PIA and PSM, which operate at a loss but continue to receive financial bailout packages from the government.  Post is not aware of any negative impact to U.S firms in this regard.

The Securities and Exchange Commission of Pakistan (SECP) introduced corporate social responsibility (CSR) voluntary guidelines in 2013.  Adherence to the OECD guidelines is not known.

Privatization Program 

Terms to purchase public shares of SOEs and financial institutions are the same for both foreign and local investors.  The government on March 7, 2019 announced plans to carry out a privatization program but postponed plans because of significant political resistance.  Even though the government is still publicly committed to privatizing its national airline (PIA), the process has been stalled since early 2016 when three labor union members were killed during a violent protest in response to the government’s decision to convert PIA into a limited company, a decision which would have allowed shares to be transferred to a non-government entity and pave the way for privatization.  A bill passed by the legislature requires that the government retain 51% equity in the airline in the event it is privatized, reducing the attractiveness of the company to potential investors.

The Privatization Commission claims the privatization process to be transparent, easy to understand, and non-discriminatory.  The privatization process is a 17-step process available on the Commission’s website under this link http://privatisation.gov.pk/?page_id=88.

The following links provide details of the Government of Pakistan’s privatized transactions over the past 18 years, since 1991:  http://privatisation.gov.pk/?page_id=125

There is no unified set of standards defining responsible business conduct (RBC) in Pakistan.  Though large companies, especially multi-national corporations, have an awareness of RBC standards, broader awareness is lacking.  The Pakistani government has not established standards or strategic documents specifically defining RBC standards and goals.  The Ministry of Human Rights published its most recent “Action Plan for Human Rights” in May 2017.  Although it does not specifically address RBC or business and human rights, one of its six thematic areas of focus is implementation of international and UN treaties.  Pakistan is signatory to nearly all International Labor Organization (ILO) conventions.

International organization, civil society, and labor union contacts all note that there is a lack of adequate implementation and enforcement of labor laws.  Some NGOs, worker organizations, and business associations are working to promote RBC, but not on a wide scale.

According to NGOs, international organizations, and civil society contacts, children continued to work in conditions of forced and bonded labor.  In rural areas, forced child labor appeared to occur most frequently in the agriculture and brick making industries.  Pakistan does not have domestic measures which require supply chain due diligence for companies sourcing minerals originating from conflict-affected areas.  In 2021, DOL started a pilot project to support tracing in supply chains for cotton in Punjab.  It does not participate in the Extractive Industries Transparency Initiative (EITI) and/or the Voluntary Principles on Security and Human Rights.

Additional Resources

Department of State

Country Reports on Human Rights Practices (https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);

Trafficking in Persons Report (https://www.state.gov/trafficking-in-persons-report/);

Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities (https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;

North Korea Sanctions & Enforcement Actions Advisory (https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf).

Department of Labor

Findings on the Worst forms of Child Labor Report (https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings );

List of Goods Produced by Child Labor or Forced Labor (https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods);

Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World (https://www.dol.gov/general/apps/ilab) and;

Comply Chain (https://www.dol.gov/ilab/complychain/).

Pakistan ranked 124 out of 180 countries on Transparency International’s 2020 Corruption Perceptions Index.  The organization noted corruption problems persist due to the lack of accountability and enforcement of penalties, followed by the lack of merit-based promotions, and relatively low salaries.

Bribes are classified as criminal acts under the Pakistani legal code and are punishable by law, but are widely believed to be given across all levels of government.  Although higher courts are widely viewed as more credible, lower courts are often considered corrupt, inefficient, and subject to pressure from prominent wealthy, religious, political, and military figures.  Political involvement in judicial appointments increases the government’s influence over the court system.

The National Accountability Bureau (NAB), Pakistan’s anti-corruption organization, suffers from insufficient funding and professionalism, and is viewed by Pakistan’s opposition as politically biased.  Fear of NAB prosecution has also deterred agency action on legitimate regulatory issues affecting the business sector.

