New PRC and Shanghai Regulations for the Encouragement of Foreign Investment

Since 1978 the People's Republic of China has permitted foreigners to invest in domestic enterprises. While foreign investors were initially enthusiastic about entering the Chinese market, enthusiasm turned to disappointment when they discovered the realities of doing business in China. The problems experienced by the foreigners have included shortages of foreign exchange, high input costs, unpredictable tax treatment, and bureaucratic errors. In an attempt to alleviate some of these problems, the Chinese Government recently enacted the State Council Regulations Concerning Encouragement of Foreign Investment.

Following the lead of the national government, regional governments have also adopted rules to encourage foreign investment. This Article analyzes the State Provisions and, as an example of regional legislation, the foreign investment regulations of Shanghai Municipality. The author discusses the benefits of these laws, the interaction between the national and local laws, and those problems which remain despite legislation. The author finds that, while the new regulations have the potential to improve the investment climate, their effectiveness will depend on how they are interpreted by the authorities.

As a result, the author concludes that foreigners should maintain a cautious approach to investing in China.