Regulatory updates and outlook for MNCs in China

Despite of the headwinds, foreign direct investment into China achieved a steady year-on-year growth of 8% in 2022. Investment in manufacturing and high-tech sectors grew the fastest, up 46.1% and 28.3% respectively on the previous year. Investment from Europe, One Belt and One Road countries and ASEAN countries increased by around 92.2%, 17.2% and 8.2% respectively. Non-financial outbound investment value also increased by 7.2% year-on-year. China-related M&A activities, however, experienced a slowdown after reaching a historic high in 2021, with a steep decline in both deal value and deal volume. That said, Greater China still maintains its central role in the APAC deal market, accounting for over 40% of the APAC transaction value in 2022.

China's central and local governments are taking steps to stabilise and encourage investment, particularly in sectors that are important for China's future development, such as clean energy, artificial intelligence, semiconductors, 5G, Web 3.0, robotics, healthcare and life sciences. On 1 January 2023, the new encouraged catalogue came into effect, increasing the number of encouraged foreign investment items from 1,235 to 1,474. Local measures were also released to relax foreign exchange regulation in certain pilot zones, to encourage foreign-invested regional headquarters and R&D centres, and to provide financial support and tax benefits to foreign-invested enterprises. At the end of 2022, a revised draft of the PRC Company Law was released for public comment, aimed at improving the ease of doing business in China, strengthening shareholders' rights and streamlining registration procedures.

With the reversal of China's 'zero covid' policy, the lifting of travel restrictions and a renewed focus on economic growth, we expect deal activity levels in China to pick up in the second half of 2023 with domestic deals and SOE restructurings continuing to drive China's M&A market. As multinational companies operating in China continue to re-assess their business strategies, we expect to see an increase in reorganisations and joint venture opportunities. Despite of the challenges, attracting foreign investment will continue to be an important theme, with further opening-up and measures to improve and stabilise the business environment.

The PRC courts have been focused on boosting litigation efficiency over the past few years. This is reflected in the high immediate case acceptance rate of 95% in 2022 and increase of 11% in the annual closed cases. Efforts have also been made on enforcement following the launch of a campaign in 2016 to tackle enforcement difficulties. Various enforcement methods have been leveraged to facilitate loss recovery. During the past decade, over RMB 14 trillion has been successfully enforced in around 64,859,000 cases. In January 2023, the Supreme People's Court announced that it will further reform the enforcement structure under PRC law to achieve its target of solving the enforcement difficulties by 2035. As such, we expect some new enforcement rules in the coming future.

In terms of the legislative developments in 2022, two are particularly noteworthy for foreign investors. Firstly, on 1 January 2023, new provisions of the Supreme People's Court came into effect which adjusted the jurisdiction of PRC courts in foreign-related civil and commercial cases by unifying the jurisdiction thresholds across various regions and delegating more adjudicative powers to the district-level courts. Secondly, the Supreme People's Court published its Meeting Minutes on Foreign-related Commercial and Maritime Trials in January 2022, which address over 100 unsettled issues including the interpretation of exclusive jurisdiction clauses, asset preservation during recognition and enforcement of foreign judgments, and the service of legal papers on foreign parties. Although the minutes cannot be relied upon as the legal basis of judgments, they do strongly influence judicial practice as the PRC courts are likely to follow the guidance.

In 2022, we witnessed some emerging trends in PRC litigation, including online hearings, the application of blockchain technology in PRC litigation and rising numbers of litigation relating to data and ESG. While some relevant rules and guiding cases were published by the Supreme People's Court in 2022, we believe that PRC litigation will be further digitalised, with new types of disputes coming before the PRC courts, particularly in relation to data rights and greenwashing.

Third-party funding is one of the alternative funding options in legal proceedings. In recent months, we have seen several rulings by the PRC courts which indicate that the PRC courts may reach different conclusions regarding the legitimacy or validity of third-party funding arrangements in legal proceedings. It is the first time the PRC courts have considered some of the specific issues relating to third-party funding, such as disclosure, conflicts of intertest, confidentiality and public policy. The decisions reflect the pro-arbitration approach adopted by the PRC courts in recent years, but also indicate that there is still some reticence at this time about expanding third-party funding to court proceedings.

