On 19 December 2020, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly issued the Measures for Security Review of Foreign Investment (New Measures) (the official Chinese text is available here; and an unofficial translation is available here). The New Measures, effective from 18 January 2021, represent China's continued efforts to provide a clearer legal regime for national security review comparable to similar procedures in other developed economies, such as the CFIUS review in the United States.
How are the New Measures different from the existing regulations?
China's national security review was first introduced in 2011 by the Circular of the General Office of State Council on the Establishment of Security Review for the Merger and Acquisition of Domestic Enterprises by Foreign Investors (2011 Circular). The 2011 Circular set forth a national security review regime where, similar to the foreign investment approval regime prior to the enactment of the Foreign Investment Law on 1 January 2020, MOFCOM would take the lead in the review of foreign investment for national security concerns in coordination with other government agencies. From 2015, the State Council issued the Circular on Issuing the Provisional Measures for National Security Review of Foreign Investment in Pilot Free Trade Zones (Free Trade Zone Circular), under which a slightly modified security review regime was created for foreign investment in the Shanghai, Guangdong, Tianjin and Fujian Pilot Free Trade Zones.
The New Measures apply to foreign investment in the entire territory of China, including the Pilot Free Trade Zones. While the New Measures seem to have combined features of both the 2011 Circular and the Free Trade Zone Circular, there are several notable new developments.
(a) Indirect investment covered
The most prominent difference is that the New Measures are intended to cover both direct and indirect foreign investments in China, in contrast to the existing national security review that applies only to foreign direct investment. As such, it seems that any investor acquiring indirect "actual control" of a Chinese target covered by the New Measures in an offshore transaction will likely be subject to a national security review in China.
The New Measures also apply to greenfield investment that is excluded from review under the 2011 Circular1. Under prior regulations, foreign investment in the financial services sector was supposed to be subject to separate legislation but such legislation was not issued. The New Measures are intended to also apply to foreign investment in the financial services sectors.
(b) Joint working mechanism
Another different feature is that the New Measures establish a working mechanism jointly headed by NDRC and the MOFCOM at the central level. A Working Office will be set up under NDRC but will be jointly led by NDRC and MOFCOM, who will be responsible for the national security review of foreign investment. Unlike the prior regulations under which MOFCOM or its local counterparts are responsible for accepting security review filings, the Working Office is now authorized to accept direct filings submitted by the investor.
(c) Staged review process
The New Measures also modify the existing review process. Under the New Measures, the security review will be a three-stage process as follows:
- Jurisdiction review: The Working Office has 15 working days (as opposed to five working days under the existing regulations) to determine whether they will commence a security review of the investment in question.
- General review: If the Working Office decides to commence a security review, they will then have 30 working days (similar to the review period under the existing regulations) to perform a general review of the investment in question. After the general review, the Working Office will either approve the transaction or decide to commence the special review process.
- Special review: The special review can take up to 60 working days (similar to the review period under the existing regulations) and may be extended if circumstances so require. Under the prior regulations, the investment in question may be referred further to the State Council for determination. Such a referral no longer exists under the New Measures so the Working Office is authorized to make a final determination upon the special review.
(d) Whistle blower mechanism
The New Measures permit any person to report to the Working Office and request the Working Office to commence a review in respect of any foreign investment if such a person believes there is a national security concern.
What are the issues with the New Measures?
There are still a number of issues to be clarified under the New Measures. For example, "national security" remains undefined and there is no clear guidance on what elements the Working Office will consider in determining whether there is national security concern2.
Further, covered sectors under the New Measures include, other than the military or national defense related business:
- key agricultural products, key energy and resources
- 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
What is considered "key" is not set out in any regulation, leaving the Working Office with discretion to make a determination that may shift with changes in China's foreign investment policies or national security outlook from time to time. Based on our recent experience, certain businesses requiring a value-added telecommunications service operating license could be subject to national security review. Further, with the recently revised technology export catalogue, foreign investment in Chinese big data or artificial intelligence companies may also be subject to national security review.
What should foreign investors do?
The national security review under the New Measures is a mandatory regime as it is under the prior regulations. Any investment project falling within the ambit of the New Measures that will be closed after 18 January 2021 will be required to be notified to the Working Office for a review. Therefore, investors who are currently investing or proposing to invest in China need to consider whether a national security review filing is triggered under the New Measures. Moreover, those who have already owned investments in China and are looking to dispose directly or indirectly of their interest in such investments will need to consider whether the potential buyer will require a national security review in China.