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China limits investments for national security

China limits investments for national security through a new review mechanism, highlighted the United States Trade Representative (USTR).

The USTR also indicated that even for sectors that have been liberalized in China, the possibility of discriminatory licensing requirements or discriminatory application of licensing processes could make it difficult to achieve meaningful market access.

In addition, it added, the potential for a new and overly broad national security review mechanism, and the increasingly adverse impact of China’s Cyber ​​Security Law, Data Security Law, and Personal Information Protection Law and Related implementation measures, including those that restrict cross-border data flows and impose data localization requirements, have serious negative implications for foreign investors and investments.

Foreign companies continue to report that Chinese government officials may condition investment approval on the requirement that a foreign company transfer technology, conduct research and development (R&D) in China, meet export-related performance requirements or the use of local content, or make valuable commercial concessions specific to the agreement.

Investments

Over the years, the United States has repeatedly raised concerns with China about its restrictive investment
regime.

Given that China’s investment restrictions place pressure on U.S. companies to transfer technology
to Chinese companies, they were a focus of USTR’s Section 301 investigation. The responsive actions
taken by the United States in that investigation are intended in part to address this concern.

The responsive actions taken by the United States in that investigation are intended in part to address this concern.

China seeks to protect many domestic industries through a restrictive investment regime.

But according to the USTR, many aspects of China’s current investment regime continue to cause serious concerns to foreign investors.

For example, China’s Foreign Investment Law and implementing regulations, which came into force in January 2020, perpetuate separate regimes for domestic investors and investments and foreign investors and investments and invite opportunities for discriminatory treatment.

There has also been a lack of substantial liberalization of China’s investment regime, evidenced by the continued application of bans, caps on foreign capital and joint venture requirements, and other restrictions in certain sectors.

New restrictions

China’s latest version of its Foreign Investment Negative List, which came into force in January 2022, leaves significant restrictions on investment in a number of areas salient to foreign investors, such as key service sectors, agriculture, certain extractive industries and certain manufacturing industries.

With respect to service sectors in particular, China maintains prohibitions or restrictions on key sectors such as cloud computing services, telecommunications services, film production and distribution services, and video and entertainment software services.

China’s Foreign Investment Law, implementing regulations and other related measures suggest that China is pursuing the goal of replacing its case-by-case administrative approval system for a wide range of investments with a system that would only apply to “restricted” sectors.”

However, as of March 2022, it is unclear whether China is fully achieving that goal in practice.

 

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