The History of China's Investment Law System: Lessons From the Past for the (Brighter) Future?

I. Introduction

Arguably, the development of China’s investment law system since the beginning of the reform process in late 1978 mirrors the development of China’s economy, if not the whole society, since then. What began as a tightly controlled regime with very limited options to choose from then saw an increasing liberalization with regulatory corrections when developments were regarded as going too far or in the wrong direction. On the face of it, the situation has culminated with the enactment of the People’s Republic of China (PRC) Investment Law on January 1, 2020. At the same time, however, China sees itself confronted with criticism from the West regarding continuing restrictions imposed on inbound investment. These restrictions, as well as increasing geopolitical tensions, have recently led to speculations that foreign investors will change their China strategies and even withdraw from the Chinese market.

Such sentiments do not derive solely from China’s muscular zero-Covid policies, though cancelled flights, visa complications and lengthy quarantines have contributed to the frustrations of foreign executives. The deeper roots of disaffection lie in a sense that doing business in China has become harder as Beijing’s rivalry with the west intensifies. . . Beijing should . . . take steps to demonstrate that foreign investors remain a valued part of the economy. Official statements to this end would set a positive tone. But a real focus on reducing red tape and ensuring equal treatment with local competitors would alleviate some of the gloom descending upon China’s foreign business community.

Two very popular claims can be extracted from this and similar statements: first, that China’s investment law is unfairly restrictive, and second, that China has to further liberalize its investment law regime or else this will negatively affect foreign inbound investments.

The restrictions imposed by China’s inbound investment law system are, on the one hand, well-known. On the other hand, it is obvious that statements like the above aim to put pressure on China while they refrain from engaging in any broader analysis. In particular, they fail to acknowledge that China began to establish its investment law system and, in fact, rebuild its entire legal system in 1979 and that the process has since overcome many challenges and is still not straightforward. This article aims to take a different approach by analyzing the development of China’s investment law system in its historical context, and, thus, to allow for a more balanced assessment. To set the scene, this article first discusses key developments of China’s inbound investment law system in six core areas, namely in regard to legislation concerning (1) investment vehicles, (2) approval, registration and verification requirements, (3) mergers and acquisitions (M&A) projects, (4) national security review for foreign inbound investments, (5) merger control, and (6) enactment of the PRC Foreign Investment Law.

In its second part, this article then aims to identify drivers responsible for the evolution of China’s investment law system. It first explores the relationship between investment-related legislation on the one hand and political, as well as macroeconomic, goals on the other hand. It also discusses the influence from abroad and the international level, with a special focus on the impact of China’s World Trade Organization (WTO) accession in 2001. It then considers whether other historic events had any traceable influence on China’s investment law system and explains how legislators took corrective steps in relation to developments that were not welcome.

The last part of this article summarizes the findings and searches for patterns that characterize the development of China’s investment law. It is the ultimate goal of this analysis to consider whether past developments allow for any predictions regarding the development of China’s inbound investment law system in the future, with a special focus on the question of whether further liberalization can be expected.

II. China’s Investment Legislation – Milestones

A. General

The controlled development of China’s foreign investment regime has stood at the heart of China’s economic reforms since its start in 1978. The focus of these developments was on inbound investments during the 1980s and 1990s. In contrast, outbound investments from China did not play a major role in the past century. While the picture has changed starting from the beginning of the new millennium, this article focuses only on China’s inbound investment law to allow a focused discussion because the legislative rationale concerning rules governing inbound and outbound investments may differ.

The following subsections analyze legislative developments in the above-mentioned six core areas of Chinese inbound investment law. Each subsection first offers some background information before it recalls each core area’s legislative history. While different developments in China’s investment law are, of course, interlinked, they are discussed separately with the goal to explore if common drivers and patterns can be identified.

B. Investment Vehicles

1. Background

In every jurisdiction, investment projects must take particular legal forms, which serve as investment vehicles. Available investment vehicles differ from jurisdiction to jurisdiction and may offer certain advantages and disadvantages from an investor’s point of view. For a very long time, it was one of the defining features of China’s inbound investment law system that investors had to use dedicated investment vehicles, normally called foreign-invested enterprises (FIEs). The following subsections recall the history of the main FIE types and the related legislative rationale.

2. Legislative History

a. Equity Joint Ventures

Foreign inbound investments were first allowed in China in the form of so-called Equity Joint Ventures (EJVs) under the PRC Sino-foreign Equity Joint Venture Law (EJV Law), which had entered into force on July 1, 1979. The enactment of the PRC Sino-foreign Equity Joint Venture Law Implementing Rules (EJV Law Implementing Rules) followed four years later. The EJV Law and the EJV Law Implementing Rules were subsequently supplemented by numerous rules and regulations on specific topics, such as minimum capitalization, the ratio between investments in cash and in kind, as well as tax and labour issues. EJVs were established jointly by at least one Chinese party and one foreign party as a limited liability company to pursue a prescribed scope of business. The EJV partners had to make capital contributions in cash or in kind. EJV capital contributions by foreign EJV partners can, in theory, only be repatriated after the end of the EJV term. Minimum capital requirements existed until 2014 and were maintained afterwards but only for twenty-seven restricted industries. This general change from a “paid-in to a subscribed capital system” was effected as of March 1, 2024 also for FIEs by the State Council’s Decision on Repealing and Amending Certain Administrative Regulations.