Resources to Report Corruption

Justice (R) Javed Iqbal
Chairman
National Accountability Bureau
Ataturk Avenue, G-5/2, Islamabad
+92-51-111-622-622
chairman@nab.gov.pk

Ms. Yasmin Lari
Chair
Transparency International
5-C, 2nd Floor, Khayaban-e-Ittehad, Phase VII, D.H.A., Karachi
+92-21-35390408-9
ti.pakistan@gmail.com

Despite improvements to the security situation in recent years, the presence of foreign and domestic terrorist groups within Pakistan continues to pose some threat to U.S. interests and citizens.  Terrorist groups commit occasional attacks in Pakistan, though the number of such attacks has declined steadily over the last decade.  Terrorists have in the past targeted transportation hubs, markets, shopping malls, military installations, airports, universities, tourist locations, schools, hospitals, places of worship, and government facilities.  Many multinational companies operating in Pakistan employ private security and risk management firms to mitigate the significant threats to their business operations.  Baloch militant groups continue to target the Pakistani military as well as Chinese and CPEC installations in Balochistan, where Gwadar port is being developed under CPEC.  There are greater security resources and infrastructure in the major cities, particularly Islamabad, and security forces in these areas may be more readily able to respond to an emergency compared to other areas of the country.

The BOI, in collaboration with Provincial Investment Promotion Agencies, can coordinate airport-to-airport security and secure lodging for foreign investors.  To inquire about this service, investors can contact the BOI for additional information – https://www.invest.gov.pk/

Abductions/kidnappings of foreigners for ransom remains a concern.

While security challenges exist in Pakistan, the country has not grown increasingly politicized or insecure in the past year.

Pakistan has a complex system of labor laws.  According to the 18th Amendment to the Constitution, jurisdiction over labor matters is managed by the provinces.  Each province is in the process of developing its own labor law regime, and the provinces are at different stages of labor law development.

In the Islamabad Capital Territory and provinces of Punjab, Khyber Pakhtunkhwa, and Balochistan, the minimum wage for unskilled workers is PKR 17,500 (c.$110) per month.  In Sindh, it is PKR 17,000 (c. $105) per month.  However, the minimum recommended living wage by the Pakistan Institute of Labor Education and Research (PILER) is PKR 31,000 (c. $200) whereas ILO has recommended a reference wage of at least PKR 25,000 (c. $165) per month.  Legal protections for laborers are uneven across provinces, and implementation of labor laws is weak nationwide.  Lahore inspectorates have inadequate resources, which lead to inadequate frequency and quality of labor inspections.  Some labor courts are reportedly corrupt and biased in favor of employers.  In July 2020, the Pakistani government amended the Employment of Children Act 1991 to include child domestic labor as hazardous work.  The decision applies to the Islamabad Capital Territory; provinces are able to adopt the measure via a provincial assembly resolution.  On January 23, 2019 the Punjab Provincial Assembly passed the Punjab Domestic Workers Act 2019.  The law prohibits the employment of children under age 15 as domestic workers, and stipulates that children between 15 and 18 may only perform part-time, non-hazardous household work.  The law also mandates a series of protections and benefits, including limits to the number of hours worked weekly, and paid sick and holiday leave.  On January 25, 2017 the Sindh Provincial Assembly passed the Sindh Prohibition of Employment of Children Act, 2017.  In August 2019, the Balochistan Assembly adopted a resolution to eradicate child labor in coal mines.

The Senate passed the Domestic Workers (Employment Rights) Act in March 2016 (http://www.senate.gov.pk/uploads/documents/1390294147_766.pdf), but the bill has not progressed in the National Assembly.  An amendment to the federal Employment of Children Act, 1991, which would raise the minimum age of employment to sixteen, has been pending in the National Assembly since January 2016.

