Foreign investment in China's changing landscape

Ye Miao, head of the Asia Team at James & Wells. Photo / Supplied

Ye Miao, head of the Asia Team at James & Wells talks to Tim McCready about the foreign investment law passed recently in China.

Herald: What areas will the new foreign investment law address?

The new Foreign Investment Law, passed by the Chinese National Congress on March 15, 2019, and coming into force on 1 January 2020, seeks to promote foreign investment into China by further easing market access for foreign businesses and encouraging foreign investment on a government administrative and policy level.

The new law addresses specific areas of concern for foreign businesses looking to invest in China, such as forced technology transfers. It also intends to help strengthen intellectual property (IP) protection and level the playing field in terms of market competition between foreign and domestic businesses.

Herald: Will the new law allay uncertainty about doing business in China?

It's important to consider the new law as a framework for the Chinese Government to set out its principles and intentions to further ease market access in China and respond to some of the concerns held by foreign businesses and investors in the China market. It is not necessarily a prescriptive set of rules that govern every eventuality. There is an expectation, however, that it will lead to stronger, more efficient compliance and enforcement.

There are some very promising principles in it. For instance, Article 22 specifically enunciates the principle of protecting the intellectual property rights of foreign investors and enforcing them against infringing parties, consistent with Chinese intellectual property law.

Importantly for foreign investors, Article 22 also affirms that foreign investors will not be forced into technology transfers as part of their investment into China.

Article 23 also seeks to further protect the trade secrets of foreign investors from being disclosed by government officials and employees.

Other principles set out in the new Foreign Investment Law include:

● Restriction of investment based on a negative list of specific industries/fields. Outside of these, the Chinese Government will afford the same national treatment to foreign investment.
● In Government procurement processes, foreign businesses will be given equal treatment as local Chinese businesses.
● Confirmation that capital invested in China, and profits made by foreign investors may freely be transferred in and out of China.
● Stronger wording that Government will not seek to impose unwarranted actions that interfere with the business activities of foreign enterprises, and that the Government will fulfil policy and contractual commitments with foreign investors and enterprises.
● Compensation and complaint mechanisms where commitments are broken and/or the where there is any infringement of the foreign business' lawful rights.

Some commentators have rightfully noted that the new law still lacks substance in a number of areas, due to its breadth and vagueness.

While this is a cause for concern, it is important to remember that it is not uncommon for Chinese law to be set out as a framework of principles and intentions, necessitating further development and interpretation.

Herald: How will this impact on the business environment for foreign firms?

This will ultimately depend on interpretation of the new law, and related laws and enforcement of these principles by Chinese authorities. We hope it will drive a change of business and administrative behaviour in specific areas such as those relating to intellectual property theft or the disclosure of trade secrets, but we cannot expect change to happen overnight.

Overall, China has become a much better and often very lucrative place to invest and do business in over the past two decades. We are cautiously optimistic that the principles and intentions set out in the new law represent further progress.

Herald: What are the challenges New Zealand businesses face when interacting with the China Trademark Office?

One of the significant challenges facing the Chinese Trademark Office (CTMO) and the Trademark Review and Adjudication Board (TRAB) is the rising volume of trademark applications, oppositions and proceedings. According to the most recent statistics in China, there are over 18 million trademarks registered in China.

In 2018 alone, the CTMO received almost 7.4 million applications and examined over 8 million.
That represents over 20,000 applications, and 22,000 examinations per day.

This puts immense pressure on the CTMO to both process the applications quickly and to act by the book, and has resulted in examiners often taking very conservative positions. Very prescriptive interpretations are taken where there are prior marks that include even minor similarities with the applied for trademark, which means an estimated 50 per cent or more of all applications are now rejected in the first instance. Applicants then have just 15 days to respond.

Therefore, it's important for a business to consider its options in depth and to engage a trademark professional to assess the examination report and respond to it by the deadline. Often, objections can be overcome at the TRAB appeal level where there is more time for examiners to consider the applications and evidence in support, or through other actions.

Where the TRAB issues an unfavourable decision, an appeal can still be made to the Beijing IP Court.

Unfortunately, however, these processes can be time consuming and costly, so it is worthwhile to have back-up plans and an overall strategy in place. Unfortunately, the high volume of applications can mean that your potential brand (words and logos) may already be taken by someone else. As such, it is wise to consider checking the availability of your brand as trademarks in the development stage of your branding, so that you don't overcommit on a brand that you may not be able to use or register in your chosen markets.

Herald: How do you see the long-term outlook for IP protection in China?

China has been updating and improving its intellectual property laws and process over the past decade, and it is continually doing so. For instance, it is currently in the process of updating its patent laws, and has recently had high level discussions as to its trademark laws and processes. These discussions have involved IP professionals as well as businesses.

While there are still frustrating processes and wait times, the overall goals of the IP authorities are admirable.

They have sought to recruit more examiners to help reduce examination times, set up the Beijing IP court to deal with specific IP matters expediently, and taken drastic steps to reduce trademark squatters.

Herald: Are New Zealand businesses ready to take advantage of the changing opportunities in China?

Some are well-prepared, others less so. In addition to a good product or service, it's important that New Zealand businesses have a good story, and that they properly assess opportunities in key markets.

We strongly recommend carrying out due diligence in advance of entering China, and engaging someone on the ground with knowledge of your industry or sector.

And of course, we recommend taking early and appropriate steps to protect your IP and trade secrets.
And be mindful of the different cultural forces in play — what works in New Zealand does not necessarily work in other markets like China.