For EJVs, the profit distribution, as well as appointments to the highest EJV organ, the Board of Directors (BoD), must be strictly according to the capital ratio of the EJV partners. The chairman of the BoD serves as the legal representative of the EJV, while the day-to-day business is run by management organs. EJVs can also have a Supervisory Board.

The establishment of the EJV framework began as early as 1979, that is, immediately after the decision to start the reform process, and was motivated by the need to create a stable and reliable legal basis for foreign inbound investments. The legal framework governing EJVs has always been comprehensive and tight. Nevertheless, EJVs have long remained the most popular investment vehicle in China, arguably because of the familiarity of approval and registration authorities with this FIE form and the resulting predictability of the establishment process and operation.

The first EJV ever established in China was the joint venture between Beijing Air Catering and the Civil Aviation Administration of China (CAAC). The father of famous Annie Wu Suk-ching and his partners invested 5 million HKD. According to Annie Wu, five months after the first discussions, her father was approached by the director general of CAAC, who asked if the money could be provided right away because necessary approvals would still take a lot of time. The investors agreed, and they started to set up the operation without the approval. Approval was eventually granted in March 1980. The joint venture officially started on May 1, 1980, and commenced its business on an inaugural Pan Am direct nonstop flight to Beijing. Annie Wu commented: “So in China, we always think that this is the way to do business—you have the egg before you have the mother hen.”

With the enactment of the PRC Foreign Investment Law on January 1, 2020, which will be discussed in a later section, EJVs are no longer available as investment vehicles. Existing EJVs must be converted into limited liability companies, according to the PRC Company Law, within five years.

b. Co-Operative Joint Ventures

During the early 1980s, investors that were typically from Hong Kong and Taiwan tried to avoid the inflexible EJV framework by establishing joint ventures that were not subject to the EJV rules and regulations. Rather, the terms of establishment, operation, and termination were set out in the joint venture contract. On April 13, 1988, PRC legislators enacted the PRC Sino-foreign Co-operative Joint Venture Law (CJV Law), followed by the PRC Sino-foreign Co-operative Joint Venture Law Implementing Rules (CJV Law Implementing Rules), which became effective on September 4, 1995. The establishment of the CJV legal framework legalized the existing practice and, at the same time, forced it into a legal framework and, thus, under government control.

As in the case of EJVs, special rules on particular issues supplemented the framework governing co-operative joint ventures (CJVs), as this joint venture type was officially called. Furthermore, in practice, some EJV-related rules and regulations were applied also to CJVs.

The CJV Law and the CJV Law Implementing Rules provided for more flexible CJV features as compared with EJVs. In particular, the profit distribution did not have to be according to the parties’ capital contribution but was set out in the CJV agreement. Furthermore, foreign CJV partners were, in theory, able to “repatriate” their capital contributions notwithstanding the CJV term, an option that did not exist for EJVs. Additionally, the CJV agreement determined the appointment of the three or more members of the highest organ of the CJV and was, thus, not linked to their investment ratios. While EJVs had to be established as Chinese limited liability companies, on paper, CJVs could also take other forms.

The CJV Law was abolished with the enactment of the PRC Foreign Investment Law on January 1, 2020. Like for EJVs, existing CJVs have to be brought in line with the PRC Company Law within five years.

c. Wholly Foreign-Owned Enterprises

Wholly Foreign-Owned Enterprises (WFOEs) are, as the name suggests, investment vehicles established solely by foreign investors. When the Chinese market was not yet very transparent, that is, during the 1980s and the early part of the 1990s, foreign investors normally opted to rely on the support of Chinese joint venture partners. WFOEs were, therefore, mostly used by parties from Hong Kong and Taiwan with connections in mainland China. With the development of China’s economy, the increasing transparency of the Chinese market, investors becoming increasingly experienced, and unhappy relationships brewing between Chinese and foreign partners, WFOEs became more popular and, eventually, even the dominant investment vehicle type.

The WFOE legal regime was comprised of the PRC Wholly Foreign-Owned Enterprise Law (WFOE Law) and related Implementing Rules (WFOE Law Implementing Rules), the latest version of which went into effect on March 1, 2014. WFOEs were normally established as Chinese limited liability companies but could take different forms on paper, similar to CJVs. WFOE investments cannot be repatriated before the end of the WFOE term.

In 2006, the Implementation Opinions for the Application of Laws and Regulations Concerning the Examination and Approval for the Registration of Foreign-invested Companies clarified that WFOEs established after January 1, 2006, had to follow the stipulations of the PRC Company Law. WFOEs, therefore, had to have a shareholders’ general meeting, a board of directors, as well as a supervisory board.

