The treatment of foreign investment under the new regime will depend on whether or not the investment takes place in an industry sector that appears on a negative list (to be published in due course). For industries in which foreign investment is already restricted or prohibited, little will change in practice: the foreign investment catalogues that China has published in the past have served a similar purpose, designating industry sectors as 'restricted' or 'prohibited' to foreign investment. The difference is in how foreign investment in sectors that are not subject to specific limitations will be treated (that is, those that are classified as 'permitted' or 'encouraged' under the current regime). Foreign investment in these sectors will be accorded 'national treatment'. That is, they will be able to establish a business by applying directly to the State Administration for Industry and Commerce (SAIC) (中华人民共和国国家工商行政管理总局), without the need to obtain a panoply of prior approvals (from MOFCOM for example) merely because one or more of the shareholders is foreign.

Foreign investors will not be offered national treatment in the industries that appear on the negative list. Foreign investments in these sectors will be prohibited outright or subject to specified restrictions, and will continue to require prior approval from the MOFCOM (or its local counterparts), as is the case under the current regime.

In restricted industries, foreign investment will require the investor to obtain an 'entry license'. The negative list will specify the limitations and conditions that will apply to obtaining such a license for each industrial sector.

In prohibited industries, no foreign investment in any form (including through any variable interest entity (VIE) structure or through any intermediary domestic company) will be allowed.

The Draft Law does not contain a draft of the negative list, which will be promulgated and released by the State Council (中华人民共和国国务院) at a later stage. Key questions remain, such as whether the negative list will be narrower than existing foreign investment catalogues are, and which industries will be excluded

Ren Qin, a partner at Zhong Lun law firm and formerly a MOFCOM official, suggests that the negative list will include fewer industries, but more importantly will be "more precise" than the current list, which in many cases simply lists the entire industrial sectors as 'restricted' or 'prohibited' without distinguishing between truly sensitive industries and those in which foreign investment is uncontroversial. His opinion is based on Article 24 of the Draft Law, which says that the catalogue of restricted industries must specify the restrictive conditions to be applied to investment with a foreign origin. If so, this would bring welcome clarity to the foreign investment system.

The negative list approach was first implemented in the Shanghai FTZ in October 2013 (see Practice note, China (Shanghai) Pilot Free Trade Zone: overview: Shanghai FTZ key reforms: Negative list approach).The Draft Law shows the government's determination to extend the reform nationwide.

Under the current regime, a company is not treated as foreign-invested (and is therefore, at least on paper, not subject to restrictions on investment that apply only to foreigners) so long as domestic Chinese individuals own its equity. This gave rise to the emergence of contractual control relationships, where foreign investors or foreign FIEs entered into contracts with the shareholders of a domestic Chinese company - known as a VIE - under which the foreign company provides capital investment in exchange for the contractual right to the VIE's revenues, to exercise board control and usually also to acquire the VIE's equity for no additional cost if foreign ownership ever becomes permitted. Under the Draft Law, a VIE will be treated as foreign-controlled if the company that exercises control of the VIE is itself foreign or foreign-controlled, unless the ultimate controller of the foreign investor is itself a domestic Chinese entity. In this case the foreign investor in the VIE will be treated as a 'de facto' domestic investor, rendering the VIE domestic controlled for the purposes of investing in 'restricted' industries (and therefore not be subject to such restrictions). Although the Draft Law does not say so expressly, in the view of Ren Qing the fact that ownership passes through a foreign VIE would still mean that the company is ineligible to invest in 'prohibited' industries.

The distinction between foreign and domestic-controlled VIEs is a practical necessity. One reason for implementing a VIE is to circumvent rules designed to keep foreigners out of sensitive sectors. Another is to allow companies where true control still rests with the Chinese founder access to foreign capital markets. The existence of these high-profile domestic champions, which include Alibaba, Tencent and Sina, has in the past been advanced as a reason why the VIE structure would be difficult for the Chinese government to ban outright. Making this distinction will allow the Chinese government to enforce the rules against foreign-controlled VIEs while sparing popular, Chinese-controlled companies.

