Shanghai’s market regulator granted its first business license to a foreign-invested enterprise funded by a Chinese individual on Wednesday, marking the onset of a law at the heart of trade contentions between China and the US.

Why it matters: The law is an attempt to address complaints that foreign companies and governments have leveled against China. One of its main tenets is establishing a level playing field for foreign-invested companies.

  • Previously, Chinese individuals could not directly become shareholders in foreign-invested enterprises. Investors had to jump through administrative hoops or divert money through other jurisdictions.
  • The law also did away with business structures that fettered foreign companies, including forcing joint ventures (JV) between foreign and Chinese partners, which enabled IP transfer or exploitation by Chinese partners.
  • The move is “a positive signal to the world that China remains committed to attracting foreign investment,” Nicholas Torres, Beijing-based Foreign Legal Consultant at King & Wood Mallesons law firm, said in a written response to TechNode.

Details: The first individual to receive the license was Xu Jin, the deputy general manager of a Shanghai-based consulting company set up with an American partner.

  • State media outlet Xinhua reported that Shanghai has already integrated the Foreign Investment Law’s provisions with its systems at the municipal and district levels.
  • The law offers “much-anticipated flexibility to structure shareholding arrangements with Chinese citizens,” Torres said. “We anticipate this regulation will only continue to encourage foreign investors to bring their business to China.”
  • Foreign invested enterprises based in Shanghai can use online platforms to submit reports rather than requiring approval from commerce departments, according to the report.
  • The number of new foreign invested enterprises increased significantly in 2019, Chen Xuejun, director of Shanghai’s Market Regulation Bureau, told Xinhua. Shanghai has more than 91,000 foreign-invested enterprises, with total registered capital exceeding $640 billion.

Context: The Foreign Investment Law came into effect Jan. 1 after a significantly shorter approval timeframe. Legislators approved it just three months after the first draft was released for comment, dramatically accelerating a process that usually takes years and a signal of its importance.

  • Local governments are starting to implement the Foreign Investment Law, which aims for equitable treatment of foreign and domestic investors and companies alike.
  • Shanghai has been a frontrunner in cutting away at red tape hindering business growth, and could prompt other areas keen for businesses to set up shop in their locales to speed up enforcement of the law.
  • Even so, enforcement of the Foreign Investment Law may vary between jurisdictions.

Updated: included additional comments from Nicholas Torres of King & Wood Mallesons.

Lavender covers regulation and its effects on people. She previously worked in a policy advisory analyzing China’s internal governance for foreign governments and multinationals. A History graduate from... More by Lavender Au

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