China has traditionally kept WFOEs under strict control, that is, the establishment, operation, and termination of WFOEs was much less flexible than in the case of EJVs and CJVs. In particular, WFOEs were not allowed in many regulated industries. China had to remove many of the former restrictions upon its accession to the WTO on December 11, 2001.

The PRC Foreign Investment Law has also abolished the WFOE Law and requires existing WFOEs to be converted into one of the legal forms prescribed by the PRC Company Law.

d. Representative Offices and Branches

During the first decade after the start of China’s economic reforms, the establishment of Representative Offices was often the first step into China. Representative Offices allowed foreign investors to familiarize themselves with and gain confidence in the mainland Chinese market, as well as the unknown societal situation in general. Representative Offices are restricted to non-operational activities, such as promotional work, market surveys, and after-sales services consultancy. They are organisationally and legally part of their foreign parent companies.

With a maturing Chinese market, which became more and more transparent, Representative Offices lost their appeal as pre-investment vehicles. Furthermore, the relaxation of the WFOE framework allowed foreign investors to use WFOEs to pursue their goals on the Chinese mainland without the restriction to non-operational activities.

Like Representative Offices, Branches of foreign investors in China are organizational and legal extensions of their foreign parent entities. Unlike Representative Offices, Branches can, however, engage in real business activities. The unlimited liability of the foreign parent entities for the debts of foreign Branches, as well as the lack of a comprehensive legal regime governing this investment type, appeared to be the main reason why Branches never gained major importance as a foreign investment vehicle in China.

e. Foreign-Invested Partnerships

On November 25, 2009, the State Council promulgated the Administrative Measures for the Establishment of Partnership Enterprises by Foreign Corporations and Individuals in China, which entered into force on March 1, 2010. The Provisions on the Administration of Registrations of Foreign-funded Partnership Enterprises, originally promulgated by the State Administration of Industry and Commerce (SAIC), followed on January 29, 2010. They were last revised as of August 8, 2019. This framework now allows Foreign Invested Partnerships (FIPs) to be established by foreign companies or individuals with or without Chinese partners. Foreign individuals, legal persons, or other organizations can also join already-existing Chinese partnerships. FIPs can take the form of ordinary or limited partnerships. Unlike the traditional FIE forms, that is, EJVs, CJVs, and WFOEs, the establishment of FIPs never required approval by the Ministry of Commerce (MOFCOM), only SAIC registration.

Internationally, limited partnerships are commonly used as vehicles for private equity investments. Third-party investors serve as limited partners without any operational powers and management rights while a private equity company is operating and managing the fund. The newly established FIP regime seemed to allow the use of similar models for the establishment and operation of onshore private equity funds in China and inspired high expectations. But many uncertainties have remained until today, and FIPs never became a very popular investment vehicle type.

f. Foreign-Invested Companies Limited by Shares

In 1994, legislative developments made it possible for foreign investors to establish or buy into companies limited by shares established under the PRC Company Law, which had entered into force that year. But Chinese government authorities did not seem to favour this option, as public financing was meant to be reserved for state-owned enterprises (SOEs). Therefore, there was no reason to support foreign investors’ attempts to establish or invest in domestic companies limited by shares, which would compete with SOEs. This appears to be the reason why the legislation regarding foreign-invested companies limited by shares always remained blurred and never reached a satisfactory level in terms of clarity and systemization.

Compared with limited liability companies, companies limited by shares require a more sophisticated corporate structure but are also eligible to list company shares on one of the two Chinese stock exchanges, which opened in Shanghai and Shenzhen in 1990, and on foreign exchanges. The latest revised versions of the PRC Company Law and the PRC Securities Law, which entered into force on October 26, 2018, and March 1, 2020, respectively, provide the legal basis and are supplemented by numerous regulations at different legislative levels on special questions related to listed companies. Rules enacted by the Shanghai and Shenzhen stock exchanges also add to this legal framework. It has never been clear whether foreign-invested listed companies limited by shares qualify as FIEs and to what extent they are subject to FIE laws and regulations.

C. Approval, Registration, Verification

1. Background

In line with a global trend during the 1970s and 1980s, since the start of the reform process in late 1978, China has always restricted foreign inbound investments in various ways to protect domestic interests. In particular, as explained in the previous sections, foreign investment projects had to use dedicated investment vehicles, most importantly EJVs, CJVs and WFOEs, to invest in China. Furthermore, foreign investment projects in China, whether in the form of greenfield or M&A transactions, had long been subject to governmental approval, registration, and verification requirements, as outlined in the following.

2. Legislative History

As a matter of principle, MOFCOM or its local representative organs (COFCOMs) had the power to approve, or not to approve, all inbound investment projects. The competence of MOFCOM or lower level COFCOMs was determined by the size of the project and the related industry sector. In addition, other government organs, such as the China Securities Regulatory Commission (CSRC) for acquisitions of listed companies and the State-owned Assets Supervision and Administration Commission (SASAC) for acquisitions of assets or equity interests in state-owned enterprises, may have had to be involved as well. Furthermore, industry sector approval requirements were in place. All of this led to a situation where it was often unclear which authority, or authorities, had to be contacted with applications for approval.

