Foreign business skeptical as China approves new investment law

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BEIJING (Reuters) – China’s parliament approved a new foreign investment law on Friday that promises to create a transparent environment for foreign firms as China and the United States work to end a trade war, though there is scepticism about its enforceability.

The law, to replace existing regulations for joint ventures and wholly foreign-owned enterprises, is designed to ease concerns among foreign companies about the difficulties they face operating in the world’s second-largest economy.

Fast-tracked for approval at this month’s annual session of parliament, the law comes into effect on Jan. 1, 2020, the state news agency said.

It will ban forced technology transfer and illegal government “interference” in foreign business practices, according to the latest draft. The full text has not yet officially been released.

While previous drafts stipulated criminal punishment for officials who violated the law, a last minute revision detailed by state media this week has strengthened those clauses.

The changes were widely seen within the U.S. business community as an effort, in part, by Beijing to address on paper some complaints underlying the bitter U.S.-China trade dispute.

Washington and Beijing have been locked in a tit-for-tat tariff battle as U.S. officials press China for an end to practices and policies it argues have given Chinese firms unfair advantages. These include subsidizing of industry, limits on access for foreign companies and alleged theft of intellectual property.

Jacob Parker, vice president of China operations at the U.S.-China Business Council in Beijing, said his group was pleased with the last-minute changes to further protect foreign firms’ commercial information.

“The addition of language imposing criminal penalties for sharing sensitive foreign company information adopts a much tougher deterrent against counterfeiting and IP theft and will offer new avenues for the enforcement of IP protection,” he said.

However, Parker added that “while the language on criminal liability is positive, it will be difficult to enforce.”

ADDITIONS LARGELY COSMETIC?

Some law experts and business consultants have expressed scepticism about how effective the law will be in protecting foreign firms from compelled technology transfers, given a lack of rule of law in China.

They maintain that the additions to the law are largely cosmetic because Chinese courts are tightly controlled by the ruling Communist Party.

“What prosecutor is going to bring a case against a Communist Party official?” one person in the U.S. business community asked.

There are also concerns that broad national security reviews could still leave foreign companies subject to overreaching regulators.

The American Chamber of Commerce in China, in a statement earlier this week, said that it in principle welcomed and appreciates “this legislative effort to improve the foreign investment climate”.

“We are concerned, however, that such an important and potentially far-reaching piece of legislation will be enacted without extensive consultation and input from industry stakeholders,” it said.

Reporting by Michael Martina and Ben Blanchard; Editing by Richard Borsuk

Our Standards:The Thomson Reuters Trust Principles.

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