Impact on Foreign Investment From The Change Of Law And Regulations In China

Nonetheless, it would be expected to hinder foreign investment at restricted industries, which had been made possible by use of Varity Interest Entities under the existing law. This research therefore aims to investigate the changes of foreign investment law and analyze its impact on foreign investment in China. Introduction China gives out some of the most peculiar opportunities, yet a special form of legal, cultural and political issues. Its legal regime is distinct in various ways such that it is no easily comprehended by referring directly to western standards. Its legislation is drafted broadly enabling civil servants and judges to have a powerful authority for proper interpretation of the rules in accordance with the changes in policy and the overall market development in China.

al, 34). These amendments to the Foreign Investment Catalogue in 2016, including the introduction of the Negative List, brought about a significant simplification of China’s foreign investment rules and regulations. In 2017, updates were made on the China’s Foreign Investment Catalogue which was the 2017 Catalogue and imported the concept of the Negative List directly into the 2017 Catalogue. The 2017 Catalogue is now divided into two large categories one the Encouraged Category which lists businesses in which foreign investment is supported and two a Negative List which is simply a list of businesses in which a foreign investor would first need to undergo a special administrative approval process before investing. The Negative List is further divided into two categories the Restricted Category and the Prohibited Category.

insurance, banking and shipping, in which case certain minimum regulatory capital requirements will apply). An FIE is, however, subject to an upper limit on the amount of a “total investment” it may have. “Total investment” is the sum of the FIE’s registered capital and its foreign debt borrowing capacity. The difference between the total amount of investment and the registered capital therefore represents the maximum ability of the FIE to take on registered foreign debt. The following table sets out the minimum required ratios of registered capital to total investment, which effectively place an upper limit on the FIE’s ability to incur registered foreign debt: In 2016, the Chinese government began to offer FIEs an alternative method of determining the amount of foreign debt that can be borrowed.

In return the government awards the foreign investors with subsidies in tax and giving the investors waivers. The Catalogue is composed of industries which are under the permitted category while the foreign investors in particular industries with restrictions are under the restriction category. For example the native citizens of Chinese partners are allowed to own more shares. The foreign investors are not allowed to invest in prohibited industries examples of such industries are medical products national defense and media business (Sornarajah et. al, 25). The VIE can then get into different restricted contracts with its relevant companies, which provide its profit to the foreign invested companies in terms of the consulting fees. This invested company can exercise authority over the local companies through equity pledge, voting proxy and other many arrangements with the local company as this allows the foreign investors to have power over how the VIE operation THOUGH IT DOES NOT GIVE THEM the accurate equity possession in the VIE.

The control exercised is retained in the PRC-domiciled company and the WFOE as in accordance to the Chinese laws. The foreign investors mainly obtain financial benefits from the agreements in the contract. The e commerce business in china are able to obtain funds overseas through the VIE structure. Nonetheless, there is a risk of when the Enforcement of VIE structure is put into question thein visitors risk losing the control. The Change Of Law And Its Implication On Foreign Investment. The foreign investors potential to put up and run business in crucial industries has been limited by the new investment law as it has fully eliminated the VIE structure , the new law has defined foreign investors to include any enterprise included under foreign law, non-citizens, International intuitions and any local business controlled by any of those.

For more regulation more standards have been included to identify foreign operated business in directly. Control has now been defined to include directly or in directly power holders in appointing or nominating more than half of board of directors members or any other governing body of a different entity, Holders of more than half of voting rights shares or any relevant equity interest of a different entity and holders of voting right which can influence the choice of corporate ruling body of different category. The other option undergoes the declaration and accreditation process whereby the foreign invest company managed under the agreement shall present to a expert in foreign investment department of the state council to be confirmed. Following of the state council that is under the Chinese investor the agreement structure maybe withheld and be in operation thus foreign investors will continue to the stage of declaration after providing an agreed interest to the Chinese partners for effective moderation.

