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China-US relations

China releases details of new law on foreign investment ahead of trade talks with US

  • Beijing pledges equal treatment and intellectual property protection for overseas firms in China in full text of draft legislation
  • Mandatory technology transfers will be banned and tech cooperation based on voluntary principles and commercial rules encouraged
PUBLISHED : Thursday, 27 December, 2018, 11:02pm
UPDATED : Friday, 28 December, 2018, 12:18am

Beijing has vowed to ensure equal treatment and intellectual property protection for overseas firms operating in China, according to the full text of its draft foreign investment law – its latest move to address long-standing complaints.

The draft law includes a widely anticipated ban on mandatory technology transfers from foreign companies and encourages tech cooperation based on voluntary principles and commercial rules in a bid to tackle a key issue in the ongoing trade war with the United States.

Will China’s new forced technology transfer law satisfy US concerns?

Government intervention in the normal business operations of foreign companies is also prohibited under the draft law, and authorities are banned from illegally setting up the conditions for foreign businesses to access or exit the Chinese market.

The full text of the new legislation was released for public consultation on Wednesday until February 24, ahead of planned face-to-face trade talks between Beijing and Washington next month.

It also states that China can take corresponding measures if it encounters discriminatory treatment on investment overseas, and foreign investment that could have an impact on national security would be subject to increased scrutiny.

The United States and the European Union have stepped up their screening of Chinese deals on national security grounds and because of a lack of investment reciprocity in China.

China’s Ministry of Commerce said in a regular briefing on Thursday that the new legislation would replace three laws covering foreign joint ventures and wholly foreign-owned companies and would eliminate problems with overlapping and conflicting rules.

It aimed to “set up and improve the mechanism facilitating foreign investment” and to create an “open, fair and transparent” business environment for foreign companies, the ministry said.

According to the draft law, the government will seek feedback from foreign companies when drafting rules related to foreign investment and it will set up a mechanism to handle complaints.

Other changes include foreign-invested firms being able to raise funds by issuing stocks and bonds, and they will have the freedom to send income overseas in either yuan or foreign currencies.

But analysts have questioned how effective the new legislation would be in addressing the concerns of the foreign business community in China.

Bonnie Glaser, director of the China Power Project at the Centre for Strategic and International Studies, was sceptical.

“A healthy dose of scepticism is necessary when evaluating all Chinese laws that pertain to foreign economic activity,” Glaser said. “It could be years before it becomes law. What will be the enforcement mechanism? Will those who violate the law still face penalties? Indictments and prosecutions will be needed to convince sceptics.”

China drafts law protecting foreign intellectual property and prohibiting forced technology transfer

The draft law also states that goods produced in China by foreign companies are to be given equal treatment in government procurement and an equal chance to join the process of drawing up industrial standards.

But Glaser doubted this would happen since “Chinese firms have long received various preferences and weaning them off may be impossible”.

Meanwhile, the commerce ministry confirmed trade talks would go ahead between China and the US next month but did not say where or exactly when the two sides would meet. Bloomberg reported that US deputy trade representative Jeffery Gerrish would lead a US delegation to Beijing in the second week of January.

Ministry spokesman Gao Feng said that in January “China and the United States will continue the intensive phone conversations, and both sides have indeed made detailed arrangements for face-to-face discussions”.

Washington has pressed Beijing to make fundamental changes to its industrial and technology policies, but Glaser said the draft law would not satisfy its demands.

“The question is what will follow; on what issues will China be willing to compromise on, what concrete steps will it take and how quickly,” she said. “China is trying to convince the US that it is willing to take some measures to address US demands. The question is how much is enough?”