On September 25, 2020, Shanghai Municipal People’s Congress passed the Regulations of Shanghai Municipality on Foreign Investment (the “Regulations”). The Regulations will be implemented from November 1, 2020. This is also the first foreign investment regulation issued by the local People’s Congress after the implementation of the Foreign Investment Law of the People’s Republic of China, and the Implementation Regulations for the Foreign Investment Law of the People’s Republic of China (collectively the “Foreign Investment Law”). Shanghai has been making constant efforts to become the first choice for foreign investment not only in China but also the whole Asia Pacific Region. This legislation not only reflects the importance that Shanghai attaches to the implementation of the Foreign Investment Law, but also highlights the firm determination and progressive actions taken by Shanghai to expand its opening-up in all directions.

Background

In March 2019, the National People’s Congress passed the Foreign Investment Law which came into force on January 1, 2020. The Foreign Investment Law has replaced the Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures, the Law of the People’s Republic of China on Sino-Foreign Cooperative Enterprises and the Law of the People’s Republic of China on Wholly Foreign-Funded Enterprises, becoming the basic law in the field of foreign investment by establishing the institutional framework and rules for foreign investment. After the formal implementation of the Foreign Investment Law, foreign investors and foreign-invested enterprises will not only enjoy the pre-entry national treatment plus negative list management system, but also enjoy the national treatment after the admission. It is clearly stated in the general provisions of the Foreign Investment Law that the State shall implement a programme of high level investment liberalization and facilitation policies, establish and improve the foreign investment promotion mechanism, and create a stable, transparent, predictable and fair market competition environment. When a huge domestic market and a complete industrial chain are formed and integrated into the global network, the opening-up needs to be furthered in all directions. The goal is to promote the relevant domestic rules and regulations to be benchmarked with the advanced international standards, and to reflect the consistency of supervision, including licensing, industrial policies, competition policies, environmental protection, intellectual property rights protection, business environment, etc.

After the implementation of the Foreign Investment Law, as the pioneer and pilot city for the programme of market liberalization , Shanghai has once again taken the lead. The Regulations not only reflect the relevant spirit of the Foreign Investment Law, but also directly address the pain points and difficulties experienced by foreign enterprises when dealing with local conditions.

For example, the Foreign Investment Law makes it clear that the State shall implement the national treatment plus negative list management system for foreign investment before admission. But in addition to the national treatment before admission, the national treatment after admission is also a pain point of foreign-funded enterprises. According to the statistics, many foreign-funded enterprises are still concerned about being treated unfairly, especially in the fairness of business opportunities. In this regard, the Regulations clearly put “the full implementation of national treatment for foreign investment” as one of the basic principles, and also stressed the need for equal protection of foreign investment.

Shanghai has given a high priority to attracting foreign investment and has issued market liberalization policies on a large-scale. This reflects the important role of foreign capital in accelerating the construction of Shanghai’s increasingly liberal economy. Among them, one of the three new major tasks of Shanghai is to build the Lin-gang Special Area within the Shanghai Pilot Free Trade Zone. It is proposed to establish a relatively mature system of investment and trade liberalization and facilitation by 2025, with the goal of attracting foreign investment.

On July 22, 2020, Shanghai held a centralized signing ceremony for foreign-funded projects. A total of 54 foreign-funded projects were signed with a total investment of more than 8 billion US dollars. Official data also shows that in the first half of the year, 26 regional headquarters and 10 R&D centers of multinational companies were established in Shanghai, reaching 746 and 471 in total respectively. By the end of August 2020, Shanghai has accumulated more than 270 billion US dollars of foreign capital. Since 2020, despite the impact of the COVID-19 and the decline of global investment, Shanghai’s foreign investment has still risen against the trend. From January to August, Shanghai has actually utilized 13.88 billion US dollars of foreign capital, an increase of 5.9% year-on-year. All of these have played an obvious supporting role in Shanghai’s economy, especially in the post pandemic era at a time when the economic recovery is gathering momentum.

Primary Coverage

The Regulations are divided into six parts: general principles, expansion of opening-up, investment promotion, investment protection, investment management and services, and supplementary provisions, with 51 articles in total. It applies to the foreign investment in Shanghai administrative region and its promotion, protection, management and service. The investment in Shanghai by Hong Kong, Macao and Taiwan investors and Chinese citizens residing abroad shall be implemented in accordance with the Regulations. The main contents are as follows:

1.  Make clear the free entry and exit of foreign capital. Foreign investors’ investment, profits, capital gains, assets disposal income, intellectual property license fees obtained, compensations or damages obtained according to law, and liquidation income obtained by foreign investors in China may be freely imported or exported in RMB or foreign exchange. No restrictions shall be imposed on currency, amount, frequency of import and export.

2.  Strictly standardize the government’s commitments and contract performance. The written policy commitments and contracts made by Shanghai municipal and district governments to foreign investors and foreign-invested enterprises within their legal authority shall be strictly performed and shall not be impaired or breached on the basis of administrative division adjustment, government renewal, institutional or functional adjustment and replacement of relevant responsible persons. If the Shanghai municipal or district government fails to implement the undertakings, contracts or otherwise fails to perform as a result of overstepping the legal authority, it shall bear legal liabilities according to law.

3.  Clarify the filing principle of foreign investment projects. For foreign investment projects of new establishment or merger of fixed assets investment projects involving foreign investors and foreign-invested enterprises, except for the projects subject to approval management according to the relevant laws and regulations, the development and reform departments shall in accordance with the principle of consistency of domestic and foreign investment, conduct filing management on the foreign investment projects, which shall be filed after receiving all information from foreign investors and foreign-invested enterprises online.

4.  Strengthen the protection of intellectual property and trade secrets. The people’s courts at all levels of the municipality shall promptly accept and examine the application for evidence preservation and behavior preservation involving intellectual property rights of foreign investors and foreign invested enterprises, and make rulings according to law for immediate implementation. And it is also required that the people’s courts at all levels of the municipality should strengthen the judicial protection of trade secrets, apply the evidence rules according to law, and reduce the burden of rights protection of the obligee.

5.  Equal participation in governmental procurement. Foreign invested enterprises shall participate in government procurement equally. In terms of the issuance of governmental procurement information, determination of supplier conditions and evaluation criteria, foreign investment enterprises shall not be imposed with differential treatment or discrimination treatment, be limited on the ownership form, organization form, equity structure or investor country of suppliers, or brand of products or services of suppliers, and be treated differently between the products produced or services provided by foreign investment enterprises in China and that of domestic enterprises.

Significance

In summary, the Regulations play an important role in promoting Shanghai’s all-round and further opening-up, highlighting equal protection of foreign investment, focusing on introducing foreign capital with higher quality, and providing more convenient and efficient governmental services.

The COVID-19 has affected the market entities to varying degrees, and the overall damage of multinational enterprises is more serious. In this context, Shanghai has sped up the formulation of local regulations to implement the Foreign Investment Law, which will help to further enhance the confidence of foreign investors and give full play to Shanghai’s leading and benchmarking role in foreign investment in China.