Gov’t seen planning overhaul of foreign investment rules

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China is proposing an overhaul of its foreign-investment rules with a draft law that could mark the biggest change in decades to the way global companies do business in the country.
The Commerce Ministry this week put forward a draft that could unify regulations overseeing foreign investment in China, scale back restrictions and begin regulating the variable interest entities that are commonly used to circumvent foreign-ownership limits. The ministry will accept feedback on the plan from the public until Feb. 17.
The proposal fueled optimism that the country is preparing for its biggest revamp of China’s rules governing foreign investment since paramount leader Deng Xiaoping introduced elements of capitalism into the economy in the late 1970s. It also comes as the world’s second-largest economy expands at its slowest pace in nearly a quarter century and money stops flowing in country as fast as it used to earlier this decade.
“It is a huge change,” Antony Dapiran, Hong Kong-based partner with law firm Davis Polk & Wardwell, said in an e-mail. “It pushes China so much closer to being a ‘normal’ place to do business.”
If enacted, the draft legislation would scrap conflicting layers of regulations and streamline bureaucracy by abolishing local and central government approvals for most investment, according to Dapiran. The ministry said the rules should “promote foreign investment and normalize foreign investment management.”
A central element of the law is the ministry’s intention to address a legal loophole that allowed foreigners to freely buy shares of companies in restricted industries – think Alibaba Group Holding Ltd., Baidu Inc., Tencent Holdings Ltd. and JD.com.
The ministry said it would tackle VIEs, a structure used in industries ranging from Internet to education. With VIEs, companies such as Alibaba create an entity abroad that lists overseas. That entity is linked with the China-based firm via contracts.
Baidu and Tencent said they’re carefully monitoring the progress of the proposed rules. Josh Gartner, a spokesman for JD.com in Beijing, declined to comment and Alibaba spokesman Bob Christie said he couldn’t immediately comment.
“The draft Foreign Investment Law represents a major step toward the formal regulation of the use of VIE structures in foreign investments in China,” according to a note by Weil, Gotshal & Manges LLP lawyers including Wenfeng Li. “When this law goes into effect, it could provide welcome regulatory certainty to foreign investors.”
The draft included three views from academics about a possible way forward for pre-existing VIEs that allowed foreigners to invest in restricted sectors. Under one scenario, foreign companies would have to apply for a permit to invest in an area restricted for outsiders.
Easing of regulations could reverse growing discontent from foreign companies after regulators announced antitrust probes against companies including Qualcomm Inc. The government is also pushing ahead with a plan to purge foreign technology from banks, the military and some state-owned enterprises, according to people familiar with the matter.
Last year, the U.S. and European chambers of commerce warned China was losing its appeal as an investment destination after the government stepped up the anti-monopoly probes.
Growth of foreign direct investment into China has slowed from levels seen at the beginning of the decade and the money flowing out of the country is poised to exceed inbound investment for the first time this year.
The American Chamber of Commerce in China supports any revision that will reduce trade barriers for U.S. companies, improve market access and “ease the approval procedures for the establishment and operation of foreign-invested enterprises in China, AmCham Chairman James Zimmerman said in a Jan. 20 statement. Bloomberg