chevron-down Created with Sketch Beta.

The International Lawyer

The International Lawyer, Volume 56, Number 1, 2023

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

Lutz-Christian Wolff


  • 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.
The History of China's Investment Law System: Lessons From the Past for the (Brighter) Future?
Xiaodong Qiu via Getty Images

Jump to:

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.”

This definition of the goals of the PRC Foreign Investment Law underscores the observations above. The PRC Foreign Investment Law consolidates and unifies the previously existing investment law sub-systems to facilitate foreign inbound investments. At the same time, it guarantees, as a matter of principle, equal treatment of foreign and domestic investors. The benefits of the PRC Foreign Investment Law are widely acknowledged, and its enactment was welcomed by the international business community and its advisors. The PRC Foreign Investment Law is regarded as a move to further liberalize China’s investment regime and “indicates that China is maintaining its commitment to further open up its market and boost inbound foreign investment.” It has been stated in this context that the resulting “more convenient, efficient, and transparent administration of foreign investment equals more certainty and more manageable processes with less unexpected hiccups.”

2. In Particular: China’s Inbound Investment Volume

The development of China’s economy since 1979 has been nothing but breathtaking, with often double-digit growth rates and similarly impressive inbound investment volumes. As highlighted in previous sections, inbound investments were extremely important for the entire reform process, and investment-related laws and regulations, consequently, had to ensure that foreign investments kept coming. But, apart from the general goal of attracting foreign investments, is it possible to prove direct causal links between the fluctuation of China’s inbound investment volume and specific legislative activities in the investment law area, as it has been suggested by some commentators?

Since the start of the reform process in 1978, China’s investment volume declined in eight of the years: 1989 (1.65 percent), 1998 (9.08 percent), 1999 (10.07 percent), 2001 (16.32 percent), 2005 (0.42 percent), 2009 (3.62 percent), 2012 (3.74 percent), and 2016 (0.21 percent). It rose by less than five percent in seven of the years: 1990 (2.28 percent), 2003 (2.05 percent), 2013 (4.79 percent), 2015 (5.48 percent), 2017 (3.99 percent), 2018 (2.99 percent), and 2019 (2.35 percent). Since 1984, China’s inbound investment volume increased by more than twenty percent in seven of the years and by more than thirty percent in four of the years: 1984 (28.66 percent), 1985 (47.60 percent), 1986 (60.28 percent), 1988 (20.99 percent), 1992 (66.20 percent), 1993 (102.88 percent), and 2008 (21.59 percent).

These are interesting numbers. But it appears difficult to draw firm conclusions regarding the relationship of China’s inbound investment volume and particular legislative developments in investment law. For example, the decline of China’s inbound investment volume in 1989 and the modest increase of only 2.28 percent in 1990 were certainly a result of the Tiananmen Square Incident but were not followed by considerable legislative action in 1991 and 1992.

Furthermore, the negative development in China’s inbound investment volume from 1998 to 2001 came at a time when China was in the process of creating its M&A framework, thus facilitating inbound investments through the acquisition mode. The enactment of related rules and regulations had, however, started in 1997 with the Changes in Equity Interest of Investors in Foreign-invested Enterprises Several Provisions and, considering the necessary lead time, could not have been triggered by the declining inbound investment volume starting from 1998.

