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China plans to ban local governments from forcing foreign companies to transfer proprietary technology to their Chinese partners, to address a complaint at the heart of the US-China trade and technology dispute.

The government is considering a streamlined foreign investment law that would replace the regime governing which industries are open to foreigners and the conditions under which they can enter, according to the official Xinhua news agency. 

Foreign companies complain that they are required to operate through Sino-foreign joint ventures in many industries, forcing them to transfer valuable technology to Chinese partners, who later go on to compete with the foreign investor through the partner’s parent company. 

The Office of the US Trade Representative emphasised such complaints in its so-called “Section 301” report on Chinese trade and investment practices, named for a provision in a rarely invoked 1974 law. 

The law says that terms of technology “co-operation” should be determined by negotiation, while local governments and officials cannot use administrative methods to force technology transfers. 

“The foreign investment law is meant to promote and protect foreign investment and ensure foreign businesses enjoy fair treatment, which will boost their confidence in the Chinese market,” Xinhua reported. 

The draft law explicitly forbids local governments from adopting policies and practices that infringe on foreign investors’ “legal rights and interests” or erecting illegal market entry or exit barriers, according to the official Securities Times. 

But foreign analysts caution that China often uses informal methods to pressure foreign groups into technology transfers. These include denying administrative approvals unless a foreign group agrees to include transfer provisions in joint-venture agreements, even when such provisions are not legally required. 

“More needed than simple rule changes. Reducing coercive tech transfer would require banning and penalising informal demands and threats, [and] heavily constraining industrial policy that directs and constrains investment,” Scott Kennedy, director of the project on Chinese business and political economy at the Center for Strategic and International Studies in Washington, tweeted in response to the proposal. 

The standing committee of the National People’s Congress, China’s parliament, began reviewing a draft of the law at a bimonthly session that began on Sunday. The standing committee typically conducts multiple rounds of deliberation before referring legislation to a plenary session of the NPC. That means final passage of the law could take anywhere from several months to over a year. 

In addition to the provisions on tech transfer, the new law aims to streamline regulation of foreign investment. It would replace three separate laws that govern, respectively, equity joint ventures, contractual joint ventures and wholly-foreign-owned enterprises. 

Separately on Monday, China’s finance ministry announced tariff cuts to 706 products, effective on January 1. Among the affected products were lithium-ion battery cells for electric vehicles and animal-feed meal used as alternatives to soyabean meal. China raised tariffs on US soyabeans as part of a tit-for-tat response to US tariffs.

Twitter: @gabewildau

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