In the early days of China’s investment law history, the approval of foreign investment projects seemed to be at the discretion of the approval authorities. More clarity was gained by the enactment of the Tentative Rules on Guiding Foreign Investment Orientation in 1995, which, after China’s WTO accession, were replaced by the Guiding the Direction of Foreign Investment Provisions of February 1, 2020, and two national-level Catalogues. According to this framework, investment projects were categorized as encouraged, permitted, restricted, or prohibited, leading to incentives, restrictions, or prohibitions, depending on the category.

Foreign investment projects also had to be registered with the SAIC, which became part of the State Administration of Market Regulation (SAMR) in 2018. Furthermore, the National Development and Reform Commission (NDRC) and its lower level branches have the power to verify investment projects from the viewpoint of China’s overall industrial development planning, based on the Administration of the Verification of Foreign-invested Projects Tentative Procedures, in force since October 9, 2004, and re-enacted in a revised form as of June 17, 2014, under the title “Administrative Procedures for the Verification and Record Filing of Foreign-invested Projects.”

From 2013, China then started to experiment with the so-called “negative list approach.” Under this approach, investments in sectors that are not mentioned in a negative list enjoy national treatment, that is, they are treated like domestic investments. In contrast, in negative-listed sectors, foreign investments are either forbidden or restricted. In other words, rather than being subject to an approval requirement per se, inbound investments are allowed prima facie, unless they fall into a negative-listed sector.

China first adopted the negative list approach in the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ), the establishment of which had been announced in September 2013. Inbound investments in the Shanghai FTZ were no longer subject to MOFCOM approval and only required SAIC registration. The Shanghai FTZ negative list was originally published in September 2013 and supplemented by other steps to reduce the barriers for foreign inbound investments.

Nationwide, on December 2, 2013, the State Council promulgated the Catalogue of Investment Projects Subject to Government Verification (the 2013 Catalogue), which became effective that same day. The 2013 Catalogue liberalised the regulatory regime for domestic investments but also abolished the approval requirement for most outbound investment projects.

The negative list approach was then generally introduced to all foreign inbound investments in China with the enactment of the Decision regarding the Amendment of Four Laws, including the PRC Wholly Foreign-Owned Enterprise Law on October 1, 2016, as supplemented by the Interim Measures for the Recordation Administration of the Formation and Changes of FIEs. The former approval system was replaced with a filing system operated by MOFCOM for investment projects in non-negative-listed sectors. The SAIC, now SAMR, registration requirement remained in place until 2020. In 2020, the nationwide SAMR registration system was further simplified and replaced the MOFCOM filing system. Registration in non-negative-listed sectors is now possible online. The registered information will be shared among different government authorities.

Originally, the above-mentioned Guiding the Direction of Foreign Investment Provisions, with its supplementing catalogues, served as makeshift negative lists. In the meantime, proper negative lists have been put in place, that is, the Special Administrative Measures for Access of Foreign Investment (Negative List) and the Special Administrative Measures for Access of Foreign Investment in Free Trade Zones (Negative List) (collectively, the Negative Lists). The latest versions of the Negative Lists were published on December 27, 2021, by the NDRC and MOFCOM and became effective on January 1, 2022. Over time, the sectors where foreign investments are prohibited or restricted in FTZs, and the rest of China, saw a significant reduction. Most importantly, restrictions on foreign equity holdings in the financial sector have been completely abolished. NDRC and MOFCOM also published a revised version of the Encouraged Industry Catalogue for Foreign Investment on June 30, 2019, which was again revised on December 28, 2020, and entered into force on January 27, 2021.

The change from the former approval system to the negative list approach does have reputational advantages. A system that claims to treat foreign investors like local investors looks more favourable than a system that subjects foreign inbound investments to special approval and registration requirements. But the change has also led to numerous questions, many of which are currently still open. For example, it is important that the NDRC verification system has not been removed. The same is true of the CSRC approval requirements for the acquisition of listed companies and of the SASAC approval requirements for the acquisition of assets and equity interests in state-owned enterprises.

D. M&A Legislation

1. Background

China’s M&A market is relatively young, and so is the legal framework supporting inbound M&A transactions. China’s investment law system was originally built on the greenfield model, that is, the idea that foreign investors should establish new investment projects rather than buying into or merging with existing Chinese enterprises. As a result, detailed rules governing inbound M&As did not exist until the late 1990s.

One may speculate that M&A options were not favored for the first two decades of China’s investment law history because any fluctuation of investors, which M&As would have encouraged, might have been contrary to the stable development of the Chinese economy. In addition, inbound M&As may have appeared as not serving China’s investment policy goals, that is, to import foreign capital and technology. This is because the change of ownership of already-existing enterprises via an M&A transaction does not, on its face, seem to add value to pre-existing domestic companies and, thus, the Chinese economy. Furthermore, allowing foreign investors to buy into domestic enterprises, SOEs in particular, might have been seen as risky due to the potential loss of control over state assets. Finally, in the immature Chinese market of the 1980s and early 1990s where foreign investors were reluctantly and initially, without much success, trying to establish their business presences, there was simply a lack of suitable M&A targets.

