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China People's Congress

Five things to know about China's new foreign investment law

Experts say rushed-through legislation is short on details

China's parliament is set to pass a new foreign investment law on Friday. (Nikkei montage/Reuters)

BEIJING -- On Friday, China's rubber-stamp parliament is set to pass a new foreign investment law, perhaps the most important item on the agenda at this year's National People's Congress.

The legislation would begin to put into law the principle that both domestic and foreign investors will be treated equally. It is an important step toward cooling the trade tensions between Beijing and Washington as it is intended to ban forced technology transfers.

Policymakers have pushed through the law at breakneck speed in a country where the legislative wheels can turn very slowly. The move comes as growth in the world's second-largest economy is slowing. Some experts, however, say it is short on details.

What is the law?

The law will replace three existing statutes on foreign investment. The legislation's six chapters cover issues such as investment promotion, investment protection, government management of foreign investment, and legal responsibilities. It will target investment activities by foreign persons, companies and organizations, including joint ventures between overseas and Chinese firms.

Article 22 states that the government must protect the intellectual property rights of foreign investors and companies, and that Chinese organizations may not use administrative measures to force technology transfers.

"This is fundamental reform of our management system of foreign investment to increase openness, transparency and predictability," Zhang Yesui, spokesman for China's parliament, told reporters at the NPC last week.

What prompted the new legislation?

The three existing laws relating to foreign investment were passed in the 1970s and 1980s when China was emerging from decades of global isolation. Therefore, an update was needed to catch up with the realities of the modern global economy.

China needs to boost foreign investments to stem the slowdown of the domestic economy amid sliding consumption and the trade war with Washington. More investment from foreign companies is required to help the country to become a high-grade manufacturing power.

While U.S. President Donald Trump has repeatedly complained about his country's trade deficit with China, the issues of intellectual property rights and forced technology transfers are key to negotiations for a possible deal. Trump is pushing China to undertake such structural reforms.

"The dispute is not a simple trade problem," said Shingo Ito, senior economist at the Institute for International Economic Studies, a Tokyo-based think tank. "It's a battle over which country holds technological supremacy in the world."

How fast was the process?

While it typically takes years for a legislature to get passed in China, legislators only took three months to consult the public and draft the law. The final version was announced on March 8 at the NPC, and was discussed twice at meetings of the parliament's standing committee.

The law will be voted on -- and inevitably -- passed on Friday, the closing day of the congress. No date has yet been set for its enforcement.

Will China really treat foreign companies equally?

The law forbids investment in certain sectors, though China's commerce ministry said on Saturday that Beijing intends to reduce the number of industries on this list.

Wang Chen, vice chairman of the NPC's standing committee, on March 8 stressed the "unique nature" of the financial sector, saying that separate stipulations shall prevail when a foreign entity invests in financial industries such as banking, securities and insurance, or markets such as securities or foreign exchange.

The European Union Chamber of Commerce in China published a statement on Feb. 25 saying that the speed of the process means that the opinions of foreign companies will not be taken into consideration in the final draft, and the lack of justification for the urgency raises questions over China implementing the rule of law.

The law also states that if any countries or regions place a discriminatory ban on Chinese investment activity, China can take corresponding measures.

Will the new law help China's slowing economy?

Foreign direct investment into China rose by 3% year-on-year to $135 billion last year, Commerce Minister Zhong Shan said in January. That's a slowdown from expansions of 7.9% in 2017 and 4.1% in 2016. The deceleration comes as overall economy grew in 2018 at its slowest rate in 28 years.

However, officials at the NPC on Saturday was that this year's FDI level was likely just to be "stable" even with the help of the new law.

Jeremy Lawson, chief economist at Aberdeen Standard Investments, was more cautiously optimistic.

The law "will be a nascent sign that policy is shifting in a more positive long-term direction," he wrote in a note. "This week's Congress is not intended to address or solve all of the country's long-term challenges. That is a multiyear project. But the signals for future growth may finally be improving."

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