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 IPR (TRIPS), and the control of foreign exchange. Despite mandatory 30-day public comment periods, PRC 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 between the CCP, the PRC government, PRC business (state- and private-owned), and other PRC stakeholders are blurred. 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, PRC 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.
While the government of China made many policy announcements in 2021 that will provide impetus to ESG reporting, stock exchanges on mainland China (not including Hong Kong) have not made ESG reporting mandatory. For instance, currently eighteen PRC companies are signatories to the UN Principles for Responsible Investment. While the PRC government did announce its green finance taxonomy known as China’s “Catalogue of Green Bond Supported Projects”, experts cited the taxonomy lacks mandatory reporting and verification. On November 4, the People’s Bank of China and the European Commission also jointly launched a sustainable finance taxonomy to create comparable standards on green finance products. Mainland ESG efforts were also primarily focused on environmental and social impact-related, and less so on governance-related reporting. China’s goal to peak carbon emissions before 2030 and reach carbon neutrality by 2060 will drive reporting on decarbonization plans and targets and could increase alignment with international standards such as those outlined in the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. The PRC government also incorporated non-mandatory ESG-like principles into overseas development initiatives such as its signature Belt and Road Initiative (BRI) via its Guiding Opinions on Promoting Green Belt and Road Construction. For instance, the PRC adopted the Green Investment Principles (GIP) for greening investment for BRI projects; under this initiative members – including major PRC policy banks funding BRI projects – are expected to provide their first TCFD disclosure by 2023. Obstacles contacts cited include a shortage of quality data and ESG professionals, such as third-party auditors which are required to support evidence based ESG reporting.
In December, MEE issued new disclosure rules requiring five types of domestic entities to disclose environmental information on an annual basis, effective February 8, 2022. The rules will apply only to listed companies and bond issuers that were subject to environmental penalties the previous year and other MEE-identified entities, including those that discharged high levels of pollutants. Entities must disclose information on environmental management, pollution generation, carbon emissions, and contingency planning for environmental emergencies. These same companies and bond issuers must also disclose climate change and environmental protection information related to investment and financing transactions.
On June 28, the CSRC issued final amendments requiring listed companies disclose environmental penalties and encouraging carbon emissions disclosures. It also issued guidelines on the format and content of annual reports and half-year reports of listed companies, requiring them to set up a separate “Section 5 Environmental and Social Responsibility” to encourage carbon emission reduction related disclosure. In May, the Ministry of Ecology and Environment (MEE) issued a plan for strengthening environmental disclosure requirements by 2025. Most contacts assessed investors are the key drivers of increased ESG disclosures.
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.
The PRC is also a member of the Regional Comprehensive Economic Partnership (RCEP), which entered into force on January 1, 2022. Although RCEP has some elements of a regional economic bloc, many of its regulatory provisions (for example on data flow) are weakened by national security exemptions.
On September 16, China submitted a written application to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) to New Zealand (the depositary of the agreement). The PRC would face challenges in addressing obligations related to SOEs, labor rights, digital trade, and increased transparency.
Legal System and Judicial Independence
China’s legal system borrows heavily from continental European legal systems, but with “Chinese characteristics.” The rules governing commercial activities are found in various laws, regulations, departmental 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. The PRC’s constitution and laws are clear that PRC courts cannot exercise power independent of the Party. Further, in practice, influential businesses, local governments, and regulators routinely influence courts. Outside of the IP space, U.S. companies often 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
The PRC’s new foreign investment law, the FIL, came into force on January 1, 2020, replacing the 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 PRC 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 PRC ministries and local officials significant regulatory discretion, including the ability to retaliate against foreign companies.
The December 2020 revised investment screening mechanism under the Measures on Security Reviews on Foreign Investments (briefly discussed above) came into effect January 18 without any period for public comment or prior consultation with the business community. Foreign investors complained 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. While not comprehensive, a list of official PRC laws and regulations is here .
