The three reporting obligations outlined in the draft foreign investment law will prevent deliberate changes in the nature of a business after overseas investors setup new companies in China, as well as keeping the government better informed, experts said.

Zhao Xudong, a professor of commercial law at the Beijing-based China University of Political Science and Law, said most foreign investment, including setting up a new company, will no longer need pre-approval from the State Council.

The reporting mechanism will become a practical method to communicate between government entities and foreign companies in China.

"As a certain number of foreign companies previously chose to operate other businesses without government permission after they gained business licenses in China, foreign companies, in particular chemical and electronic product manufacturers, have caused environmental damage and disturbed the order of the domestic market," Zhao said.

Zhao said the new draft can effectively halt such practices and further standardize foreign companies' business ethics in the Chinese market.

The new reporting mechanism includes initial, subsequent and periodic reporting obligations. All reports must be submitted based on the facts, and misrepresentations and omissions will result in severe consequences.

The initial reporting obligation stipulates that foreign investors must submit an investment information report within 30 days after the implementation date for the investment or the completion date of the investment transaction.

The subsequent reporting obligation requires overseas investors to deliver an updated investment information report within 30 days after any change to the matters reported in the initial investment information report.

The annual reporting requirements (which constitute the periodic reporting obligation) apply to all foreign-invested enterprises. Quarterly reporting requirements will apply to any foreign-invested enterprise that has total assets, sales income or revenue exceeding 10 billion yuan ($1.63 billion) per annum or that has more than 10 subsidiaries.

The only exception is where a foreign party intends to invest in one of the restricted industries on the "negative list" - likely to be based on the Catalogue of Restricted and Prohibited Industries for Foreign Investment - or the investment amount exceeds the level set by the State Council.

He Jingtong, professor of foreign investment at the Tianjin-based Nankai University, said most of the concerns about foreign investments are those associated with mergers, acquisitions and takeovers of established domestic companies, rather than new ones.

"Countries like Germany, Australia, the United States and Canada have all implemented similar reporting systems in their government and legislative sectors to maintain order in their markets," said He.

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