But, when China’s economic reforms took off, the need for M&A options, and, thus, supporting legislation, became apparent. Perceived control needs, as they existed for the greenfield investment sector, also applied to the emerging M&A market. Inbound M&As were, therefore, initially also made subject to strict government approval and registration requirements.

2. Legislative History

On May 28, 1997, the Changes in Equity Interest of Investors in Foreign-invested Enterprises Several Provisions entered into force, marking the first major step towards the establishment of a legal framework for inbound M&As. The scope of applicability of these provisions includes the assignment of FIE equity interest by one investor to another investor, the assignment of FIE equity interest by one investor to a third party, and the transfer of FIE equity interest due to a merger or division of the original investor.

The Changes in Equity Interest of Investors in Foreign Investment Enterprises Several Provisions neither covered acquisitions of equity interest in domestic enterprises without foreign investment nor asset deals conducted by foreign investors. The legislative gap was filled in 2003 with the enactment of the Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions. In addition, rules enacted from 1998 onwards regarding the use of foreign investments as part of the ongoing SOE reforms supplemented the emerging M&A framework.

On November 1, 1999, the Merger and Division of Enterprises with Foreign Investment Provisions entered into force, which, as their name suggests, covered mergers and divisions of FIEs. Furthermore, various rules regulating M&A transactions involving listed companies and, as of January 1, 2005, a revised version of the PRC Securities Law, became effective. The 2005 version was again amended on December 28, 2019, and became effective on March 1, 2020.

Moreover, the updated version of the PRC Company Law of January 1, 2006, contained a new chapter on the transfer of equity interest in limited liability companies and revised respective stipulations on companies limited by shares. Finally, industry-specific norms and special regulations (e.g., on taxation), asset evaluations, and foreign currency control were enacted, supplementing China’s legal framework on inbound M&As.

As discussed in a later section, the PRC Foreign Investment Law has brought major changes also to China’s M&A regime. In particular, the previously existing general MOFCOM approval requirement for inbound M&A transactions has, in principle, been abandoned.

E. National Security Review

1. Background

National security review systems enable government authorities of target countries to screen and block inbound investment projects due to national security concerns. Around the world, national security review systems have become very important over the past two decades. Like for many other countries, China’s national security review regime is a rather recent phenomenon, as explained in the following.

2. Legislative History

It must first be remembered that approval, registration, and verification requirements have, in the past, allowed Chinese government authorities to veto foreign inbound investments or impose restrictions. This offered, and, as far as negative listed sectors are concerned, continues to offer, the de facto opportunity to address national security concerns. The amendment of the Acquisition of Domestic Enterprises by Foreign Investors Provisions in 2006 had seen the addition of a new Article 12, which provided for the first time a special, but very basic, vague, and thus impractical, national security review option. According to its pure wording, this Article 12 seemed to empower MOFCOM to veto all major foreign acquisitions in China at its sole discretion. Article 12 was widely criticized, although it never did play any major role in practice.

On January 1, 2008, the PRC Anti-Monopoly Law entered into force, requiring a national security review for all foreign M&As in China under Article 31. Details were again missing.

On February 3, 2011, the General Office of the State Council then published the more detailed Notice on Setting Up a Security Review System for Mergers and Acquisitions of Chinese Enterprises by Foreign Investors. The Notice was supplemented by the Provisions on the Implementation of a Security Review System for Mergers and Acquisitions of Chinese Enterprises by Foreign Investors of September 1, 2011, which replaced the Interim Provisions that had been issued on March 4, 2011.

The Draft for PRC Foreign Investment Law, published on January 19, 2015, for public consultation provided a whole new chapter on national security review issues. But this chapter was not maintained for the version of the PRC Foreign Investment Law that entered into force on January 1, 2020, which only provides in Article 35 that the State establishes a national security review system. Based on Article 35, on December 19, 2020, NDRC and MOFCOM jointly published the Measures for the Security Review of Foreign Investment, which became effective on January 18, 2021, and superseded previously enacted national security review provisions. The Measures cover (1) sole or joint foreign investments in new projects and the establishment of new enterprises in China, (2) M&A transactions by foreign investors in the form of equity and asset acquisitions of domestic enterprises, and (3) foreign investments by other means. It is especially noteworthy that, compared with the former regime, which was only applicable to M&As, the Measures now also apply in relation to inbound greenfield investments.

A national security review is required if foreign investments are made in the following areas: (1) the military industry, including military facilities and equipment, as well as areas related to national defense and security, and (2) key areas with national security relevance, including those related to agricultural products, energy and resources, equipment manufacturing, infrastructure, transportation, cultural products and services, information technology, and internet and financial services, if leading to actual control over the investee entity. A so-called “Working Mechanism Office” under the NDRC is in charge of the national security review process. An investor and concerned domestic parties must initiate a review if the investment falls within the above scope. The Working Mechanism Office shall decide within fifteen days if a general security review is merited. If this is not the case, the project can go ahead. Otherwise, a general security review must be conducted within thirty days. In special situations, a special review can be conducted within sixty days. National security reviews can also be initiated independently by the Working Mechanism Office when suggested by other concerned parties. The decision of the Working Mechanism Office can be to either prohibit or allow the transaction with or without conditions.

