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China Frustrates Foreign Firms With Accelerated Investment Law

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01/30/2019 | 10:48am EDT

By Chao Deng

BEIJING -- China is giving foreign businesses a tighter window to voice concerns about new rules on foreign investment as Beijing speeds passage of a proposed law in the midst of trade talks with the U.S.

The Chinese legislature's standing committee reviewed the latest version of the legal framework this week, and at the end of a two-day session on Wednesday decided to put the draft before the full congress in early March, the official Xinhua News Agency reported.

That sets in motion a potentially speedy rollout of the law, with less time for lawmakers to weigh feedback from foreign businesses, which have long sought a legal framework that levels the competition between foreign and domestic firms in China.

While the current draft responds to some longstanding criticisms from foreign firms, vowing to protect their intellectual-property rights and ban coerced technology transfers, it contains vague language on national security reviews, government expropriation and other matters officials could use against foreign firms.

It also ignores the long-running practice of subsidizing state-owned enterprises -- a sore point for the Trump administration that some businesses hoped would be addressed.

Foreign business groups such as the American Chamber of Commerce in China and the U.S.-China Business Council say they are now at a disadvantage under the legislature's new timetable.

Those two business groups are still gathering input from their member companies and plan to submit feedback to authorities just before the official comment period ends on Feb. 24. That is 10 days before the National People's Congress convenes to deliberate -- and possibly pass -- a new draft.

Business groups see the accelerated process as a sign that China is trying to patch together the law to use as a sweetener in its trade talks with the U.S.

"They are doing whatever they can to change the narrative that China's not open for business," said Andrew Polk, founder of consulting firm Trivium/China, of Chinese lawmakers. "It's really an effort to get the high-level pieces in place."

The news department of the National People's Congress didn't respond to a request for comment. A Xinhua report said the "signal to accelerate" the legislation, with two reviews in just one month's time, shows China's determination to open its market further.

Cabinet-level officials from the U.S. and China are meeting for two days of negotiations in Washington starting Wednesday to try to resolve trade frictions that have seen both sides levy punitive tariffs on goods accounting for about 60% of their trade. They are trying to meet a March 1 deadline and forestall a U.S. threat to increase tariffs on about $200 billion of Chinese products.

China's new foreign-investment law would replace three separate laws on how foreign companies operate via joint ventures or wholly owned entities. An earlier version of a draft to unify those laws had been inactive for three years until late last year.

After a draft was released to the public in December, foreign businesses voiced concerns including whether the law is codifying separate treatment -- and hence discriminatory -- for foreign investors.

A law aimed at foreign investment means that China continues to regard foreign and domestic firms separately, despite language in the draft calling for a "principle of consistency," say foreign business groups.

"We encourage China to consider a single "Company Law" as is common in many parts of the world," the American Chamber of Commerce in China said on Tuesday.

At this week's session, lawmakers made a few changes to the December draft, adding, for example, that foreign firms would be subject to an antimonopoly review when buying Chinese companies, according to state-owned Legal Daily. Lawmakers have yet to release an updated draft publicly.

The reported changes are immaterial, said Jacob Parker, vice president of the U.S.-China Business Council. He said the lawmakers conducted the latest review "without sufficient feedback from foreign industry" and should have waited until the comment period closed.

Other concerns from foreign businesses include the broad language of the law on mandated regulatory reviews for companies involved in deals that could affect China's national security.

The American Chamber said the language should be narrowed to apply to legitimate national-security risks, not broader issues like economic and industrial security. "That may create opportunities for protectionism," the group said.

In the trade talks, the two sides remain far apart on Chinese government support for domestic companies, with Beijing resisting U.S. demands for structural changes, including eliminating subsidies to favored industries. Some business representatives had hoped the subsidies would have been addressed in the December draft of the law, as a sign of commitment to leveling the playing field for foreign firms.

Liyan Qi contributed to this article.

Write to Chao Deng at Chao.Deng@wsj.com

Stocks mentioned in the article
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BYD COMPANY LIMITED 3.62% 77.3 End-of-day quote.98.97%
CHANGE INC. 3.17% 8140 End-of-day quote.179.92%
DRAFT INC. 1.52% 1071 End-of-day quote.0.00%
JUST GROUP PLC 2.25% 49.06 Delayed Quote.-37.90%
WILL GROUP, INC. -2.52% 618 End-of-day quote.-50.64%
WORLD CO., LTD. -5.40% 1420 End-of-day quote.-47.23%
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