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Chinese government seeks to attract foreign investment with improved regulations

Faced by a slow economic recovery, the Chinese government is evaluating ways to attract foreign direct investment. In a recently published document, titled “Opinions on increasing efforts to attract foreign investment,” Chinese authorities outline a series of guidelines which give local governments clear directives on how to implement specific policies to increase support and improve business confidence among foreign companies.

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This is the most comprehensive set of proposals for improving the environment for foreign companies in the country. These guidelines are not binding on the Chinese government, however, they provide insight into coming legal and regulatory priorities, as quarterly foreign investment in China hit a 25-year low earlier this year.


According to data from the Ministry of Finance and Commerce (MOFCOM), foreign capital in China has declined considerably since the lifting of the COVID-19 measures. Between January and July 2023, actual use of foreign capital in China reached RMB 766.7 billion (US$111.8 billion), a decrease of 4% year-on-year. In dollar terms, this figure decreased by 9.8% year-on-year.


Nevertheless, the number of newly established FIEs (Foreign Invested Enterprises) increased by 34 percent year-on-year with 28,406 new companies, indicating that companies have been eager to enter the China market after the pandemic, even if the total foreign capital amount has decreased.


Goals


The document lists 24 specific measures aimed at implementing six overarching goals, which are: improve the quality of foreign capital; guarantee national treatment for foreign enterprises; strengthen protections for foreign investments; improve investment facilitation; increase fiscal and tax support for foreign investments; and improve promotion methods to attract foreign capital.


Major scientific research projects and biomedicine are two of the main interest areas with respect to foreign direct investment highlighted in the guidelines. The document proposes the creation of “research and development centers” dedicated to these sectors.


The guidelines call for supporting foreign investment in the field of biomedicine and pharmaceuticals by accelerating the implementation and commissioning of foreign-invested projects in biomedicine; encouraging FIEs to carry out clinical trials of overseas marketed cell and gene therapy drugs; and optimizing the application procedures for marketing registration applications for drugs that have been marketed overseas and transferred to domestic production.


The initiative looks to encourage as well qualified investors to establish investment companies and regional headquarters. It calls for the implementation of the Qualified Foreign Limited Partnership (QFLP) program, a pilot inbound investment program for foreign companies and investors.

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The guidelines propose legal and regulatory updates to improve intellectual property protection for foreign companies investing in China, facilitate cross border data transfer of foreign companies in China to their home country, and improve immigration restrictions for employees of foreign corporations investing in China.


Equal participation in government procurement


For a long time, FIEs in China have complained of unequal access to government procurement and bidding. This issue is addressed in the guidelines, which state that authorities should “guarantee FIEs to participate in government procurement activities in accordance with the law.”


Revisions to the Government Procurement Law, researching and innovating on cooperative procurement methods, and “supporting FIEs to innovate and develop world-leading products through measures such as first-order purchases,” are some of the solutions offered by the document to create a fairer business environment.


The guidelines intend to increase the accountability of government agencies in bidding processes by carrying out inspections to ensure the fair participation of business entities in government procurement activities, investigating and dealing with possible violations, such as differential treatment of FIEs, and promptly reporting typical cases.


FIEs should be able to raise questions and complaints if they believe that government procurement activities have harmed their rights and interests.


Participation in standard-setting and equal policy treatment


FIEs should have a fair role in shaping industry standards, according to the guidelines. They should be actively involved in standardization efforts and should be treated equally when it comes to preferential and support policies.


FIEs will be supported to participate in the creation of standards, ensuring transparency throughout the standardization process, and allowing FIEs and domestic companies to equally engage in standardization committees and activities.


The document calls for FIEs to be granted equitable access to policies designed to support industrial growth and boost domestic demand. Unless explicitly defined by laws, regulations, or matters of national security, policies should not discriminate against FIEs or their products and services.


Intellectual property rights


The lack of protection of intellectual property rights (IPR) in China has also been a strong complaint by foreign companies.


The guidelines recommend refining the administrative ruling system for patent infringement disputes and enhancing the enforcement of these rulings, among other things. The establishment of intellectual property workstations at exhibitions across regions will aid in accepting copyright, patent, and trademark applications and provide effective measures to prevent infringements.

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The need to crack down on misinformation and “malicious speculation” that infringes on the legitimate rights and interests of foreign companies and investors, such as publishing and spreading false and infringing information online, was also highlighted.


The Cyberspace Administration of China (CAC) launched a campaign to fight against misinformation and fake news about companies online. Under new rules for implementing the campaign, companies can report misinformation or infringements such as impersonation of the company to the host platform.


Visa and residence procedures for foreign employees


The visa and residency procedures for foreign employees of FIEs in China, specifically “foreign executives, technicians, and their families,” will be expedited.


Embassies and consulates in key countries for attracting investment will facilitate visas for executives. In addition, foreign senior management and technical personnel hired and recommended by qualified FIEs should be facilitated in applying for permanent residence.


China recently relaxed requirements for on-arrival business visas, allowing foreigners traveling to China for business activities on short notice to apply for a business visa on arrival.


Foreigners applying for residence permits will be allowed to keep their passports while waiting for their permits to be issued, allowing them to travel more freely.


Cross-border data transfer


Cross-border transfer of personal information (PI) has been a major preoccupation for foreign enterprises. Under China’s Personal Information Protection Law (PIPL) and related regulations, companies that wish to transfer the PI collected from users in China are required to undergo certain procedures.


China’s Data Security Law (DSL) also imposes similar requirements for the export of “important” data outside of China.


Multinationals have had great difficulty with this issue since much of their business requires the transfer of data. Despite the release of various standards for the implementation of cross-border PI transfer regulations, companies have complained of unclear requirements and slow administrative procedures.


The guidelines call for establishing “green channels” for qualified FIEs, which would facilitate cross-border PI transfer procedures. In addition, they require authorities to “efficiently carry out security assessments for the export of important data and personal information”.


A pilot list of “general data” that can be transferred freely would be created in Beijing, Tianjin, and Shanghai. These regions should also build a dedicated service platform and provide cross-border PI transfer compliance services.


Tax policies for FIEs


A series of tax policies designed to attract and retain foreign investment were proposed, ranging from funding support and tax exemptions for reinvestment to preferential treatment for foreign individuals and incentives for investments in specific sectors.


Possible steps include increasing support for significant foreign-funded projects to facilitate their swift implementation, providing support in the implementation of preferential tax policies for companies and their foreign employees, and supporting investment in encouraged sectors specifically.


The document encourages domestic reinvestment of foreign capital by waiving withholding income tax on profits earned by foreign investors within China, provided it is reinvested domestically. This policy has been implemented since 2018.


The State Tax Administration and Ministry of Commerce recently announced the extension of tax-exempt “benefits-in-kind” (BIK) for foreign employees until the end of 2027. These include tax-exempt items, such as housing rental, children’s education costs, and language training costs.


Attracting foreign capital


The implementation of these guidelines will determine the success of the new proposals. The central and local governments have previously released similar documents on boosting foreign investment and improving the business environment but haven’t always been fruitful.


The Chinese government has been actively seeking to attract foreign capital, by building back the confidence of FIEs.


Addressing the difficulties that foreign companies face in China, such as cross-border data transfer, IPR protection, and equal access to government procurement, could represent an important step towards rebuilding confidence, attracting new investment, and recapturing foreign talent.



 

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