F. Merger Control

1. Background

Merger control aims to restrict or prohibit transactions with a negative impact on the market. In China, the basic rules regarding merger control are set out in one chapter of the PRC Anti-Monopoly Law, which entered into force on August 1, 2008, that is, thirty-five years after the start of China’s economic reforms in 1979, and was revised as of August 1, 2022. Already in 1985, the Legislative Affairs Bureau of the State Council had initiated the drafting of an anti-monopoly law. But the parties involved in the legislative process over the years had different opinions about questions such as the role of different government departments in anti-monopoly proceedings, whether the anti-monopoly law should address the use of administrative power to eliminate or restrict competition, that is, the so-called “administrative monopolies,” and whether special rules should be required for China’s state-owned industry and foreign M&A activities. The version of the PRC Anti-Monopoly Law enacted in 2008 obviously tried to accommodate the different positions. The rather late establishment of the merger control system also mirrors the delayed establishment of China’s M&A framework, as described in an earlier section.

From early on, some commentators have raised concerns that China’s new merger control regime could serve protectionist purposes. There is no hard evidence that this has ever been the intention, or even that such intention has ever been implemented, although it has been observed, particularly in the first years following the enactment of the PRC Anti-Monopoly Law, that foreign investment projects were subject to a larger number of merger control investigations as compared with purely domestic transactions. Having said that, foreign investment projects are particularly prone to merger control scrutiny for two reasons. First, foreign investors may already dominate (directly or indirectly) specific markets, for example, because of advanced technologies they have introduced to FIEs in which they have invested. Second, foreign investments may often target domestic companies that are already holding a strong market position.

2. Legislative History

Prior to the enactment of the PRC Anti-Monopoly Law, only some basic merger control rules had been introduced, as part of different M&A sub-systems. The Acquisition of Domestic Enterprises by Foreign Investors Provisions then established for the first time a more detailed framework, although the rules lacked clarity.

The SAIC and the State Economic and Trade Commission (SETC) had published the first official draft of the PRC Anti-Monopoly during the 1990s. Different draft versions were discussed amongst different government bodies in 2006. The draft PRC Anti-Monopoly Law was finally approved by the State Council on June 7, 2006, and the Standing Committee of the National People’s Congress (NPC) passed the PRC Anti-Monopoly Law on August 30, 2007. It became effective on August 1, 2008. Widely criticized for being unclear in the beginning, the PRC Anti-Monopoly Law was subsequently supplemented by numerous implementing rules and regulations, which improved the situation significantly.

The PRC Anti-Monopoly Law expressly aims to control and, if necessary, prohibit transactions that restrict or eliminate competition within the Chinese market. It covers domestic and foreign M&A projects in the form of mergers, share and asset deals, and acquisitions of control over enterprises via contractual arrangements or similar means or by gaining decisive influence over other enterprises. MOFCOM is the merger control enforcement authority and has established an Anti-Monopoly Bureau for this purpose.

If transactions, as specified in the previous paragraph, reach the following statutory thresholds, MOFCOM, has to be notified: (1) in the preceding financial year, the aggregate global turnover of all the concerned enterprises exceeded 10 billion CNY and the turnover in China of at least two of the parties exceeded 400 million CNY; or (2) in the preceding financial year, the aggregate turnover in China of all the concerned parties exceeded 2 billion CNY and the turnover in China of at least two concerned parties exceeded 400 million CNY. In June 2022, SAMR published draft rules for public consultation, according to which these thresholds will be adjusted upwards, along with other changes to China’s merger control regime, once formally adopted.

MOFCOM can initiate investigations irrespective of these thresholds if a transaction can potentially lead to the elimination of competition. If this is confirmed by the investigations, MOFCOM can prohibit transactions or impose conditions. A transaction may not be implemented prior to the MOFCOM decision, that is, “gun-jumping” is not allowed.

G. The PRC Foreign Investment Law

1. Background

One of the main problems behind China’s investment law has always been that it was not set up as one coherent system. Rather, it was comprised of scattered rules in uncountable laws and regulations that were enacted at different times by different authorities whenever an ad hoc need arose. As demonstrated in the previous sections, China’s investment law system consisted of different regulatory sub-systems that depended on factors such as the investor type, investment mode, and concerned industry sector. Apart from the fact that many investment law rules were partly unclear, their respective scopes were often overlapping or even contradicting. In addition, different authorities oversaw different aspects of inbound investment projects. Finally, China’s tight control of foreign inbound investments, while Chinese companies seemed to have free access to foreign markets, was a point of heavy criticism from abroad.

On January 1, 2020, the PRC Foreign Investment Law entered into force. The PRC Foreign Investment Law created a new uniform basis for all foreign inbound investments in China and, thus, completed the process of consolidating various pre-existing regimes. By underlining the principle of equal treatment of domestic and foreign investments projects, the PRC Foreign Investment Law was obviously aimed to counter the international criticism that China fails to grant foreign companies proper market access. The evolution of the PRC Foreign Investment Law and its main features are set out in the following.