On June 10, the Standing Committee of the NPC adopted the Law of the People’s Republic of China on Countering Foreign Sanctions (“Anti-Foreign Sanctions Law” or AFSL). The AFSL gives the government explicit authority to impose countermeasures related to visas, deportation, and asset freezing against individuals or organizations that broadly endanger China’s “sovereignty, security, or development interests.” The law also calls for Chinese citizens and organizations harmed by foreign “sanctions” to pursue damages via PRC civil courts.
On October 13, MOF issued a circular prohibiting discrimination against foreign-invested enterprises (FIEs) in government procurement for products “produced in China.” The circular required that suppliers not be restricted based on ownership, organization, equity structure, investor country, or product brand, to ensure fair competition between domestic and foreign companies. The circular also required the abolition of regulations and practices violating the circular by the end of November, including the establishment of alternative databases and qualification databases. This circular may have been intended to address the issuance of Document No. 551 in May by MOF and the Ministry of Industry and Information Technology (MIIT) (without publishing on official websites), titled “Auditing guidelines for government procurement of imported products,” outlining local content requirements for hundreds of items, many of which are medical devices, including X-ray machines and magnetic resonance imaging equipment. It is unclear whether Document 551 will be rescinded or revised based on this circular. Additionally, the circular applies only to FIEs and does not provide fair treatment for imported products from companies overseas. While the circular does state FIEs should be afforded equal treatment, the circular does not address concerns about localization pressures created by Document 551. Further, the circular provides no guidance on what constitutes a “domestic product” and does not address treatment of products manufactured in China that incorporate content from other jurisdictions, key concerns for a wide range of U.S. firms.
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 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 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 oversees assessing the project’s compliance with a panoply of PRC laws and regulations. In some cases, NDRC solicits the opinions of relevant industrial regulators and consulting agencies acting on behalf of domestic firms, creating potential conflicts of interest disadvantageous to foreign firms.
Competition and Antitrust Laws
In November 2021, the PRC government announced transformation of the Anti-Monopoly Bureau of the SAMR, renaming it the National Anti-Monopoly Bureau, adding three new departments, and doubled staffing. The National Anti-Monopoly Bureau enforces China’s Anti-Monopoly Law (AML) and oversees competition issues at the central and provincial levels. The bureau reviews mergers and acquisitions, and investigates cartel and other anticompetitive agreements, abuse of a dominant market positions, including those related to IP, and abuse of administrative powers by government agencies. The bureau also oversees the Fair Competition Review System (FCRS), which requires government agencies to conduct a review prior to issuing new and revising administrative regulations, rules, and guidelines to ensure such measures do not inhibit competition. SAMR issues implementation guidelines 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 October 2021, SAMR issued draft amendments to the AML for public comment. Revisions to the AML are expected to be finalized in 2022 and likely will include changes such as stepped-up fines for AML violations and specification of the factors to consider in determining whether an undertaking in the internet sector has abused a dominant market position. 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.
Foreign companies have long 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 authorized monopolies in industries that affect the national economy or national security. U.S. companies expressed concerns that in SAMR’s consultations with other PRC agencies when reviewing M&A transactions, those agencies raise concerns not related to competition concerns to block, delay, or force transacting parties to comply with preconditions – including technology transfer – to receive approval.
Expropriation and Compensation
China’s law prohibits nationalization of FIEs, except under vaguely specified “special circumstances” where there is a national security or public interest need. PRC 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). PRC 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. However, in some disputes, PRC courts have refused to enforce arbitral awards they deem violate public interest and policy. Further, the process by which PRC courts – and ultimately the Supreme People’s Court – agree or refuse to enforce an arbitral award is opaque, and U.S. companies seeking enforcement of such awards are often left in the dark for years awaiting a determination.
