China has implemented a sweeping new law allowing national security reviews of foreign investments, just as foreign money flowing into the country is expected to reach record levels.
Monday’s new regulations also come as Beijing has seen recent Chinese investment abroad come under increased scrutiny.
The Foreign Investment Security Review Measures, developed by the National Development and Reform Commission (NDRC) and the Ministry of Commerce, bring together China’s old trade rules while expanding the scope of transactions to l foreigner who should be considered. By law, virtually all areas are now subject to review, with particular emphasis on areas related to the military and acquisitions that give foreign companies control over Chinese companies.
“Without introducing radical changes from previous regulatory guidelines, the measures expand the list of foreign investment industries that will be subject to a safety review,” said a report by international law firm Paul, Weiss, Rifkind, Wharton & Garrison.
Helpfully, the measures establish a clear notification and authorization process, including regulatory timetables within which applications must be processed. However, it will be necessary to test in practice whether the actual processing time will meet regulatory timetables, ”the report said.
The law has notable similarities to the Committee on Foreign Investment in the United States, or CFIUS, according to a memo from the law firm Denton. Applicants can be foreign investors or domestic partners, and the 15 working day milestones for determining whether a review is needed and 30 days for an initial decision are not far behind CFIUS ’45 day decision timeframe.
Nonetheless, it is more rigorous and broader than the CFIUS, Denton said, in that it does not only apply to mergers and acquisitions and other types of investment such as securities, trusts and convertible debt. The text says that the acquisition of publicly traded shares in Chinese companies will be subject to a safety review if such actions could impact national security.
The implementation of the new rules comes amid political and financial pressure between China and some of its largest trading partners.
The Trump administration’s trade war with China was only one, albeit the most important, of Beijing’s recent disputes. He continues to fight with Australia on a range of issues and has imposed tariffs on some of Australia’s most lucrative exports. Meanwhile, China’s sprawling Belt and Road Initiative has been plagued by indebted borrowing partners and moves by the United States and other countries to counter the infrastructure-focused pact.
China has repeatedly insisted that its new rules simply align it with examination practices in developed countries. In written responses to questions from the media last month, the NDRC noted that “in recent years, the world’s major countries have successively introduced or perfected their own foreign investment security review systems,” particularly states. United, Australia, Germany and Japan. .
“China’s new National Security Review Law seeks common ground between retaliation against US restrictions on investment from China and attracting valuable US investment to China,” Peter A. Petri, Professor Carl Shapiro of International Finance at Brandeis International Business School. , Recount Barron Tuesday.
“Under the Foreign Investment Risk Review Modernization Act of 2018, the Trump administration dramatically increased the scope and severity of U.S. reviews, causing Chinese investment in the United States to plummet from $ 23 billion in 2017 to just $ 3 billion in 2019, ”he said.
Meanwhile, China is expected to record a record level of foreign direct investment. As of November 2020, FDI had already reached $ 129 billion, according to Chinese government data, to surpass $ 138 billion and $ 135 billion for all of 2019 and 2018, respectively. Annual data for 2020 is expected to be released next week.
The revised guidelines went into effect the same day China announced results of its GDP growth in 2020. At an official rate of 2.3%, it is the only major economy that grew last year, having quickly contained the coronavirus outbreak and restarted production at factories across the country.
Petri de Brandeis warned that the effective implementation of the law can be tempered by practical or political considerations.
“China doesn’t want to retaliate tit for tat – it still welcomes US investment, especially from tech companies. But he wants more leverage. For example, when the United States pressured ByteDance to sell TikTok in 2020, the Chinese government stepped in to announce that it would have the final say on the sale of tech assets, in this case artificial intelligence algorithms. from TikTok, ”he said.
“The final effect of these rules – how rigorously they are enforced – will depend on the overall health of US-China relations.”
Tanner Brown covers China for Barron’s and MarketWatch.