Legislative developments in subsequent periods can, as well, hardly be directly linked to the decline or only modest increase of China’s inbound investment volume. For example, it would be pure speculation to assume that the slight year-on-year drop in 2005 caused the reenactment of the Acquisition of Domestic Enterprises by Foreign Investors Provisions in 2006 or the launch of the PRC Partnership Enterprise Law in the same year. Furthermore, a lot of legislative activity related to inbound investment took place in 2009, a year when China’s inbound investment volume dropped by 3.62 percent, apparently due to the global financial crisis that had hit the world one year earlier. But these legislative developments might have happened anyway as part of the ongoing process of building a comprehensive investment law system. The same is true for the 3.74 percent decline in 2012 and the 0.21 percent decline in 2016, followed by the below five percent increases from 2017 to 2019. While one could assume that this eventually led to the enactment of the PRC Foreign Investment Law, it must be kept in mind that the first draft of this important law had already been published in 2015 and that the work on such draft had started much earlier, that is, during times when China’s inbound investment volume was still high. Furthermore, the reduction of negative-listed areas in which foreign investments are subject to restrictions or prohibitions in the years since 2019 could, of course, be interpreted as a response to the very moderate development of China’s annual inbound investment volumes since 2015. But one might as well argue that this development was simply in line with the general liberalization approach adopted by the Chinese leadership or the fact that, with the evolving national security review and merger control systems, mechanisms were now in place to control inbound investments in sensitive areas.

To sum up, it would be nothing but surprising for the Chinese central government not to monitor the country’s inbound investment volume and consider legislative action in the case of unwanted developments upwards or downwards. But, as explained in the previous paragraphs, it is difficult to establish direct causal links to the enactment of specific investment laws and regulations.

3. International Influence

Foreign investors, their legal advisors, their home countries, and their representative organizations at the national and international levels are major stakeholders in China’s investment law system. These stakeholders have always attempted to influence the development of China’s investment law system in different ways. Examples are government-led development aid initiatives, for example, to strengthen the rule of law in China, to reform the legal framework of specific sectors, lobbying, the publication of general analyses, constructive or destructive criticism, as well as the provision of specific comments on published draft legislation. Input, of course, also came from international academia. It can be safely assumed that many of the expressed views, even when they were not directly addressed to decisionmakers in China, as well as international developments in general, were noticed, considered, and adopted for Chinese investment lawmaking, where regarded as helpful. At the same time, the internationalization of both the Chinese economy and the Chinese society as a whole may have simply led to an adjustment of the Chinese system, in line with international standards and practices. A good example in this regard is the establishment of China’s national security review system.

As explained above, rudimentary legislation regarding the national security review of foreign inbound investments was first introduced in China in 2006. A more specific framework was enacted in 2011, and the national security review system obtained its current form with the enactment of the PRC Foreign Investment Law on January 1, 2020, and the Measures for Security Review of Foreign Investment on January 18, 2021.

The establishment and refinement of China’s national security review system mirrors developments in other jurisdictions. In the United States, the Foreign Investment Risk Review Modernization Act of 2018 has strengthened the Committee on Foreign Investment in the United States (CFIUS) by expanding its jurisdiction. In 2019, the EU Regulation 2019/452 introduced the Framework Regulations on Foreign Direct Investment, and, in 2020:

Twenty-five countries and the European Union (EU), nearly all of them developed economies, adopted or reinforced screening regimes for foreign investment, bringing the total number of countries conducting FDI screening for national security to 34. Together, these countries account for 50 percent of world FDI flows and 69 per cent of the world stock of FDI.

In the United Kingdom, on November 11, 2020, the government announced the National Security and Investment Bill 2019/20, which introduced a “standalone CFIUS-style foreign investment regime.” The United Kingdom’s National Security and Investment Act entered into force on January 4, 2022.

Even prior to these legislative developments around the world, steps to block Chinese investments in various countries due to national security concerns had caught worldwide attention. One might, therefore, consider whether the establishment of China’s own national security review system was a response to these developments. While commentators have, in fact, raised concerns that China could use its own national security review system for political or protectionist purposes, there is no related hard evidence as of now. In fact, it must be remembered that China always had the opportunity to disallow foreign inbound investments through the approval, registration, and verification system. With the introduction of the negative-list approach, this option became unavailable across the board, and the establishment of a national security review system in line with what many other countries had set up seemed prudent.

4. China’s WTO Accession

The international impact on China’s foreign investment law system is, of course, the most visible in the context of China’s accession to the WTO.