Another notable trend is the impact of China's data regime on the resolution of cross-border disputes. The laws and regulations on data transfer have created difficulties in the evidence collection and disclosure process, as that often involves the cross-border transfer of data. We expect to see more and more cases encountering such difficulties. One of the most frequently discussed issues is the treatment of WeChat data. As a widely used communication tool in Chinese mainland, it will inevitably contain huge amount of personal information. In preparing for cross-border disputes we recommend analysing the potentially relevant data, seeking approval from relevant authorities and informing the tribunal and counterparty as to the underlying difficulties as soon as possible.

In December 2022, the Supreme People's Court issued a new batch of guiding cases on the judicial review of arbitration. These echo some of the clarifications which were set out in the Supreme People's Court's Meeting Minutes on Foreign-related Commercial and Maritime Trials in January 2022 and highlight some of the key concerns regarding the judicial review of arbitration. They also serve as a guide to harmonise the practise at the various court levels.

In the past year, the Chinese government has adopted a more prudent approach to probing into the markets given the overall state of the economy and developments in China and the world. However, some recent Anti-Monopoly Law cases have been helpful in clarifying some common misconceptions.

One of the common misconceptions is that the same enterprise will not face multiple enforcement actions. This was shown not true in 2022 when Jinyao received an administrative penalty notice from Tianjin Administration of Market Regulation ("AMR") for its abuse of market dominance in selling Carmustine at monopolistic prices, having already been penalised in 2021 for price-fixing and market allocation arrangements. The second misconception is that the prohibition on retail price maintenance only applies to traditional modes of distribution. This was dispelled when Beijing Administration of Market Regulation penalised franchisor Kairui Alliance for setting minimum prices for Sesame Street English courses. Finally, the fine issued against CNKI.net has debunked the misconception that State-Owned Enterprises are immune from antimonopoly enforcement. CNKI, a state-funded academic database platform, was found by State Administration of Market Regulation to have abused its market dominance in the market of Chinese academic literature online database by forcing academic journals and institutions to enter into exclusive deals with award and punishment arrangements. This decision opens a new chapter by piercing the assumption that SOEs would have immunity against infringement of the Anti-Monopoly Law.

The amendments to the Anti-Monopoly Law were highlights of China's competition policy in 2022. The amended law attaches personal liability to management level personnel, so a company's legal representative, executives, and other employees who are personally involved in a monopoly agreement can now face fines of up to RMB one million. For infringements with particularly serious circumstances, negative impact, and serious consequences, the fine may be increased up to fivefold against infringing undertakings. Such cases fall outside the usual maximum fine cap of 10% of a company's previous year's turnover, which significantly increases the potential liability for parties to an infringement. For technical breaches of the merger control regime, which do not give rise to any anti-competitive effect on the market, the maximum fine has been increased from RMB 500,000 to RMB 5 million. For breaches involving concentrations that have the actual or potential effect of excluding or restricting competition, the maximum fine has been further increased to 10% of the company's turnover in the previous year, similar to the behavioural penalty.

Many highlights relating to intellectual property rights in China emerged in 2022.

In respect of patents, the supporting regulations for new patent laws are gradually being developed. China signed on as a member of the Hague Agreement which has come into effect, making the protection and management of design patents easier and more international. In addition, the patent linkage system has been used more widely, which is likely to intensify competition in the pharmaceutical industry between drug originators and generics. The war of SEP licensing will gradually move from the mobile phone to the auto industry.

The judicial interpretation of the Anti-Unfair Competition Law further clarified the enforcement scenarios, and names of foreign companies are definitely protected. The collision between the laws on anti-trust and intellectual property resulted in new cases, providing valuable judicial reference on aspects such as Taipu v. Huaming.

Meaningful cases continue to emerge in areas such trademarks, trade secrets and the metaverse. There have also been a number of developments impacting legal procedures, resulting in more intellectual property lawsuits being dealt with by grass-roots courts. The appropriate court jurisdiction now needs to be considered and verified on a case by case basis.

For 2023, we expect that intellectual property will remain one of the fastest growing legal fields in China.

Following the effectiveness of the Personal Information Protection Law (PIPL) and the Data Security Law (DSL) in 2021, there have been significant developments in respect of the regulation of cross-border data transfers.

