STANCE #29 – JUNE EDITION
By Alison Fenech

The new Foreign Investment Law of the People’s Republic of China (PRC) was passed by the National People’s Congress on the 15th of March with overwhelming support from lawmakers, following an uncharacteristically rapid bureaucratic approval process.

The law is intended to “promote and protect foreign investment in the PRC by creating a stable, transparent and predictable market environment for fair competition”. Some have described it as a progressive attempt to level the playing field for foreign companies operating in the PRC, while others have criticised it as a toothless policy reform designed to appease the current United States government and lacking necessary detail for implementation. Aspects of the updated legislation could raise new concerns for Australian companies investing in or trading with the PRC.

The long-awaited changes have arrived at a pivotal moment in the PRC’s development, as domestic growth continues to slow and foreign direct investment (FDI) plays a greater role in supporting the PRC’s economy. According to the UNCTAD Investment Trends Monitor, “China became the largest recipient of FDI, attracting an estimated US$70 billion in inflows in the first half of [2018]”. The new law will further stimulate this already thriving FDI environment.

The new legislation consolidates and modernises previous PRC foreign investment laws. At the very least, this gesture showcases the willingness of the modern state to open its doors to the world. The updated law is better equipped to deal with contemporary concerns such as intellectual property rights protection. For example, Article 22 stipulates that the PRC cannot “force technology transfers through administrative means”. This is meant to allow foreign businesses to operate in the PRC with greater confidence. Whether this confidence is warranted, however, only time will tell.

While many of the changes are favourable for Australian entities, there are definite red flags; most notably Article 37, where discriminatory measures taken against the PRC may result in “China [taking] corresponding measures against that country or region …”. Previous political tensions between the PRC and Australia have resulted in similar measures, including recent restrictions on imports of Australian coal. Considering the actions taken by the PRC government in recent years, in which the PRC has used its economic clout to influence foreign decision-making, one must wonder whether such policy language has been included in order to provide a legal justification for future actions.

There are concerns with the practicality of the FDI law. The PRC has supposedly fast-tracked the law to pacify the US government, leading to criticism of aspects that provide minimal structure and legal guidance. This includes holding security checks for FDI imports to vague standards “in accordance with the law”. Commentary on the law indicates that it lacks clarity and may be problematic for Australian companies, which understandably cannot forecast the state of future relations with the PRC.

Further, the legislation’s ambiguous language allows the PRC authorities room to take counter-measures wherever they deem these measures necessary. It is unclear to what extent Australian businesses could face backlash due to the PRC’s disapproval of decisions by the Australian government. This may result in Australia avoiding economic retaliation by reconsidering decisions such as the Huawei equipment ban. As a nation so reliant on the PRC economy, Australia has every right to be wary about the legislation’s wording. Although these new measures highlight the PRC’s attempt to create an equitable environment for FDI, it remains the case that for nearly two decades the PRC has been criticised for its international trade practices despite its WTO membership. Nevertheless, the new legislation is a step in the right direction for international trade.

Australia should revisit the non-discrimination policies addressed in the Australia-China bilateral investment agreement. Public servants in Canberra should attempt to create a dialogue with their Chinese counterparts which clearly disentangles the concepts of “non-discrimination” and “national security”. It would be important to highlight the clear differences between “discriminatory practices” on the one hand, and on the other hand Australia’s right to uphold its “critical infrastructure evaluation” legislation, a system designed to protect national interests and preserve national security.

While certain compromises may have to be made in the future to avoid economic retaliation, it is vital that Australia is firm on matters concerning national security, not allowing changes in PRC policy to dictate domestic decision-making.

Alison Fenech is a doctoral candidate at the University of Sydney through the Department of Political Economy. She received her M.A. in Development Studies at the University of Sydney and her B.A. from Franklin & Marshall College with a focus on sociology and anthropology. She has interned at the Mckell Institute and was part of the New York University’s Visiting Scholars in International Relations program.

The opinions expressed in this article are the author’s and do not represent the views of China Matters.