The late 1990s were dominated by negotiations over China’s accession to the World Trade Organization (WTO). The Chinese Communist Party’s (CCP) authority became subject to international legal scrutiny. The reformist faction of the CCP led by Jiang Zemin and Zhu Rongji saw the WTO as an opportunity for future reform and rallied to attract foreign investors, carefully retaining Deng Xiaoping’s vision of ‘socialism with Chinese characteristics. Chinese regulations evolved in response to this new political reality.

In fact, the impact of China’s accession to the WTO for China and the whole world cannot be underestimated and may only have become fully apparent in recent times.

China’s accession to the WTO was a major milestone of its deep integration into the international economy . . . WTO membership became an important, if not vital, card for the leadership to boost its exports and attract [foreign direct investment] (FDI), the two pillars of China’s growth in the past decade. The reformers were also convinced that, by increasing the growth of GDP, more jobs would be created, which could help alleviate the worsening problem of urban unemployment due to the SOE restructuring.

As mentioned, it was one of the preconditions set by the WTO member states for China’s accession to the WTO in 2001 that China would further open up its markets for foreign inbound investments. As a result, in particular, the WFOE regime was significantly liberalized, and WFOEs became available as investment vehicles in many industry sectors that were previously closed for or only open to foreign investments via EJVs and CJVs. China’s WTO accession, therefore, had a major direct impact on the development of China’s investment law system. It also increased China’s attractiveness for foreign investors and boosted confidence in the Chinese reforms. As a result, the portion of China’s industrial output generated by foreign-invested enterprises grew from twenty-eight percent before China’s WTO accession to thirty-six percent in 2003.

5. “Other” Historic Events

As outlined above, anecdotal evidence suggests that China’s investment law system has, for a long time, developed unsystematically, without an overall strategy, and in an ad hoc manner in response to particular needs. This section now briefly considers if inbound investment legislation may have been influenced by general historic events inside and outside China.

First, the Asian Financial Crisis hit Southeast Asian countries and Japan in 1997. While China was only affected to a very limited extent, the crisis:

served as a wake-up call to the Chinese leadership because many of China’s large SOEs and financial institutions exhibit the same symptoms as those of the countries affected by the crisis. The leadership in Beijing came to realize that economic reform and developing a market economy is a do-or-die proposition.

Second, 1997 was also the year Deng Xiaoping, the former chairman of the Chinese People’s Consultative Conference and the legendary leader who had initiated China’s reform process in late 1978, passed away. Furthermore, on midnight of July 1, 1997, after more than 150 years of British colonial rule, Hong Kong became a Special Administrative Region (SAR) of the People’s Republic of China under the notion “one country, two systems,” which guaranteed, among other things, that Hong Kong’s legal system would remain unchanged for a period of fifty years. Macau followed under the same concept and formally changed its status from being under Portuguese rule to becoming a SAR of the PRC in 1999. Again, there is no evidence that any of these very important historic events have triggered specific legislative activity in the area of investment law in China.

Third, the GFC of 2008-2009 and the European Debt Crisis of 2009-2014 have rocked the world’s economies. The Chinese leadership has certainly considered legislative responses to national, regional, and global financial crises. However, there is again no hard evidence that this has translated into specific legislative activities in investment law. First, while the European Debt Crisis did not appear to have any direct impact on China, the GFC led to a noticeable decrease of China’s inbound investment volume. However, China was much less affected and more able to overcome the consequences of the GFC compared with other countries in the Western Hemisphere. As a result, Western companies in urgent need of cash injections welcomed Chinese investments, which, in turn, helped the Western world accelerate the post-GFC recovery process. It was, however, not long until the strong global presence of Chinese outbound investors reached a noticeable level and became regarded as a threat generating lots of criticism and leading to countermeasures, for example, in the form of governments or government agencies vetoing Chinese acquisitions in their countries, as discussed earlier.