In June 2022, the Cyberspace Administration of China (CAC) published the Measures for Security Assessment of Cross-border Transfer of Data (Measures) which became effective on 1 September 2022. These aim to implement the CAC security assessment requirements as stipulated in the PIPL, DSL and Cybersecurity Law covering both personal information and important data. Companies which are subject to the mandatory security assessment of CAC are required to have obtained approvals from CAC by the end of February 2023. However, based on public information, only a couple companies have obtained these approvals. Some companies submitted their applications in time and are still awaiting approval. It is expected that this will be CAC's enforcement focus in 2023.

In December 2022, the Chinese National Information Security Standardisation Technical Committee released the second edition of the "Practice Guidelines for Cybersecurity Standards – Technical Specification for the Certification of Cross-Border Processing of Personal Information". In February 2023, CAC also officially released its long-awaited, final version of the standard contract for cross-border transfer of personal information, which will come into force on 1 June 2023. In addition, for companies which are not subject to the mandatory security assessment of CAC, they will need to consider signing the standard contract or applying for certification for their cross-border transfer of personal information. To rely on the standard contract, any non-compliant cross-border transfer of personal information in place before 1 June 2023 will be required to ensure compliance with the measures on standard contract by 30 November 2023. Any new arrangements set up after 1 June 2023 will be required to comply before the transfer, or comply with one of the other mechanisms (e.g., certification of cross-border processing of personal information). However, given certain implementation issues still need to be clarified under the certification mechanism, companies are likely to prefer to adopt the standard contract as it is easier to implement. It is expected that companies will negotiate and sign standard contracts with their counterparties overseas in the coming months.

We have not yet seen any penalty being imposed on any company because it has failed to comply with the cross-border transfer requirements. This is likely because the grace period for security assessment has only just expired, and the standard contract will only come into force in June 2023. In addition certification is only a recommended mechanism. That said, if companies haven't yet taken action, they should do so as early as possible, given that China places great emphasis on data security, especially in relation to cross border data transfers. Each of the mechanisms requires a significant investment of time, resources and coordination between different company departments. It is important for companies to be compliant to avoid potentially high fines, or administrative orders which may hinder business operations in China.

China has been devoting a significant amount of effort to helping employers check the background of employees and job candidates. Conducting a proper background check is obviously an important part of the recruitment process. Under the Regulations on the Handling of Criminal Record Inquiries by the Public Security Bureau, criminal record checks are simplified for employers, in theory at least. Although the on-the-ground practice of local police stations may vary and the documentation required for the application may be different, most of the police stations in Shanghai and Beijing will now conduct criminal background checks for employers.

The Supreme People's Court published ten employment-related guiding cases in 2022, seven from Batch No. 32 and three from Batch No. 34. The guiding cases are useful for employers as they carry persuasive authority in the treatment of future similar cases and may lead to a nationwide unified view on such cases, notwithstanding the varying employment law practices across different provinces, cities, and regions in China.

In order to protect female employees in the workplace from discrimination and sexual harassment, China has significantly revised the Law on the Protection of the Rights and Interests of Women. The new revision came into effect on 1 January 2023 and made significant changes to the employment section to:

• eliminate gender discrimination;

• protect women's rights and interests; and

• prevent workplace sexual harassment.

On 26 December 2022, the National Health Commission of the State Council reclassified COVID-19 as a class B infectious disease, marking a major shift in China's COVID-control policy. Following this, the National Immigration Administration (NIA) released a circular providing that, from 8 January 2023, China would implement a series of measures to optimise its immigration administration policies, including resuming the acceptance and review of expats' visa applications. Additionally, since 1 March 2023, the NIA has lifted travel restrictions in respect of many countries. Generally speaking, the re-opening of China's borders has been progressing steadily since January 2023. This is of great importance to many employers, especially to multinational companies conducting business in China, and Chinese companies conducting international business. Over the past few years, many of our clients have experienced significant difficulties with, for example, implementing their employee relocation programs and managing expatriate employees. The good news is that it may be time to get things back on track.

We have experienced teams in corporate and M&A, disputes, competition, compliance, data protection, intellectual property, and employment law in China and across the key markets in the world. We regularly advise international clients on some of the largest and most significant projects and transactions and are well aware of current trends, legal and regulatory challenges and market practices. We always strive to add value to you and your business. We would be delighted to discuss how we can further support you and your team in China's dynamic regulatory landscape.