2. Legislative History

MOFCOM published the Draft PRC Foreign Investment Law for public consultation on January 19, 2015. Comments from the public were invited until February 17, 2015. The draft heralded substantial changes to China’s investment law system and, therefore, immediately caused very controversial discussions inside and outside China. A second draft was published on December 26, 2018. It took almost five years from the publication of the first draft until the final version of the PRC Foreign Investment Law entered into force on January 1, 2020. Despite its differences, as compared to the draft of 2015, the enactment of the new PRC Foreign Investment Law and related supplementary rules marked the preliminary end to China’s inbound investment law system reform, which had ironically started immediately after the enactment of the first piece of investment legislation, that is, the EJV Law in 1979.

The PRC Foreign Investment Law is, among others, supplemented by the PRC Foreign Investment Law Implementing Rules (Implementing Rules) promulgated by the NPC on December 26, 2019, and in force since January 1, 2020, the Supreme People’s Court Interpretation of Several Issues Concerning the Application of the PRC Foreign Investment Law issued on November 26, 2019, the Measures for Reporting of Information on Foreign Investment issued by MOFCOM on December 31, 2019, and the Public Notice on Some Matters Concerning the Reporting of Information on Foreign Investment, which was issued on the same day. The two Negative Lists also form part of the new framework. Already on October 30, 2019, the State Council had issued the Opinions on Further Improving the Use of Foreign Capital, which stated general goals on further opening up the Chinese economy.

The PRC Foreign Investment Law defines “foreign investment” as “investment activities in mainland China carried out directly or indirectly by natural persons, enterprises or other organizations of foreign countries,” including (1) the individual or joint establishment of FIEs in mainland China by foreign investors; (2) the acquisition of stocks, equity interests, assets, or similar rights and interests in mainland Chinese enterprises by foreign investors; (3) individual or joint investments in new projects in mainland China by foreign investors; and (4) other methods of investment. The scope of the PRC Foreign Investment Law covers investments from Hong Kong and Macau, while it is applied mutatis mutandis to investments from Taiwan, where the PRC Law on Investments by Taiwanese Compatriots does not have relevant provisions.

Except for negative-listed areas, the PRC Foreign Investment Law grants foreign investors national treatment, that is, the same market access available to domestic investors. China supports and encourages foreign inbound investments and may provide preferential treatment. In particular, China must ensure participation and fair and equal treatment of FIEs in government procurement projects, an area that has led to many complaints from abroad in the past. The PRC Foreign Investment Law also confirms that FIEs “may raise capital by publicly issuing stocks, corporate bonds, and other securities.”

A whole chapter, Chapter III, of the PRC Foreign Investment Law addresses the issue of investor protection and confirms that expropriations shall not occur unless for a public purpose, in line with legally prescribed procedures and against prompt, fair, and reasonable compensation. Capital contributions, profits, capital gains, royalties, and all other material gains may be freely transferred into and out of China in accordance with the law. Intellectual property rights of investors and FIEs shall be protected.

In negative-listed sectors, foreign investments may be prohibited or restricted. Otherwise, foreign investments are allowed and are to be treated like domestic investments. But foreign investments must be recorded with the SAMR and may be subject to licensing requirements. The form of investment vehicle must follow the PRC Company Law and the PRC Partnership Enterprise Law. Furthermore, foreign inbound investments must comply with Chinese labour law and the PRC Anti-Monopoly Law. They are also subject to an investment information reporting system and the provisions of China’s national security review system.

The EJV Law, the CJV Law, and the WFOE Law, as well as the related Implementing Rules, are abolished. EJVs, CJVs and WFOEs established under the old regimes may maintain their organizational structure for only five years from the enactment of the PRC Foreign Investment Law.

The enactment of the PRC Foreign Investment Law has not solved all the problems of China’s inbound investment law system. Many issues will have to be clarified in the years to come. One example is the currently unclear approval process for restricted foreign investments in negative-listed sectors. Furthermore, according to anecdotal evidence, even in non-negative listed areas, authorities sometimes still insist that their approval is required. Many governmental bodies and Chinese lawmakers at various levels are still involved in the process of bringing laws and regulations in line with the PRC Foreign Investment Law.

III. China’s Investment Legislation – Drivers

A. General

The previous sections have highlighted legislative developments in six core areas of China’s inbound investment law system. This section now aims to identify potential drivers of these core areas and related legislative activities. It first highlights the role that the political and macroeconomic context has played in shaping China’s investment law system. It then considers if there is evidence that specific legislative activities were triggered by the fluctuation of China’s inbound investment volume. Next, foreign influence or impact from the international level and the potential effects on China’s investment law system are addressed, with a special focus on China’s WTO accession in 2001. In a more general approach, this section then seeks to verify the role of other historic events in relation to legislative activities in the area of investment law. Finally, this section discusses corrective changes that have taken place along the way.

