China released a draft for public comment concerning a new foreign investment law (FIL) in January 2015, in an attempt to improve its business environment. The draft will, however, open some established foreign-invested enterprises (FIEs) to increased scrutiny.

The new law plans to remove the special case treatment of different kinds of FIEs and treat foreign firms much more like domestic companies. The draft also simplifies the definition of FIE, it implements a 'national security review' as national law, and there is also no longer a requirement to seek pre-approval from the government when entering 'encouraged' and 'permitted' sectors.

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“General implications suggest that the draft FIL will result in greater FDI in China, and more importantly for the government, better regulated FDI,” said Matthieu David-Experton, CEO at the market research firm Daxue Consulting. “Some FIEs will likely find themselves in a difficult legal situation under the new definitions of what constitutes an FIE, and contradictions or loopholes will inevitably show themselves in practice. But, the relaxing of regulations and restrictions, streamlining of bureaucracy, improved information submission systems and generally improved transparency will encourage new FDI."

The draft seeks to reduce barriers to foreign investment while increasing scrutiny of foreigners trying to evade regulations in restricted industries. “If passed, this law will represent a major step in China’s efforts to rationalise its foreign investment regulatory regime in line with prevailing international best practices, while still maintaining control in sensitive industries,” said Robert van Aert, project manager in charge of executing FDI at Maxxelli Consulting, a company launching western small and medium-sized enterprises in the Chinese market.

The new law will substitute Sino-foreign equity joint venture law, the wholly foreign-owned enterprise law and the Sino-foreign contractual joint venture law.

“Current laws and regulations are considered relatively hard and difficult. There are numerous applications for licenses, approvals and the whole procedure takes about three to six months,” said Mr van Aert. He added that the eased regulations aim to simplify the requirements as well as procedures, thus removing obstacles for many investors.

Mr David-Experton said that the draft law was implemented at this time as part of the overall shift toward a cleaner, more efficient and better government in China. “It may also be a sign that China's government now has the confidence in domestic companies being able to compete with foreign players in the Chinese market,” he added.

Greenfield investment monitor fDi Markets shows that a total of 14,432 FDI projects in China were recorded between January 2003 and January 2015. These projects represent a total capital investment of $505.81bn.