Foreign Investment Regulation Under the Foreign Investment Law
The Foreign Investment Law (Waishang Touzi Fa, 外商投资法), effective 1 January 2020, represents the most fundamental reform of China’s foreign investment regime in decades. The Law replaced the three separate laws governing foreign-invested enterprises — the Sino-Foreign Equity Joint Venture Law, the Sino-Foreign Cooperative Joint Venture Law, and the Wholly Foreign-Owned Enterprise Law — and established a unified legal framework based on pre-establishment national treatment and negative list management.
Pre-Establishment National Treatment
The cornerstone of the Foreign Investment Law is the principle of pre-establishment national treatment (zhu ce qian guomin daiyu, 准入前国民待遇), which provides that foreign investors receive treatment no less favorable than domestic investors during the investment entry stage. Foreign investment in sectors not included in the negative list (fumian qingdan, 负面清单) is subject to the same establishment procedures as domestic investment.
The principle is implemented through Article 4 of the Foreign Investment Law, which provides that foreign investment in sectors outside the negative list shall be treated on an equal basis with domestic investment. The negative list, published by the National Development and Reform Commission and the Ministry of Commerce, specifies sectors where foreign investment is prohibited or restricted. The list has been progressively shortened from 190 measures in 2013 to approximately 30 measures in 2024, reflecting ongoing liberalization.
The Negative List
The negative list classifies foreign investment into three categories: prohibited, restricted (subject to additional conditions), and permitted (no restrictions beyond standard requirements). Prohibited sectors include: news services, broadcasting and television, publishing, internet news, certain cultural activities, and traditional Chinese medicine processing. Restricted sectors include: value-added telecommunications services (subject to foreign ownership limits), banking and financial services (subject to specific conditions), education, healthcare, and certain manufacturing activities.
The negative list is supplemented by special administrative measures, including joint venture requirements, foreign equity caps, and management qualification requirements. For example, foreign investment in automobile manufacturing transitioned from joint venture requirements to no restrictions as the negative list was progressively liberalized. The negative list applies equally to all foreign investors, including Hong Kong, Macau, and Taiwan investors.
FIL Administration
The Foreign Investment Law establishes a comprehensive administrative framework. The information reporting system (xinxibaogao) requires foreign investors to submit information on their investments to the Ministry of Commerce’s foreign investment information system. The reporting requirement applies to all foreign investments, including those in sectors outside the negative list.
The Law establishes a foreign investment review mechanism (Article 33) to review foreign investments that affect national security. The foreign investment security review system, established by a State Council directive in 2011 and strengthened in 2020, applies to investments that could affect national security, including acquisitions of domestic enterprises in critical sectors. The review is conducted by a joint mechanism led by the NDRC and MOFCOM, with participation from other agencies. The security review is separate from negative list compliance and may result in prohibition or conditional approval.
VIE Structure Legality
The Variable Interest Entity (VIE) structure — a contractual arrangement that allows foreign investors to gain economic exposure to sectors restricted to foreign investment — has operated in a legal gray area under Chinese law. The VIE structure involves a domestic company that holds operating licenses in restricted sectors, with foreign investors controlling the domestic company through contractual arrangements rather than direct equity ownership.
The Foreign Investment Law does not explicitly address the legality of VIE structures. Article 2 defines foreign investment broadly as investment activities by foreign natural persons, enterprises, or other organizations within China, including indirect investment through contractual arrangements. This broad definition could encompass VIE structures, potentially subjecting them to foreign investment restrictions. However, the Law also provides that the specific application of negative list restrictions to indirect investment arrangements will be determined by the State Council.
The practical impact on VIE structures has been limited. Existing VIE arrangements have not been subject to systematic challenge, and new VIE structures continue to be used in restricted sectors. However, the legal uncertainty persists, and the SPC has not directly ruled on VIE legality. The Hong Kong Stock Exchange has tightened disclosure requirements for VIE-structured listings, increasing transparency.
CATS+ Investment Agreements
China has concluded bilateral investment treaties (BITs) with over 100 countries and has participated in regional trade agreements with investment chapters, including the Regional Comprehensive Economic Partnership (RCEP, 2022) and the China-Australia Free Trade Agreement (ChAFTA). These agreements provide varying levels of investment protection, including fair and equitable treatment, most-favored-nation treatment, expropriation protections, and investor-state dispute settlement.
The Comprehensive Agreement on Investment (CAI) between China and the EU — agreed in principle in December 2020 but not ultimately ratified — would have provided significant additional market access commitments and investment protections. The CAI’s suspension by the European Parliament in 2021 reflected political tensions but the commitments made individually by China on market access have been implemented through negative list liberalization.