Investor-State Dispute Settlement (ISDS)
As China has become a capital exporter under its “Going Global” initiative and through 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. PRC investors did not use investor-state dispute settlement (ISDS) mechanisms until 2007, and the first known ISDS case against China was initiated in 2011 by Malaysian investors. China is a signatory to the International Centre for Settlement of Investment Disputes (ICSID) under the World Bank which provides arbitration under ICSID and United Nations Commission on International Trade Law (UNCITRAL) rules. China submitted a proposal on ISDS reform to the 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
PRC officials typically urge private parties to resolve commercial disputes through informal mediation. If formal mediation is necessary, PRC 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 PRC and foreign arbitration bodies. In these instances, foreign investors may appeal to higher courts. The government of China and its 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, Xian, and 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 PRC law-qualified lawyers, as foreign lawyers do not have a right of audience in China’s 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 PRC law, courts must prioritize the Party’s needs, China’s laws and other regulatory measures above foreign court judgments.
Comprehensive data on how investments disputes over the last ten years involving a U.S. or international person was not available, however, there have been limited instances of PRC courts enforcing U.S. court (or other foreign court) decisions on the basis of reciprocal treatment. It is unclear what the trend on enforcement of foreign judgments will be.
Bankruptcy Regulations
The PRC introduced bankruptcy laws in 2007, under the Enterprise Bankruptcy Law (EBL), which applies to all companies incorporated under PRC laws and subject to PRC regulations. In May 2020, the PRC released the Civil Code, contract and property rights rules. Despite the NPC listing amendments to the EBL as a top work priority for 2021, the NPC has not released the amendments to the public. 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. As of 2021 official statements cited 5,060 institutional administrators and 703 individual administrators.
On August 18, the Law Enforcement Inspection Team of the Standing Committee of the NPC was submitted its report on the enforcement of enterprise bankruptcy to the 30th meeting of the Standing Committee of the Thirteenth NPC for deliberation. While the report is unavailable publicly, the Supreme People’s Court (SPC) website issued a press release noting the report found that from 2007 to 2020, courts at all levels nationwide accepted 59,604 bankruptcy cases, and concluded 48,045 bankruptcy cases (in 2020 there were 24,438 liquidation and bankruptcy cases). Of the total liquidation and bankruptcy cases recorded in that same period, 90 percent involved private enterprises. The announcement also cited the allocation of additional resources, including future establishment of at least 14 bankruptcy tribunals and 100 Liquidation & Bankruptcy Divisions and specialized collegial panels to handle bankruptcy cases. As of August 2021, bankruptcy cases are handled by 417 bankruptcy judges, 28 high people’s courts, and 284 intermediate people’s courts.
In 2021 the government added a new court in Haikou. National data is unavailable for 2021, but local courts have released some information that suggest a nearly 10 percent increase in liquidation and bankruptcy cases in Jiangxi province and about a 66 percent increase in Guangzhou, the capital city of Guangdong province. While PRC authorities are taking steps to address 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 outcome. According to the SPC, 2.899 million enterprises closed business in 2020, of which only 0.1 percent or 3,908 closed because of bankruptcy.
In August 2020, Shenzhen released the Personal Bankruptcy Regulations of Shenzhen Special Economic Zone, to take effect on March 1, 2021. This is the PRC’s first regulation on personal bankruptcy. On July 19, the Shenzhen Intermediate People’s Court of Guangdong Province, China served a ruling on Liang Wenjin approving his personal bankruptcy reorganization plan. This was the first personal bankruptcy case closed by Shenzhen Court since the implementation of the Personal Bankruptcy Regulations of Shenzhen Special Economic Zone and is the first personal bankruptcy reorganization case in China.
The Personal Bankruptcy Regulations is China’s first set of rules on personal bankruptcy, which formally establishes the personal bankruptcy system in China for the first time. At present, the Personal Bankruptcy Regulations is only applicable in Shenzhen. Numerous other localities have also begun experimenting with legal remedies for personal insolvency, in part to deter debtors from taking extreme measures to address debt.