Responding to a drawn-out trade dispute with the U.S., China has approved a major rewrite of its foreign investment laws, which could appease foreign governments and companies that have accused Beijing of failing to protect their intellectual property and of forcing them to hand over technological secrets.

The new foreign investment law, passed by China's legislature earlier this month after an expedited review process, addresses these complaints in part by forbidding forced technology transfer and government interference in foreign business practices.

And the new law, which will take effect on January 1, 2020, may well bring about an increase in inbound investment into China and an uptick in related legal work, some lawyers say. But others are sceptical, believing there will be little change.

U.K. firm Linklaters concluded in a recent study that the new law could catalyse $1.5 billion worth of inbound investment into China during the next decade – an amount that would more than triple the value of foreign investment into China for the past 10 years.

"The new law will definitely be welcomed by foreign market participants and lead the next upsurge in foreign investment," said Eric Liu, managing partner at Shanghai-based Zhao Shang Law Firm, Linklaters' joint operation partner in China.

Liu and others have good reasons to be excited. Until about a decade ago, foreign firms were mostly in China to do inbound work, advising their multinational clients on doing business and operating in China. But during the past decade, many global law firms have been limited by the fact that foreign firms are not allowed to give Chinese legal advice. In addition, they have faced stiff competition from the exponential growth of domestic Chinese law firms. So, many global firms focused instead on doing outbound work for Chinese clients.

Outbound work, which allows international firms to tap into their global network of offices and their foreign law expertise – often in U.S. and English law – became a bigger part of the China practices of global firms. But with an increase in geopolitical tensions and China struggling to find a way out of an economic slowdown and keep money from leaving the country, the appetite for overseas investments by Chinese entities hit the brakes. It did not help that the U.S. blocked several Chinese investments, citing concerns about national security. 

In 2018, Chinese direct investment into North America and Europe totaled $30 billion – down 73 percent from a year earlier and the lowest amount since 2012, according to a joint study by Baker McKenzie and New York-based research firm Rhodium Group.

With uncertainty clouding the prospect of China outbound work, Beijing's gesture to encourage foreign investment can be promising to foreign lawyers. "The new law encourages more inbound investment into China," said Shaun Wu, Shanghai partner of U.S. disputes specialist firm Kobre & Kim. "The next step is that it is up to the lawyers to structure a deal and figure out how to protect the foreign investment."

The new foreign investment law will replace three separate laws that regulate foreign companies based on the amount of ownership they hold in their China entities. Lawyers advising foreign investors will likely switch from advising on minority governance rights, to negotiating controlling stake investments, said John Xu, a Shanghai partner at Linklaters.*

With new deal structures available, according to Kobre's Wu, new types of potential cross-border disputes might also emerge.

"Lawyers could start rethinking deal structures and dispute resolution clauses in contracts," said Wu. For example, one of the more popular options has been to resolve China-foreign disputes at the Hong Kong International Arbitration Centre, whose awards are recognised and enforceable under the New York Convention by 159 countries, including mainland China.

But under a new foreign investment environment, the dispute resolution clauses will change if companies decide to resolve cross-border disputes through China's International Commercial Courts (CICC), Wu said. The CICC is not a traditional court in China; instead, it's a one-stop venue for litigating, mediating and arbitrating foreign commercial cases.

Foreign investors might also benefit from the establishment of a formal process for national security review. "It's a positive step and improves transparency," he said, adding that the law improves an arbitrary investment screening system and will add predictability to the process.

Still, the new law lacks detail and uses ambiguous and vague language, some lawyers say. The implementing rules for the foreign investment law have not been published, although Chinese Premier Li Keqiang did recently say that a series of action plans and policies based on the law are in the works and the government will issue them soon.

The lack of clarity has led some lawyers to be less hopeful about how much of a game-changer the new foreign investment law can be. "Overall, [it] will not have a significant impact," said James Zimmerman, a Beijing partner at Perkins Coie.

Fewer companies were investing in China during the past decade, primarily because most are already there, he said. And the newcomers tend to do tech licence deals without putting up significant capital.

"The day and age of large joint ventures is a thing of the past," he said.

David Tang, Asia managing partner of K&L Gates, also questioned whether the new law will bring about substantive change. While it may affect potential investors on a superficial level, it doesn't make any significant difference in terms of how investors deal with risk in China, either on the legal side or on the business side, he said.

Tang also doesn't think the new law will increase inbound investment in a meaningful way, as deals have already been picking up during the past two years. "We have already been busy doing deals for the past 15-18 months," he said.

China hit a historic peak in foreign direct investment in 2017, pulling in $144 billion, according to a report by the United Nations Conference on Trade and Development.

Perkins' Zimmerman also doesn't see any potential change on the disputes side. "If it means going to Chinese court against a state-actor, some foreign firms will pass on that," he said. "The advice on dispute resolution [for cross-border deals] will remain the same. Arbitrate offshore if you can."

Despite the lack of substantive impact, Tang said the foreign investment law is a good move for all concerned, especially at a time when China and the U.S. are locked in trade conflicts.

"The U.S. Government has proclaimed victory after this. It's a feel-good reaction for both sides," he said. "It's good PR."

*Updated Apr. 1: This story has been updated with additional comments from Linklaters.