Like in relation to any historical analysis, a caveat is required before embarking on the search of any legislative rationale, as it is impossible to go backwards and determine with one hundred percent certainty the thinking of Chinese lawmakers at a particular point in time. Furthermore, in light of the possibility of hidden political agendas and goals, publicly available materials can only serve as evidence to a certain extent for legislative rationales and motivations. Any analysis of the drivers of investment law legislation in China must, therefore, additionally rely on anecdotal evidence. Having said that, the observations presented in the following sections are at least strongly indicative of such rationales and motivations and, thus, form a solid basis for further discussion.

B. Drivers

1. Political and Macroeconomic Parameters

The history of China’s inbound investment law system must first be seen in the context of the political and economic reforms that started in late 1978. These reforms were a “state-led, leadership-driven, top-down political process in which a determined political leadership partly bypassed and partly restructured a largely reluctant and resistant bureaucracy, under constant pressure from an increasingly globalized international system.”

At the start, these reforms consisted of two main elements. First, they involved the change of China’s economic system from a planned economy towards what has eventually been labeled as a “socialist market economy with Chinese characteristics.” Second, after thirty years of self-isolation since the revolution in 1949, the reforms also implied an opening up of China to the rest of the world. This included China’s integration into international trade, investment, and financial systems, and it arguably peaked with China’s accession to the WTO, thus confirming the country’s international status.

While the establishment and further development of China’s legal system, including its investment law system, were important parts of this whole reform process, the building of legal structures to support the ongoing reforms from scratch was an extremely challenging task. It is easy to understand that many problems had to be solved, and it is not surprising that such a massive

paradigm shift could not take place at once, with the old legal system being replaced overnight with a comprehensive set of rules supporting the new system . . . this was and is a delicate task because the law always has to address a ‘moving target’, making it very difficult to avoid inconsistencies and thus creating the potential for rule-inherent flexibility. The difficulties are exacerbated by the varying speed of the reforms at different times and in different areas.

The creation of China’s investment law system must be understood against this background. Furthermore, it is noteworthy that Chinese lawmakers had to address a dilemma since the beginning of the reform process: On the one hand, they had to pursue the goal of modernizing and, thus, liberalizing investment-related laws and regulations while, on the other hand, they had to attempt to keep foreign investments and, thus, foreign influence under control, taking corrective measures when things developed into an undesired direction. In other words, legislative activities related to inbound investment had to pursue two contradicting goals, and the potential for legislative hiccups was rather obvious. Interestingly, a similar situation has emerged in many other countries over the last two decades.

The development of China’s inbound investment law system can be broadly divided into three stages. In the initial stage, during the 1980s and 1990s, China had to establish a stable and reliable basis to attract foreign inbound investments, with the goal of ensuring access to hard currency and advanced foreign technology to drive the reform process. In other words, investment lawmaking was aimed at supporting very fundamental reform needs.

The second stage started from the new millennium when the Chinese economy had become more mature, sophisticated, and transparent. During this period, the number of domestic enterprises that became serious market players and, thus, competitors for FIEs saw a steady increase. Furthermore:

China’s sprawling metropolises became a reflection of China’s progress after 2008. They housed a burgeoning middle class with rapidly rising incomes. Consumer goods sales grew from under $2 trillion in 2008 to roughly $5 trillion by 2019. Urban discretionary spending increased by 9 percent between 2010–2014. FDI consequently pivoted toward domestic demand as China’s comparative advantage became less entwined with lower production costs. This transformed the sectoral composition of foreign investment as manufacturing declined as a share of FDI, while technology, IT services, aerospace, transportation and financial services rose.

In this context, the following was observed, as early as 2013:

FDI inflows are no longer an increasing contributor to the country’s trade surplus, industrial output, fixed investment or tax revenues. This is mainly due to dynamic GDP growth, but also to a more selective—though still open—policy approach. Nevertheless, FDI continues to play a disproportionately large role in promoting China’s trade, investment and tax revenue generation, albeit not as large as before.

With the rapid development of China’s economy after the Global Financial Crisis (GFC) of 2008–2009, rising consumer prices and labour costs, as well as increasing restrictions imposed by China’s environmental laws, inbound investment projects in China were no longer lucrative based on cheap production costs alone. In addition, the gap between the industrialized and well-developed areas along China’s Eastern coast and China’s Central and Western regions required action on the part of the Chinese government. As a result, a shift in China’s investment policy and lawmaking towards the goals of attracting more investments in high-tech areas and redirecting investments towards Central and Western China could be observed. It is also important to note that, at the beginning of this second stage, China finally succeeded in becoming a member of the WTO, with major consequences, as highlighted in a later section of this article.

The third stage of building China’s investment law system concerns the work towards the enactment of the new PRC Foreign Investment Law. According to its Article 1, the PRC Foreign Investment Law was enacted “to further expand opening-up, vigorously promote foreign investment, protect the legitimate rights and interests of foreign investors, standardize the management of foreign investment, impel the formation of a new pattern of all-around opening-up and boost the sound development of the socialist market economy.”