New FIL regime's impact on multinational businesses in China

It is nearly nine months since the new Foreign Investment Law (FIL) came into effect in China at the start of 2020. The new FIL regime has been China’s most significant legislative development in foreign investment in decades. As a result, new opportunities and challenges are emerging for multinational companies operating in China. To assist companies navigating the new regime, we are launching a series of articles focusing on the impact of the FIL. We will address the various practical issues that have arisen as a result of its implementation and share our insights and experience.

In this first article of the series, we provide a snapshot of the FIL regime and its impact on foreign investment in China. Our upcoming articles will cover topics including downstream equity investments by foreign invested enterprises (FIEs), practical issues in the implementation of the FIL, special regimes such as foreign strategic investment in listed companies under the FIL and comparison of preferential policies in various free trade zones. 

What are the key features of the FIL regime?

The FIL overhauls the decades old regime for foreign investment in China. Key features of the new regime include:

How will the FIL regime impact multinational businesses in China?

Firstly, the ever shorter negative list (which sets restrictions on foreign investment) under the FIL regime means more opportunities for foreign investment in China. Over recent years, China has been shortening the negative list and opening up more industries for foreign investment, such as financial institutions, medical institutions and the automobile, telecommunications and education industries. Foreign investors are seizing these liberalising opportunities to enter the Chinese market or expand their China business.

Secondly, existing FIEs must convert their corporate governance structures to comply with the PRC Company Law within the five-year transitional period following the FIL's implementation, that is by 1 July 2025. This will involve changes to the decision-making mechanisms, voting rights, board quorum and the management nomination rights of the FIE. Constitutional documents and joint venture contracts of the FIE will need to be amended. For joint ventures, this could open the gate for re-negotiation with joint venture partners, which could extend beyond the corporate governance issues to other commercial issues.

Thirdly, the FIL regime is impacting the execution and timeline of M&A and investment projects in China. Generally speaking, the approval and registration process is now more streamlined. However, companies are encountering practical issues during the implementation phase as local company registration authorities get up to speed with the new regime. These include technical issues with the local procedures and online platforms. Foreign investors should be prepared for potential procedural uncertainties or delays at the local level.

Last but not least, the FIE regime will also have an impact on future investment strategies and structures in China. With the liberalisation of foreign exchange control for FIEs, there will be more alternative funding options for China investment and businesses. We also anticipate that the legal regimes governing strategic foreign investment in Chinese listed companies, Chinese holding companies and foreign invested partnership enterprises will be amended in the near future to comply with the new FIL. 

What’s your strategy for the FIL regime?

Faced with the opportunities and challenges resulting from the implementation of the FIL, it is crucial for foreign investors to have a strategy to address the new regime. To ensure a smooth transition into the new regime, you should:

How can we help? 

We can provide tailored solutions for FIL-related issues. Please do not hesitate to contact us if you are interested in knowing more about our offering.

KEY CONTACTS

Nanda Lau 刘依兰

Head of Shanghai Office

Nanda.Lau@hsf.com

Gavin Guo 郭武汉

International Partner, 

Kewei (Shanghai)

Gavin.Guo@hsfkewei.com

Angela Zhao 赵秋丹

Senior Associate, Shanghai

Angela.Zhao@hsf.com

Alizee Zheng 郑晓夏

Senior Associate, Shanghai

Alizee.Zheng@hsf.com

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