China: Fundamental Changes To Foreign Investment In The People’s Republic Of China

Last Updated: 8 May 2015
Article by Thun Lee

On 19 January 2015, China's Ministry of Commerce (MOFCOM) released its draft Foreign Investment Law (FIL) outlining major amendments to the existing legal regulations of foreign investment into China. The draft FIL eases entry requirements for foreign investments as it unifies foreign and domestic regulations. It also eliminates existing grey areas that have allowed participation of foreign investments in otherwise restricted industries. The draft FIL is expected to be ready for implementation within two years, while foreign enterprises will be given a further three years to adjust to the new legal reality outlined in the law. 

New definition of foreign investment

China's current regulatory regime defines foreign investment by means of three different laws: the Foreign Cooperative Joint Venture Law (CJV Law), the Wholly Foreign-Owned Enterprise Law (WFOE Law) and the Chinese-Foreign Equity Joint Venture Law (EJV Law). These three laws are all expected to be replaced by the new FIL. The new definition of a foreign enterprise as outlined in the draft FIL follows a concept of so-called actual control. This means that an enterprise will be defined as foreign if its actual controller is foreign, independent of whether the enterprise is, for instance, registered as a fully Chinese invested entity. The definition of control, however, is relatively broad. Apart from establishing an enterprise, it also constitutes controlling shares, providing financing for more than a year, obtaining rights for natural resources or infrastructure, acquiring immovable property, or obtaining holding rights or interests in a domestic enterprise.  

Lifting the veil on Variable Interest Entity structures

Actual control will also shed light on the current Variable Interest Entity (VIE) structures, which have been utilised by foreign investors to invest in otherwise restricted industries. With actual control as the determining factor on whether or not an enterprise is considered foreign, the Chinese authorities will be equipped with the legal means to deal with foreigners controlling enterprises in restricted sectors through VIE structures. This means that 100%-owned Chinese enterprises that are under the control of foreign entities will be considered foreign and therefore no longer able to invest in sectors restricted or prohibited for foreigners.

Negative list and information reporting system

The current approval system is to be replaced by a negative list, similar to that applied in the Shanghai Free-Trade Zone. This means that foreign investment in industries not included on the list will no longer need approval from MOFCOM. They will instead be offered the same treatment as domestic enterprises, while investments in industries listed as restricted will need approvals from the respective regulatory bodies within the government.

The negative list is said to be implemented alongside an information reporting system that requires enterprises to submit a report upon investment (maximum 30 days after implementation) along with annual or quarterly reports; the quarterly reports only apply to foreign-invested enterprises with revenues above 10 billion RMB or more than 10 subsidiaries in China. The content of the initial investment report is to consist of information on the foreign investor as well as the investment itself, such as geographic area, industry, amount invested, shareholding ratio, organisation type and corporate structure of the enterprise. 

While the implementation of a negative list is considered to be a significant step towards modernisation of China's FIL, concerns have been raised over the information reporting system. The information required to be submitted in the reports could be comprehensive and often sensitive. Apart from the fact that the obligation to submit continuous reports can be burdensome for enterprises, the disclosure of detailed and sensitive company information could potentially lead to a loss of trade secrets. 

It is explicitly stated in the draft that failure to comply with the reporting obligations or any attempt to provide misleading information can result in punishments and, in severe cases, criminal charges for the people directly responsible. 

National security review

The draft FIL also outlines a national security review stating that foreign investment that is a threat to China's national security is to be terminated. As the draft's definition of national security is relatively loose and not explicitly limited to any particular industries, it might be difficult for foreign enterprises to know whether or not they fall under this category. However, it is possible for the foreign enterprise to request talks on any potential national security issues prior to review in order to get an understanding of any restrictions or necessary changes as early in the incorporation process as possible.


The draft FIL displays MOFCOM's intention to fundamentally change the landscape of foreign investment into China. The current laws implemented in the 1980s, which define the framework for foreign investors to navigate within, will now be replaced. While the draft FIL can be viewed as an attempt to modernise and ease the entry barriers for foreign investment, many uncertainties still remain, such as the practical consequences of the broadly defined terms of actual control and national security threats. Moreover, it is yet to be seen whether major amendments to the draft will be made to the final version of the FIL. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Zhong Lun Law Firm
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Zhong Lun Law Firm
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions