Foreign Related Rule of Law
Foreign-related rule of law (涉外法治) is a relatively new buzz phrase that has been making the rounds in China's policy circles, with even Xi Jinping himself getting in on the action. Like other language coined by Chinese officialdom, the phrase is somewhat vague. At its core, this initiative aims to align China's legal system with international standards, making it more accessible and predictable for foreign businesses operating in the country. This in turn, it is hoped, will facilitate the country's integration into the global economy, with its accompanying legal complexities.
Xi Jinping's Vision: Strengthening China's International-Facing Legal System
Xi Jinping has emphasized the importance of strengthening foreign-related rule of law as a crucial step towards building a strong China and integrating into the global economy. Given the signals from the very top, the legal community has been in overdrive. The Supreme People's Court (SPC) is weighing in on the subject and law schools are holding moot court competitions inspired by it.
Judicial Interpretations and Typical Cases
Last year the SPC issued a judicial interpretation on the application of foreign law to civil disputes, for the first time since 2012. It then followed up by publishing five typical cases (典型案例) involving foreign legal elements. These cases, the facts of which are considered by the SPC to be representative of the most common foreign-related disputes heard by Chinese courts, provide guidance to lower courts on applying foreign law within the Chinese legal system, helping promote consistency in judicial decision-making.
Application of Foreign Laws in Chinese Courts
The typical cases involve matters of Delaware, England and Wales, Mexico, Tajikistan, and Hong Kong law. In the first of these cases, a Shanghai court had to consider whether an investor had become a shareholder or director in a Delaware company. Relying on Delaware law, the Shanghai court determined that the investor had in fact become a director and a shareholder.
In addition to its judicial interpretation mentioned above, in 2023 the SPC also issued a judicial interpretation on the application of international treaties and international practices by Chinese courts. This was again followed by the publication of typical cases.
Earlier this year, the SPC published typical cases on the review of arbitration, including one in which the same Shanghai court as in the Delaware matter described above upheld an arbitration agreement that called for arbitration in China by a foreign arbitral institution. The focus on foreign-related rule of law also led to changes in China's Civil Procedure Law, which as our partner Dan Harris explained earlier this year in Enforcing U.S. Judgments in China: What You Need to Know, have the potential to lead to easier and more frequent enforcement of foreign judgments in China.
With these judicial interpretations and typical cases, China is signaling its commitment to a more predictable legal environment for foreign entities—a move that could alleviate long-standing concerns about fairness and encourage continued foreign investment.
The Path Ahead for China Foreign Investment
Foreign companies have long navigated a complex legal landscape in China. While the country's vast market has been a powerful draw, concerns about a level playing field have persisted. One factor driving phenomena like nearshoring, which involves shifting production activities away from China, is the perception that foreign businesses cannot receive fair treatment in China.
As China introduces these legal reforms under the banner of foreign-related rule of law, foreign businesses may view this as a positive signal that the country is becoming more welcoming and predictable for international investment. The prospect of a legal system that aligns more closely with international standards would reduce — at least somewhat — the perceived risks of operating in China, potentially leading to increased foreign direct investment.
While these reforms present a promising development, foreign investors must remain vigilant, as the true test will be in their implementation. Only time will reveal whether these changes will deliver the substantive shifts necessary to help level the playing field for foreign businesses in China.
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