The new law would 'legitimise' the existing structure of variable interest entities (VIEs), which are offshore companies that are generally based in tax havens and used by technology firms such as Alibaba, Tencent and Baidu, according to the Financial Times (FT).
The new law, which is not expected to enter into force before next year, would give foreign investors legal options in a dispute with Chinese principals, and decrease the risk associated with equity investments.
Professor of economics at Peking University Paul Gillis told the FT: “Making the VIEs legal is a big step forward for investors, because when it’s legal, those contracts should actually become enforceable.”
The China Daily reported earlier this month that a national security review for foreign investors in China would become official law rather than an administrative regulation for the first time when it is incorporated as a chapter in a proposed foreign investment law.
Corporate law expert Dr. Bernd Uwe Stucken of Pinsent Masons, the law firm behind Out-Law.com, said the draft foreign investment law “is an important development towards China's goal to reform the foreign investment-related approval system, particularly given the challenges China faces in terms of slowdown in economic growth”. He said it would also pave the way for discussions “on other issues including the VIE structure, security review and foreign exchange controls”.
Last December, China announced plans to “improve the investment environment” in 2015, by boosting market access in the service sector and “further opening up manufacturing sectors”.
China’s Central Economic Work Conference said activities to improve the investment climate would draw on experiences from the 29-kilometre Shanghai Free Trade Zone that was set up in 2013.