Fourth, China’s current president, Xi Jinping, assumed his position from his predecessor, Hu Jintao, in 2013. It is hotly debated in China and abroad how this has changed China’s domestic and international politics. In 2014, the NPC and the Chinese People’s Political Consultative Conference (CPPCC) highlighted the importance of the rule of law, sparking a lot of interest and excitement around the world. But China’s leadership now appears to insist on the differences between the Chinese and the Western approach: In an address to top Communist Party leaders in November, President Xi Jinping once again made clear the differences between China’s socialist legal model and Western notions of judicial independence when he called for members of China’s legal community to “ensure loyalty to the party, the country, the people and the law,” in that order.

Chinese academics and legal practitioners continue to debate the significance of the rule of law for China. A special focus is on the question of whether the Western rule of law concept is suitable for China, or if China needs a rule of law with Chinese characteristics. While the evolution of Chinese investment law must be considered against the backdrop of this development, it is questionable if the ongoing debate regarding the role of law in China in general and the significance of the rule of law concept in particular has directly affected legislative activities in the area of investment law. In other words, the reasons that have been important for China’s leadership’s position vis-à-vis the development of China’s legal system in general have not necessarily been determining factors for the development of China’s investment law system in particular. This becomes clear when one considers that the start to building reliable investment law structures right after the beginning of the reforms in 1979, that is, the enactment of the EJV Law, was not aimed to promote legal certainty as a core feature of the rule of law for its own sake. The goal was rather to attract foreign inbound investments and, thus, the inflow of foreign capital and technology. It appears that this rationale of investment lawmaking has not changed over the years.

Finally, in 2013, President Xi Jinping announced China’s Belt and Road Initiative (BRI), the implementation of which started in 2015. BRI concerns China’s global outbound activities, and it aims to, and certainly will, underscore China’s increasing geopolitical and global economic influence. Arguably, BRI is also one of the reasons for the United States-China trade war, which the former United States President Donald Trump had started in 2018, that is, one year after he had assumed office. The United States-China trade war may have affected China’s inbound investment volume, which has risen at comparatively smaller margins since 2016. While Chinese lawmakers have certainly taken note of, or even expected, these developments, there are again no signs that all this has directly influenced the process of consolidation and liberalization of China’s investment regime over the last two decades.

6. Corrections Along the Way

As indicated in the previous sections, the development of China’s foreign investment system was not a straightforward process for a number of reasons. In particular, China’s leadership took corrective steps when developments were regarded as undesirable. The establishment of the CJV and WFOE regimes to force existing unregulated practices into a legal framework and, thus, to take control of these sectors are examples in this regard.

Another more recent and widely discussed example is China’s approach towards so-called “variable interest entities” (VIEs). The case of VIEs is particularly interesting because it sheds light on the challenges China’s foreign investment lawmakers had to, and still have to, face in times when Chinese businesses internationalize their operations.

In the past, foreign investors had used VIE structures to invest in sectors not open for foreign investments:

A VIE Structure typically involves contractual arrangements pursuant to which an offshore holding company . . . (usually through a wholly foreign-owned enterprise . . . established in China) controls and receives the economic benefits of a Chinese onshore operating entity (the “VIE”) whose shareholders would normally be PRC nationals.

Here, the offshore holding company would normally own the equity interest in an onshore WFOE. But, because the WFOE cannot directly invest in an area not open to foreign investments, VIE structures entail contractual arrangements that allow de facto control by the WFOE of a Chinese partner entity, the VIE, which operates in the banned area. The two draft versions of the PRC Foreign Investment Law contained provisions prohibiting VIEs structures. But VIE structures are also heavily used by Chinese investors through round-tripping arrangements. A general prohibition of VIE structures would, therefore, hurt Chinese interests. The draft version of the related Implementing Rules, consequently, excluded round-tripping via wholly Chinese-owned enterprises from the negative list, while the final version of the Implementation Rules did not maintain this clause and VIEs are not addressed at all by the final version of the PRC Foreign Investment Law. Apparently, it had not been possible to reach an agreement on this issue, which, therefore, had to be left open. It remains to be seen how VIE structures will be handled in practice and if government authorities will issue clarifying guidelines in the future.