Once the Draft Law comes into force, the VIE may quickly become a structure of purely historical interest to foreign investors in China. Combined with the negative list, which promises to expand the scope of business that foreign investors can do in China without requiring approvals, the need for a structure to circumvent investment restrictions appears to be diminishing. In any case, the Draft Law makes it clear that the use of the VIE structure to circumvent restrictions on foreign control of domestic Chinese companies is no longer in a grey area, but will be expressly prohibited.

The deadline for comments on the draft foreign investment law is 17 February 2015, right before Chinese New Year. Considering the complexity in reforming process and foreign investment regulatory systems, a range of opinions have been expressed as to when the Draft Law will come into force, with some suggesting it may take as long as three to five years to actually take effect.

Ren Qing thinks the estimated timetable will be shorter. "Regarding the timing, an optimistic expectation is one and a half to two years from now. But it really depends. The draft must be submitted to the State Council for approval first. After that, the NPC or its standing committee will normally need to review the draft law two or three times".

Practical Law China discussed some of the principal changes with partner Hong Guibin (洪桂彬), an employment law specialist at Shanghai HuiYe law firm.

Practical Law China: Article 6 of the draft law holds out the prospect of financial subsidies for employers who take measures to downsize or avoid mass layoffs to cover employee training expenses, social insurance contributions and so on. What is this likely to mean in practice?

Hong: The limits on these subsidies and their availability in practice are hard to predict. First, it is not clear who is going to pay the subsidies. Human resources and social security departments are certainly not empowered to do so; current speculation is that it will be paid for out of unemployment insurance funds. Second, this article could create a perverse incentive to enterprises to use the excuse of downsizing or avoiding employee layoffs to ask for financial support.

Practical Law China: Under Article 12 of the draft law, employers will only be able to implement the mass layoff plan ten days after they have both submitted all the necessary supporting documents to the local labour authority and received a written acknowledgement of receipt from the same authority. In practice, many labour authorities have been found to be rather reluctant to issue written acknowledgements of receipt. What is the government seeking to achieve?

Hong: The main purpose of Article 12 is to enhance government control. Because the filings that must be made in support of employee layoffs are not regulated as a formal administrative approval item, they can not legitimately be restricted using the administrative approval system. In other words, written acknowledgements of receipt can be considered to be a back-door way for local governments to introduce an effective "administrative approval" requirement in disguise.

Practical Law China: Under Article 18 of the draft law, employers will be required to comply with rules similar to those that already exist under Article 41 of the 2012 Labour Contract Law. These rules apply when 20 or more employees are affected by a termination and require the employer to notify the trade union or the employee body of the proposed mutual termination 30 days in advance and report the number of the employees to be terminated to the local labour authority. Employers may face a fine of up to RMB 20,000 in the case of any violation. Under the new law, these requirements will apply in relation to consensual terminations (that is, where the employee leaves on terms mutually agreed between him or herself and the employer). On its face this would seem to make mass layoffs more difficult, as in practice these have tended to be conducted as consensual terminations. What are your thoughts on the impact of Article 18?

Hong: In my view, Article 18 conflicts with the terms of the 2007 Labour Contract Law and interferes with the legal effect of negotiated terminations. The wording of this article is very vague. First, Article 18 does not state clearly that employers are required to report the number of affected employees to local labour authorities before actually terminating them. If the law allows employers to terminate first and report later, then what is the point of reporting? What if local labour authorities then refuse to make a record once the report has been filed? It would create a space for the employees who have signed termination agreements to question on the legal effect of negotiating the termination of their employment. Second, it is unclear how the figure of 20 employees will be reached if consensual terminations are to be included in the figure. Does it mean that 20 people must be terminated simultaneously, or within a certain period? Does it apply to subsidiaries or other group companies? This article is new to this draft, but I think it violates the spirit of the 2007 Labour Contract Law. It might be approved, but then again it also might not be.

The main implications of the draft provisions all arise from the general point that entrusted loans will be put on the same footing as regular commercial loans, closing a number of loopholes that have arisen in the past. The highlights of the draft are:

There is no specific legislative timeline for implementing the draft provisions. For now, GC should monitor developments and review their intra-group lending arrangements to ensure that none of their existing entrusted loans would be adversely affected by the coming into force of the draft provisions, and take advantage of the opportunity to comment on the draft.