China is seeking a legal reform that will fundamentally change the way flows of foreign investment in the country.
The central government is proposing a reform of the current foreign investment law. The bill would unify regulations, reduce restrictions and deal with the structure of variable interest entities that investors often use to circumvent the limits of ownership in a number of restricted as education and internet industries. It invites the public to provide feedback before February 17, according to a post in the Ministry of Commerce website.
At present, foreign investment in China is regulated by three sets of rules. But in an online statement, Sun Jiwen, a spokesman for the Ministry of Commerce, says that existing laws were considered "integrated" because the system of approval on a case by case basis and regulations conflict with other sets of laws.
"The biggest change [the proposal] is that foreign investment in China no longer needs to be reviewed on a case by case basis," says Qing Ren, a partner at the law firm Zhong Lun and previously worked for the Ministry of Commerce. "This greatly opens the Chinese market. It is also a restructuring of Chinese law that would eliminate the uncertainties and conflicting norms".
The proposed change is also part of Beijing's efforts to attract more foreign investment at a time when economic growth has stagnated at a minimum of a quarter century. Controversial government antitrust investigation against a number of foreign companies last year also reduced the attractiveness of the mainland as an investment destination.
James Zimmerman, chairman of the American Chamber of Commerce in China, says the organization welcomes the recent effort of the government. AmCham China supports a review of the law "to facilitate approval procedures" for foreign investment and reduce "trade barriers affecting US companies," he says.
It is expected that the draft foreign investment law to deal with the variable interest entity (VIE) structure - a complex series of contractual arrangements which exploit loophole foreign investors can buy shares of companies in restricted industries. Chinese Internet companies like Alibaba Group Holding, Inc Baidu, Tencent Holdings and JD.com listed on this road.
Beijing proposes to distinguish between variable interest entities controlled by Chinese investors and those controlled by foreign investors, according to the law firm Weil, Gotshal & Manges LLP. Variable interest entities controlled by China can retain its structure and functioning, as usual, the firm said in a research note.
"[The bill] reduces uncertainty on investment through the VIE structure," says Li Wenfeng, a lawyer in the Beijing office of Weil, Gotshal & Manges'. "There has been no formal regulation governing the VIE structure. Investors have long been concerned about the potential risks."
The impact on Alibaba Group will be limited, since the signing of e-commerce is obviously a Chinese-controlled company because its corporate structure which leaves the group firmly in the hands of their partners, according to Ren Zhong Lun.
However, the fate of variable interest entities under foreign control are less certain. Apart from those companies close down, forcing Beijing may choose foreign players to sell their shares to Chinese investors, or request these companies to move to free trade areas, says Antony Dapiran, a partner at law firm Davis Polk & Wardwell.
In the future, it is expected that the use of VIEs to lose interest because the government open more industries to foreign investment. And restrictions on e-commerce sector are reduced analysts say the country, after Beijing allowed foreign investors to fully own e-commerce companies in the Free Zone of Shanghai from January.
E-commerce companies operating in the free zone of Shanghai include yhd.com, an online supermarket corporation controlled by US Wal-Mart Stores Inc. In addition, another US company, Amazon.com Inc said in August last year planning to establish operations in the area, hoping to benefit from less stringent regulations and sell more imported goods to Chinese consumers.
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