According to Pakistan’s most recent labor force survey (conducted 2017-2018), the civilian workforce consists of approximately 65.5 million workers.  Women are far under-represented in the formal labor force.  The survey estimated overall labor participation at approximately 45 percent, with male participation at 68 percent and females at 20 percent.  The largest percentage of the labor force works in the agricultural sector (38.5 percent), followed by the services (37.84 percent), and industry/manufacturing (16 percent) sectors.  Although the official unemployment rate hovered at roughly 6 percent pre-COVID-19, the figure is likely significantly higher.  Additionally, there are as-yet no reliable unemployment statistics since the COVID-19 outbreak.  In 2018, the UN Population Fund estimated that 29 percent of Pakistan’s population was between the ages of 10 and 24 and according to 2017-18 labor force survey estimates unemployment for 15 to 24 year old was 10.5 percent.

Pakistan is a labor exporter, particularly to Gulf Cooperation Council (GCC) countries.  According to Pakistan’s Bureau of Emigration and Overseas Employment’s 2019 “Export of Manpower Analysis,” (the latest report available) the bureau had registered more than 11 million Pakistanis going abroad for employment since 1971, with more than 96 percent traveling to GCC countries.  Pakistanis working overseas have sent more than $20 billion in remittances each year since 2015.  Remittances of more than $2 billion per month have continued from mid-2020 through February 2021 despite the negative impacts of COVID-19 that has resulted in many overseas Pakistanis returning to Pakistan over the last year.

Pakistani government sector contacts say their workforce is insufficiently skilled.  Federal and provincial government initiatives such as the National Vocational and Technical Training Commission and the Punjab government’s Technical Education and Vocational Training Authority aim to increase the employability of the Pakistani workforce.  However, the ILO’s 2016-2020 Pakistan Decent Work Country Program notes that, “Neither a comprehensive national policy nor coherent provincial policies for skills and entrepreneurship development are being applied.”  The ILO report notes that “a small fraction of vulnerable workers are covered by social security in one form or another, while access to comprehensive social protection systems is also limited.”  The ILO’s 2016 Decent Work Country Profile states that in 2015, only 9.4 percent of the economically active population – excluding public sector employees – were contributing to formal social security systems such as old age, survivors’, and disability pensions.

Freedom of association is guaranteed under Article 17 of Pakistan’s Constitution.  However, the ILO indicates that the Pakistani state and employers have used “disabling legislation and repressive tactics” to make union formation and collective bargaining “extremely difficult.” A report compiled by ILO in 2018 noted there were a total of 7,906 registered trade unions with a total membership of 1,414,160.  However, this may underreport the actual figure because it pertains to the number of members declared at the time of union registration.  As membership grows over time, provincial labor departments and the National Industrial Relations Commission (NIRC) do not regularly update their records.  According to worker representative organizations, the estimated unionized workforce is approximately two million, which would represent roughly three percent of the total workforce in Pakistan. Provincial labor departments are responsible for managing trade union and industrial labor disputes.  Each province has its own industrial relations legislation, and each has labor courts to adjudicate disputes.  Recent strikes have been spearheaded by public sector workers, such as teachers and public health workers.

The ILO’s 2016-2020 Pakistan Decent Work Country Program states that “exploitative labor practices in the form of child and bonded labor remain pervasive…” and notes “the absence of reliable and comprehensive data to accurately assess the situation of hazardous child labor, worst forms of child labor, or forced labor.”  The report also identifies weak compliance with, and enforcement of, labor laws and regulations as contributing to poor working conditions – including unhealthy and unsafe workplaces –and the erosion of worker rights.

Pakistan is a beneficiary of the U.S. Generalized System of Preferences (GSP) program, (Note: As of April 2021, the GSP program has lapsed pending review.  End Note), as well as the EU’s GSP+ program, both of which require labor standards to be upheld.

The Development Finance Corporation is active in Pakistan with a current portfolio in excess of $400 million as of June 2020, including investments in, insurance for, or financing of microfinance, wind energy, and healthcare projects, among others, with more in the pipeline.  An Investment Incentive Agreement was signed between the United States and Pakistan in 1997.

https://www.dfc.gov/sites/default/files/2019-08/bl_pakistan_islamic_republic_of_11-18-1997.pdf

https://www.state.gov/pakistan-12903-investment-incentive-agreement/

Michael D. Boven
Economic Officer – Trade and Investment
Embassy Islamabad
+92 51 201 4000
BovenMD@state.gov