IV. China’s Investment Legislation: Patterns and Future Prospects

A. General

The previous section aimed to highlight the main drivers of China’s legislative activities in the area of investment law since the reform started in 1979. This section now explores if it is possible to deduct any pattern and, if so, if such pattern can offer any conclusions, particularly with regard to the future development of China’s investment law system.

B. Patterns

When searching for patterns, one has to aim at identifying events or other factors that have, in a similar way, led to the same outcome, that is, in the context of Chinese investment law, events or factors that have triggered legislative activities. Four observations appear important in this regard.

First, the previous sections have demonstrated that, apart from China’s accession to the WTO, it is rather difficult to point to specific events or factors that have caused legislative activities in investment law. Although the establishment of China’s investment law system did, of course, respond to particular reform needs or entailed the reaction to unwelcome developments, it appears inconceivable to translate these reform needs or developments into a reliable taxonomy. In other words, apart from the fact that Chinese investment law was always aimed to attract inbound investments and ensure foreign onshore business activities, it is impossible to identify a more detailed pattern. Consequently, firm predictions regarding what specific events or factors might trigger legislative activities in investment law in the future are not possible.

Second, at a more general level, it must be acknowledged that China’s investment law system has seen a constant development since 1979. This development was not based on a systematic approach that followed an overall strategy. Chinese legislators have developed China’s investment law system in an ad hoc manner to support China’s economic and political system at its various reform stages, in line with political and macroeconomic goals. This has led to a fragmented, piecemeal framework that underwent numerous changes to respond to different legislative needs at different levels and at different points of time. While the resulting legislative diversity has created many challenges for foreign investors and their advisors, as of January 1, 2020, this framework has been consolidated under the roof of the PRC Foreign Investment Law.

Third, since the start of the reform process in China in late 1978, China’s investment law system has always subjected foreign investors to many restrictions leading to complaints, criticism, and numerous practical problems. The ongoing liberalization process, particularly during the last decade, has improved the situation significantly.

Fourth, the fact that the building of China’s investment law system was aimed to support reform needs implies that the creation of investment law and, thus, the provision of legal certainty for foreign investors was a tool, but apparently not a goal in itself. This is in line with the different role ascribed to law in China as compared to Western countries by many observers. Law has no absolute authority but rather flanks the political and economic agenda. Having said that, the Chinese development model, which is arguably built on this basis, has been extremely successful over the past decades. Many developing countries are studying China’s approach carefully to explore if they should follow the same path.

C. Future Prospects

The question is whether the enactment of the PRC Foreign Investment Law in 2020 marks the beginning of the end of the challenges that have haunted China’s investment law system since the start of the reform process in 1979, or if history will simply repeat itself. Even if it will be the latter, as far as the uncertainty inherent in China’s investment law system in the past is concerned, it must be acknowledged that this may only be regarded as unfortunate by Western lawyers and their clients. In contrast, for their Chinese counterparts, it could just be a normal feature of the Chinese system:

Chinese companies will always have a hard time understanding why foreign companies can’t get comfortable with the uncertainties inherent in the rapidly evolving Chinese regulatory landscape . . . The national regulatory environment is a moving target, so it is important to find the most effective way to work together.

As for the restrictions imposed by China’s inbound investment law system, in 2007, Chinese former Vice-Premier Zeng Peiyan was quoted as follows:

[We] should maintain a certain degree of restriction on foreign capital in ‘key areas’ and ‘sensitive industries’ to prevent international economic risks and to protect our national economic security . . . The more we open up, the more we need to safeguard our national economic security and our trade interests.

It is a common perception in the West that the rationale behind China’s investment lawmaking and application will remain in line with Zeng Peiyan’s statement. The historical account of the development of China’s investment law system over the past four decades conducted in this article is, on the one hand, not able to dispel assumptions of this kind. On the other hand, as also outlined, China’s investment law system has seen significant liberalization. In particular, the national treatment promise of the PRC Foreign Investment Law is a welcome development that meets the demands of many years. There are, consequently, also good reasons to assume that there is more to come, that is, that China’s investment law system will continue to open up further in the future.