China recently revised several lists that would potentially attract more foreign investments. However, its new measures on foreign investment security review could create more hurdles for foreign investors.

On December 19, 2020, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly issued the Measures for Security Review of Foreign Investment (《外商投资安全审查办法》). The Measures will take effect on January 18, 2021. Under the Measures, the national security review will be mandatory for foreign investments in military and related sectors, as well as foreign investments that would result in actual control of a Chinese company in some key sectors, including infrastructure, agriculture, major equipment manufacturing and information technology, and internet products and services. This is another example, after the Export Control Law, of China developing a similar legal regime as other developed economies. The Measures are an implementing regulation of China’s new Foreign Investment Law passed in 2019 and the National Security Law passed in 2015.

In 2011, the General Office of the State Council issued the Notice on the Establishment of Security Review for the Merger and Acquisition of Domestic Enterprises by Foreign Investors  (国务院办公厅关于建立外国投资者并购境内企业安全审查制度的通知), which creates a security review process for foreign investment. Subsequently, MOFCOM issued the Provisions on the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors 《商务部实施外国投资者并购境内企业安全审查制度的规定》) (2011 Measures). In 2015, the General Office of the State Council issued the Notice on Provisional Measures for National Security Review of Foreign Investment in Pilot Free Trade Zones(《自由贸易试验区外商投资国家安全审查试行办法》)(2015 Provisional Measures). The 2015 Provisional Measures apply to foreign investments in Shanghai, Guangdong, Tianjin, and Fujian pilot free trade zones.

The new Measures are similar to the 2015 Provisional Measures, with more details offered. Furthermore, they will apply to all territory in China rather than just specific regions. Compared to previous provisions, the new Measures have several new developments: They apply to more transactions, clarify the review process, simplify the application materials, and create a whistle blower mechanism.

In contrast to previous provisions, the new Measures apply to both direct and indirect foreign investment, including greenfield investments, mergers and acquisitions, as well as other methods of investment. This means an offshore transaction that would give foreign investors actual control of a Chinese firm will also be subject to the Measures.

The review process now has three stages: Jurisdiction review, general review, and special review (Articles 7 to 10). The Measures create a Working Office, led by the NDRC and MOFCOM. The Working Office has 15 working days to determine whether a transaction falls within the scope of security review, and then has 30 working days to conduct a general review and reach a conclusion to approve the transaction or start a special review. Under the special review, the Working Office will have up to 60 working days, which can be extended if needed, to make a final determination to either approve, approve with conditions, or block the transaction.

Similar to the 2015 Provisional measures, investments in covered sectors shall be submitted for review pursuant to the Measures (Article 4). They include:

  • Investments in military and related sectors that are relevant to national defense and security, as well as investments near military facilities,
  • Investments that will result in the actual control of a Chinese target in the following sectors:
  • Key agriculture, key energy and related sources,
  • Key major equipment manufacturing
  • Key infrastructure
  • Key transportation services
  • Key cultural products and services
  • key information technology and internet products and services
  • Key financial services
  • Key technology
  • Other key sectors

Actual control means when:

  1. Foreign investors hold more than 50% of the company’s equity;
  2. Foreign investors hold less than 50% of the company’s equity, but their voting rights can have a significant impact on the decisions of the board of directors or the shareholders’ meeting;
  3. Other circumstances when foreign investors are able to have a major impact on business, personnel, finance, and technology.

In addition to the mandatory review, any individual, entity, or agency must report to the Working Office if he or she believes a potential transaction involves a national security concern (Article 15).

What is unclear from the Measures is the review criteria that the Working Office will follow to make its determination. In addition, what would be considered as “key” sectors also remain to be seen. Most likely, foreign investment in sectors that are subject to export control restrictions will also be subject to security review.