Furthermore the system for giving feedback enforced in the new law contains questions as to if the grandfather cover is an applicable option for the already VIEs in the long run. Article 92 necessitates provision of annual content report by the foreign investors entailed in the creation of or change to foreign invested company. Foreign investor Details that are compulsory in the annual content report include name, jurisdiction of creation original controller organizational form contact person and domicile. In response foreign investors can plead with their Chinese shareholders o reform the location of the enterprise sand prevent a total transfer of their interest. Change From Catalog Approach To Negative List Approach. The new law gave an idea that foreign investment will gain national treatment in the same terms as local investments therefore permitting foreign companies exempted in the prohibited list to create businesses through directly applying to the senate administration for industry and commerce however this transformation will be depended on industrial sectors' negative list whereby national treatment will not be applicable.

the method of negative list will displace the easting catalogue method and only leave two classes of industries that is the prohibited class where there is complete prohibition of foreign investment and restricted class where various restriction are subjected on foreign investment. Industries in prohibited class are not allowed any form of foreign investment even through intermediary domestic or even VIE structure. The committee is termed as nation al developmental and reform commission. Some of the agencies acting as member agencies in the committee are China's economic planning agency among other agencies though the new law has not specified the particular names of member agencies excluding NDRC and MOFCOM. The review process of Chinas pilot free trade zone is one of the main references for the membership of the committee.

In the Shanghai free trade zone the security review committee is made up of 30 agencies inclusive of finance department, justices department, industry and information technology ministry that are involved in the review process. The improper combination in the national security review system makes implementation inconsistent in that industries in the restricted class are the only one where national security review applies and there is un clear definition of the evaluation process factors. Other factors may include key information and internet security in China, long term demands in China for grain and energy, public interest and public order, stable operation of national economy among other factors that must be considered according to the joint committee. The arbitrary description of control according to the natural security review system manifest the in experience in national reviews as the foreign investment committee in the United States has a clear description of control.

This control permits the committee to change the review process even when there is a small amount of shares accounted by foreign investors as no limited amount is stipulated for a protected transaction qualified for the committee. Therefore when a control is found an investor has to record a notice with the committee as well has less than 10% foreign ownership on united states business may contain foreign control if at all it is mainly for the aim of passive investment without an element of control hence the definition of control is much narrower in the Chinese context as china applies a 50% cut off of equity interest as its limit in national security review. Control is available where foreign investors in a target company hold more than 50% interest.

Stiff competition between the local government and department insinuates a weakened review standard The national security review is conducted by an inter-ministerial going committee led by MOFCOM and NDRC and other agencies in charge of sectors and industries in association with the proposed foreign acquisition ,although there is complexity in the specific ministries involved the review process entails two steps which include the general review step where in the CFIUS process it is analogues to the first review and it is completed in a period of 30 working days. The transaction can proceed if at all there are no national security concerns found unless there is detected false or cancelled information by the committee during the report progress hence restarting the investigation in lack re initiation the review gets into the second phase which is a unique investigation.

In a period of 60 business days the process is to be completed which is referred to as the special investigation phase in the CFIUS process. However the disparity between the two phases is not clarified in the new foreign investment law. Items in consideration within the national security review process as indicated in the new law seem to be applicable along the board for the whole reviewing proceeding. Within different departments of MOFCOM lies the authority to approve a transaction and the power to undertake a national security review. Before issuing are view decision the applicant may suggest extra restrictive rules for the foreign invetment to the department in charge of foreign investment then it is the responsibility of the joint committee to perform an appraisal of the proposals feasibility and effectiveness in accordance with the outcome of the appraisal the joint committee may eliminate any available risk to national security and come into terms with the associated parties for extra restrictive measures inclusive of relevant adjustments to the foreign investment.

As compared to the forum shopping in the United States the unique specific plan of the foreign investor's attempts to refers to MOFCOMS with respect to their choices during the process of screening. This is due to the fact that the MOFCOM has the powers to pre approve thus unnecessitating filling of with the national security review with the central MOFCOM by the foreign investor. An incentive can be claimed by a foreign investor if the authority grants him an endorsement and hence prevent himself from reporting to the central MOFCOM. Failure to disclose the information during the process of registration and review, the law stipulates severe penalty for such a mistake. the law also imposes Criminal responsibility for going against the new foreign investment law in addition to penalty and confiscations of profit.

However foreign investors are exempted from disclosing their information concerning property about the available impacts of national security of their transaction till an appropriate time for them to enter the general review phase of security review the penalty is most unlikely to have a serious impact over practices of investors filling Generally the filling process is convolutted because of the competition between ministries within the Chinese government and the different interests of the decision deterrence effect over investors’ filing practices. Overall, the processing of filing is convoluted due to the ministerial competition within the Chinese government and the divergent interests from different decision makers with regard to the initiation of the security review process. In addition, the capabilities of MOFCOM branches vary in China, and the review proceedings mitigate the effectiveness of the penalty set up in the Draft Law.