Author: Laura McCaskill

Publisher:

Published: 2016

Total Pages: 70

ISBN-13:

On January 19, 2015, China's Ministry of Commerce released a Draft proposal for a new Foreign Investment Law in order to solicit opinions from the public. This new law, which if promulgated will replace the existing laws governing foreign investments, will reduce restrictions on foreign investment and streamline the approval process for foreign investment. However, the law also constitutes a crackdown on foreign investment in sensitive sectors. Most notably, the law will bring the variable interest corporate structure within the definition of foreign investment, and therefore within the ambit of regulation. This structure has been widely used by foreign investors to circumvent restrictions and prohibitions imposed on foreign investment in China. Many of the largest Chinese companies listed on U.S. exchanges are operating in China through a variable interest entity. Their standing under the new law is therefore of paramount importance.Unfortunately, the proposed law does not provide much clarity regarding how existing and new variable interest entities will be treated. Instead, the Draft maintains a broad and flexible approach that has informed the last 30 years of economic transition in China. This approach allows Chinese regulators to engage in selective enforcement, and has therefore been a popular policy choice of the Communist Party of China in it's desire to enjoy the benefits of a market economy, while maintaining tight control. However, it also leaves many questions unanswered and issues unresolved and reduces legal certainty.It is therefore important to develop a more comprehensive understanding of how the FIL fits with the overall objectives of the Communist Party of China, which can provide some indication as to how these unresolved issues may be addressed. Examining the proposed law in its larger context, as a step in China's economic transition, it becomes clear that ultimately Beijing adopts a cautious approach to foreign investment. The Draft, if enacted in its current form is neither a death sentence nor a thumb of approval for the VIE corporate structure. Instead, its provisions are broad enough that the impact of the law will depend upon their interpretation by authorities and courts.