Accustomed to unfulfilled promises from the Chinese government, foreign businesses are keeping a wary eye on a nascent law aimed at addressing their long-standing grievances about unfair treatment in the world's second largest economy.

The foreign investment law, which came into force on January 1, is supposed to give local and foreign companies equal treatment in the Chinese market and improve protections of intellectual property.

But international companies, which have in the past complained about having "promise fatigue", have not been wowed by the legislation.

"Our expectations are quite modest," said Lester Ross, who heads the policy committee at the American Chamber of Commerce in China.

"The longest-standing issues in China do not concern an absence of legislation, but rather the lack of enforcement and the breadth of government discretion resulting in selective enforcement," Ross said.

The legislation, which replaces three older laws, says foreign firms are no longer obligated to have a Chinese partner to start a business in the country.

It also prohibits the use of administrative means to force foreign firms to transfer technology to Chinese partners -- one of the major sticking points in Beijing's trade war with the United States.

But a survey of 249 companies, published in December by the British Chamber of Commerce in China, indicated that 38 percent of respondents believed the law would not change anything. A quarter of respondents did not know what changes to expect.

- Regional competition -

Beijing passed the law as it faces rising competition for foreign direct investment from other Asian manufacturing hubs, notably in Southeast Asia, said Rajiv Biswas, Asia-Pacific chief economist at IHS Markit.

"This reform is an important priority for the Chinese government in order to maintain an attractive business climate for foreign investment," Biswas said.

Rising wages have reduced China's competitiveness, with countries such as Vietnam offering manufacturers a cheaper alternative.

Biswas said China has recognised that in order to attract more foreign investment, notably in high-tech, it had to provide a more level playing field and improve intellectual property protection.

But without strict on-the-ground implementation mechanisms, foreign investors are unlikely to be reassured, Ross said.

Other issues remain as well.

The law does not spell out what penalties would be imposed for violating intellectual property rights.

It is also silent on subsidies to state-owned enterprises.

Such enterprises have been accused of distorting competition, and the issue of subsidies has been among structural reforms that the US has been demanding from China in the trade war.

- Right of expropriation -

Joerg Wuttke, president of the European Union Chamber of Commerce in China, said a significant issue is the continued existence of a legal framework that treats foreign investment differently from that of Chinese players.

"The foreign investment law's implementation measures are a step up from the previous draft, but many significant concerns remain," Wuttke said.

The European chamber is also concerned about the vague wording of certain provisions which would allow local governments to expropriate investments that "harm the public interest".

Foreign companies also criticise the difficulty of making an appeal in the event of litigation.

Another concern surrounds the provision that China can "take appropriate measures" if a country adopts "discriminatory restrictions" or "discriminatory prohibitions" against it.

This appears to be linked to the sanctions against Chinese telecoms giant Huawei in the US, suggesting that Beijing reserves the right to take retaliatory measures in such a case.

In spite of the new law, foreign investors in China remain excluded from many business sectors such as healthcare and publishing, although China has reduced this "negative" list and promised to continue doing so.

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IHS Global Insight

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