United States: China's Draft Foreign Investment Law Still Under Review, But "Negative List" System Comes Into Effect Nationwide October 1

Last Updated: September 19 2016
Article by Paul D. McKenzie, Xiaohu Ma and Wei Zhang

 A February 2015 Morrison & Foerster client alert reported on the issuance of a new draft Foreign Investment Law ("FIL") that, if promulgated, would institute far-reaching changes to the Chinese government's oversight of foreign investment. Twenty months on, the FIL has yet to be promulgated. Nonetheless, two key changes anticipated by the draft FIL – the introduction of a new "negative list" in place of the foreign investment catalogue and a shift away from mandatory government approval to a filing system for most types of investment – come into effect October 1, 2016, as a result of amendments to key existing foreign-investment legislation passed by the Standing Committee of the National People's Congress ("NPC") on September 3, 2016. Affected laws include the core laws governing establishment of wholly foreign-owned enterprises and both Sino-foreign equity and Sino-foreign cooperative joint ventures (often collectively referred to as "foreign investment enterprises" or "FIEs.")

In anticipation of these changes, the Ministry of Commerce ("MOFCOM") has circulated for public comment new draft measures governing MOFCOM filings in regard to FIEs, which we expect will be finalized soon so they can also come into effect October 1.


  • Effective October 1, many foreign investment projects will no longer be subject to a government approval (审批) procedure but instead will require only a filing (备案). Only projects in sectors specified in a so-called "negative list" will be subject to government approval.
  • This change adopts an approach to foreign investment already piloted locally in a number of free trade zones starting in 2013, including initially the Shanghai Free Trade Zone and then free trade zones in Guangdong, Tianjin and Fujian.
  • The national negative list that will underpin this change has not yet been finalized. The State Council will need to approve a national negative list before October 1 in order for the NPC amendments to be implemented. The negative list may resemble to some extent the negative lists currently in effect in the various free trade zones.
  • The NPC amendments will have a significant impact on MOFCOM procedures, so it is not surprising to see MOFCOM's issuance of draft filing measures. Many other national and local laws and regulations, and many administrative procedures, will need to be revamped to take account of the NPC amendments, involving coordination between MOFCOM and other government authorities, such as the National Development and Reform Commission, the State Administration for Industry and Commerce ("SAIC") and the State Administration of Foreign Exchange, at both the central government and local level. The next several weeks are likely to see a flurry of work by these authorities. At the same time, we anticipate that it may not be feasible for the NPC amendments to be fully implemented as of October 1 and may instead be implemented gradually over a period of months after that date.
  • A special concern relates to the interplay between MOFCOM and SAIC procedures after October 1, 2016. For most FIEs, completion of MOFCOM formalities is no longer a condition for registration with SAIC. This change potentially places an additional burden on the SAIC. Will the SAIC have authority to interpret the "negative list" and to deny registration of an FIE and require the FIE to obtain MOFCOM's pre-registration approval? What if SAIC and MOFCOM officials have different views on whether an FIE falls into the scope of the "negative list?" These issues will need to be addressed.
  • MOFCOM's draft filing measures contemplate adoption of a requirement also found in the draft FIL to disclose the "actual controlling person(s)" of an FIE. The term seems to have a broad scope and includes not only a person who holds 50% or more of the ownership interests but also a person who has "a material influence" on operational decisions of the enterprise. This change represents an important evolution in the approach of Chinese foreign-investment rules, looking beyond the place of incorporation of the immediate investor. Implementation of the requirement will be challenging in many cases, such as where information about actual controlling persons is confidential or where the actual controlling person is a PRC person. Various legal and practical questions will need to be clarified by MOFCOM.
  • MOFCOM's draft filing measures contemplate a relatively streamlined filing process applicable to FIEs in sectors not included on the negative list, devolving to FIEs for the first time significant autonomy in relation to corporate structure and governance.
  • MOFCOM's draft filing measures contemplate that existing FIEs do not need to make immediate changes in order to conform to the NPC amendments. Existing approval certificates will remain valid and only when an FIE makes a corporate change that needs to be filed with MOFCOM (such as, for example, amending its business scope) must its approval certificate be surrendered to MOFCOM and a "filing receipt" issued under the new filing system provided in its place.
  • An ongoing uncertainty is in regard to when / whether the draft FIL will be promulgated. The draft FIL contemplates scrapping altogether the foreign-investment legislation that the NPC has just amended. Some commentators suggest that the NPC's amendment of these laws signals a likely delay in implementing the much more extensive changes contemplated in the draft FIL. Others see the amendments as part of a staged implementation of the draft FIL, with promulgation of the FIL to follow. Time will tell.


1. NPC Decision

The Decision of the Standing Committee of the NPC on Amendment of Four Laws Including the Law of the People's Republic of China on Wholly Foreign-Owned Enterprises (全国人民代表大会常务委员会关于修改《中华人民共和国外资企业法》等四部法律的决定, the "NPC Decision"), which was passed on September 3, 2016, amends the following legislation:

  • Law on Wholly Foreign-Owned Enterprises;
  • Law on Sino-Foreign Equity Joint Ventures;
  • Law on Sino-Foreign Cooperative Joint Ventures; and
  • Law on Protection of Investments by Taiwanese Compatriots.

