CHINA: Measures for Safety Review of Foreign Investment issued, follow-up impact worth observing
Executive Summary:
The introduction of security review system is bound to have a more or less impact on China Foreign Investment in some special areas, which is mainly manifested in the uncertainty of whether the investment can be implemented.
On December 19, 2020, the National Development and Reform Commission and the Ministry of Commerce in China jointly issued the Measures for Safety Review of Foreign Investment (hereinafter referred to as the “Measures”). In the context of the rise of trade protectionism in many countries in Europe and America, the introduction of Measures has attracted particular attention.
1. Background
Security reviews of foreign investment have been in place in major European and American countries for years. In February 2011, the General Office of the State Council issued the Circular on the Establishment of a Safety Review system for mergers and acquisitions of domestic Enterprises by Foreign investors, which is the beginning of the formal establishment of a security review system for foreign investment in China.
In August of the same year, the Ministry of Commerce issued the provisions on the implementation of the Safety Review system for mergers and acquisitions of domestic Enterprises by Foreign investors.
In April 2015, the General Office of the State Council issued the “Trial Measures for National Security Review of Foreign Investment in the Pilot Free Trade Zone”. In the free trade zone, the object of security review of foreign investment was extended from mergers and acquisitions to new projects, newly established enterprises and other investment methods such as agreement control, escrow, trust, reinvestment, overseas transactions, leasing, and subscription of convertible bonds.
The 2017 version of the National Security Law and the Foreign Investment Law promulgated in December 2019 made it clear in legal form that the state establishes a security review system for foreign investment to conduct security review of foreign investment that affects or may affect national security. In this context, the “Measures for Safety Review of Foreign Investment” came into being.
2. Scope of application
The foreign investment activities to which the Measures apply include new foreign projects or newly established enterprises, mergers and acquisitions and other forms of investment. In addition to deleting the enumerated parts in other ways, it basically follows the expression of the “Trial Measures for National Security Review of Foreign Investment in the Pilot Free Trade Zone”.
According to Article 4 of the Measures, foreign investment in the following areas shall be declared on its own initiative prior to implementation:
(1) To invest in areas related to national defense and security, such as military industry and supporting facilities, as well as in areas around military facilities and military facilities.
(2) To invest in important agricultural products, important energy and resources, significant equipment manufacturing, important infrastructure, important transport services, important cultural products and services, important information technology and Internet products and services, important financial services, critical technologies and other important areas, and obtain actual control over the invested enterprises.
It is worth noting that for the second item in the scope of active declaration, the Measures do not define what is meant by “important”, “significant” and “critical”.
3. Review process
For investment projects applicable to the safety review, foreign investors shall take the initiative to report to the Office of the Foreign Investment Safety Review Mechanism before implementing the investment. Youly briefly summarizes the declaration and review process into the following figure.
4. Doubts to be clarified
Reading through the full text of the Measures, it is not difficult for us to find that the Measures need to be further clarified in the following aspects.
(1) Definition of the scope of declaration
In addition to military and national defense projects, investment projects applicable to security review involve many aspects of economic activities. It is not clear which agricultural products, energy and resources, equipment manufacturing, infrastructure, transport services, cultural products and services, information technology and Internet products and services, financial services, technology and other areas that foreign investors invest are important, significant and critical areas related to national security.
(2) Whether it has retrospective effect or not
Under the premise that Article 4 already stipulates the obligation of foreign businessmen to declare initiatively in advance, it is also mentioned later that the competent authority has the right to require the parties concerned to declare the foreign investment within the scope of the declaration. Does this mean that for the existing foreign investment projects before the promulgation and implementation of the Measures, if they fall within the scope of the declaration and are proposed by the competent authority, the parties concerned should also declare (afterwards) and enter the safety review process?
5. Follow-up influence
The establishment and improvement of the foreign investment safety review system is not only the need of China to promote the reform of the foreign investment management system, but also the realistic need to meet the changes of the external political and economic environment.
The impact of its implementation can be considered from the following two aspects:
On the one hand, as long as the basic national policy of opening up to the outside world remains unchanged, the introduction of the Measures will not shake China’s general direction of attracting foreign investment, nor will it have a significant impact on the general investment activities of foreign investors.
On the other hand, the introduction and continuous improvement of the safety review system in foreign investment management is bound to have a more or less impact on investment projects in some special areas, which is mainly manifested in the uncertainty of whether the investment can be implemented.
This uncertainty comes not only from the establishment of the review system itself, but also from the scope of declaration, retrospective effect, review criteria and standards that need to be clarified, and even from the changes of international relations and situation.
How the measures will affect foreign investment in China at the macro and micro levels after the implementation of the measures on January 18, 2021 is worthy of continuous observation by foreign investors and relevant industry insiders.
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