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The rise of the Chinese economy over the past decades is striking in its scale, and turns the PRC into a real engine of the global economy. Foreign direct investment in China is the key to the country's prosperity. It is impossible to determine how much investment is actually foreign and how much of it is domestic. Often, Chinese companies transfer money overseas and then redirect it to take advantage of tax breaks and other incentives.

To clarify this situation, at the beginning of this year, China issued a new Law on Foreign Investment, which establishes a new procedure for controlling foreign companies in China. The updated regulation of foreign investment in the PRC requires careful scrutiny by those foreign entrepreneurs who are planning or already operating in the country, as it can have a huge impact on the activities of American and European enterprises wishing to initiate a private equity deal in China. Today we will assess the prospects of the new law in terms of international expectations.

The importance of FDI for the economic development and strengthening its position in the global arena is well understood by the Chinese government. Cooperation with the most developed countries is crucial because the largest multinational corporations are the developers and carriers of advanced technologies and management methods. Thus, China is updating its technological base and establishing a more efficient production. At the same time, China does not bear large financial costs and contributes its share in the form of buildings and land plots, while the foreign partner transfers technology and invests funds.

Now without expropriation

China faces the need to resolve numerous complaints from the global business community, for example, by explicitly prohibiting forced technology transfers.

 Therefore, the new law states that:

  • foreign investors will be provided with a level playing field as local Chinese firms;
  • FDIs in China will not be subject to expropriation by the government.

However, there are exceptions that can be justified by the protection of public interests. Foreign investors will continue to face penalties for investing in China’s critical infrastructure. Penalties can be in the form of the termination of business investment, divestment of shares or assets, and even potential confiscation.

Alternatively, there are industries, investments in which will be encouraged in China:

  • high tech and IT;
  • energy saving and environmental protection;
  • production of new energy;
  • pharmacology;
  • new materials etc.

From scratch

Foreign businesses seek to establish a company in the People's Republic of China and oversee every stage of the deal. This greenfield approach contrasts with a direct acquisition, in which foreign entrepreneurs acquire assets in China.

When registering an investment business in the PRC, control over operations, production, sales, personnel, and other key commercial components is retained. Companies remain in control of their expansion strategy, creating natural economies of scale. Thus, "investments from scratch" allow for more balanced financial management of the company's working capital in support of the activities of the enterprise.

 

Final word

FDI tends to carry more risk while maintaining an acquisition-like level of strategic planning. Investments in start-ups remain the main structure of transactions conducted by Chinese investors in the US, while acquisitions and joint ventures with Chinese partners tend to have a greater impact on transactions carried out by American and European firms in the PRC.

Our company has extensive experience with the regulations and processes governing such transactions. Our specialists will provide clients with individual advice on how to fulfill FDI obligations in accordance with Chinese law. Reach out to us by filling out the feedback form below.