The amendments, which come into effect on October 1, 2016, eliminate the requirement to obtain government approval (审批) for the establishment of any FIE and provide instead for a filing (备案) process relevant to most FIEs. Only if the business scope of an FIE is within an industry listed on a "negative list" for inbound foreign investment is government approval as such required.

The "negative list" approach to the regulation of inbound foreign investment is a key feature of the draft FIL and was provisionally implemented in 2013 on a pilot basis in the Shanghai Free Trade Zone as well as in free trade zones in Guangdong, Tianjin and Fujian.

The negative list has not yet been issued, and it is anticipated that the State Council will approve issuance of the negative list in the coming weeks. The negative list may resemble to some extent the negative lists currently in effect in the various free trade zones.

2. MOFCOM Draft Filing Measures

On the same date the NPC Decision was passed, MOFCOM published the draft Interim Administrative Measures for Filing of Establishment and Changes of Foreign-Invested Enterprises (外商投资企业设立及变更备案管理暂行办法(征求意见稿), the "Filing Measures") for public comments. The deadline for comments is September 22, 2016, and the draft Filing Measures would need to be finalized for promulgation by October 1, 2016.

The draft Filing Measures provide details in relation to the filing process to govern both the establishment of FIEs no longer requiring government approval and corporate changes in respect of those FIEs. Notable features of the draft Filing Measures include as follows:

  • Filing Authority. The draft Filing Measures contemplate that MOFCOM and its counterparts at the provincial level will be designated as the competent filing authority. For the moment at least, it does not seem as if local branches of MOFCOM below the provincial level will have authority to accept FIE filings, possibly with a view to enhancing consistency in the implementation of the draft Filing Measures.
  • Post-Filing. Current law makes the effectiveness of joint venture contracts and other constituent documents for the establishment of FIEs conditional upon MOFCOM approval, and such approval must be obtained before an FIE is established and before various important corporate changes take effect. The draft Filing Measures contemplate that filings by FIEs whose business scopes fall outside of the "negative list" can be made after the fact. A filing can be made as late as 30 days after issuance of the business license when an FIE is established. For a corporate change, the filing deadline is 30 days after the change "comes into effect," which the draft Filing Measures define as when the highest authority of the FIE (a reference to what would usually be its board of directors) makes its decision about the change. The draft Filing Measures contemplate devolution to FIEs for the first time of significant autonomy in relation to corporate structure and governance.
  • Streamlined Filing. The filing will be done through a consolidated online information system for administration of foreign investment. As compared with the current approval system, the documents required to be included as part of the new filing system are quite limited. MOFCOM does not require documents such as joint venture contracts, articles of association and feasibility study reports to be filed. Moreover, it is required that the filing process be completed within three business days.

Proof of Online Filing. The proof of online filing will be a "Filing Receipt," instead of "Certificate of Approval." An existing FIE whose business scope falls outside of the "negative list" is not required to take immediate steps to conform to the new filing system as of October 1, 2016. However, if it makes corporate changes in the future (such as changes to its basic information or those of its investor(s) or material changes such as equity transfer, merger or termination) these will need to be addressed via an online filing, and at that time the FIE's original Certificate of Approval will be surrendered with a "Filing Receipt" issued in its place.

  • Disclosure of Actual Controlling Person(s). The draft Filing Measures require disclosure of "Actual Controlling Person(s)" by FIEs but provide no formal definition. However, Appendix I of the draft Filing Measures does enumerate the following methods for acquiring "actual control" of an FIE:
    • independently or jointly with affiliate investors, directly or indirectly owning 50% or more of the shares, equity, share of property, voting rights or other similar interests of the FIE;
    • owning less than 50% of the foregoing interests but having a voting that may have a material influence on decisions made by the FIE; or
    • other methods that may have a material influence on operational decisions or on human resources, financial or technical matters.

    This broad disclosure requirement will cause substantial regulatory and practical issues in its implementation, including in relation to whether and how an FIE will be required to verify and report changes to direct and indirect shareholdings and how an enterprise with an offshore holding structure but with a PRC person as the controlling person will be viewed.

  • Supervision and Inspection. At the same time as the draft Filing Measures make ongoing compliance less onerous, they also enhance the supervisory powers of the filing authority in order to deal with FIEs that do not strictly follow the filing requirements. These include the right to conduct spot-checks and also initiate inspections in response to whistleblower reports or at the suggestion of other government departments.
  • Penalties. Under the draft Filing Measures, the most severe penalty for different types of violations (including conducting business activities restricted or prohibited for foreign investment under the "negative list") is RMB 30,000. This is a much lighter penalty than those contemplated under the draft FIL, which include confiscation of illegal income and fines of up to RMB 1,000,000 (or 10% of the illegal investment). The draft Filing Measures also contemplate that MOFCOM will establish a blacklist system in order to publicize noncompliant conduct by FIEs or foreign investors.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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

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

Paul D. McKenzie
Xiaohu Ma
Wei Zhang
In association with
Related Topics
Related Articles
Related Video
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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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