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China Unveils New National Security Review Measures For Foreign Investment

  • China
  • Competition, EU and Trade - Foreign investment regimes
  • Other


On 19 December 2020, the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) jointly published the "Measures for the Security Review of Foreign Investment" (the "NSR Measures"), which will come into force on 18 January, 2021. The NSR Measures draws its legal basis from the “Foreign Investment Law” and the “National Security Law” and represents the latest development in the People’s Republic of China (the “PRC”)’s effort in building a national security review framework for foreign investments which is aligned with many international jurisdictions such as CFIUS in the US and FIRB in Australia. The NSR Measures builds upon its predecessor such as “the Notice of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors” (effective since March 2011) and “the Tentative Measures for the National Security Review of Foreign Investment in Pilot Free Trade Zones” (effective since May 2015) (collectively referred to as “Tentative Measures”), and provides further clarifications and transparency to the rules of national security review (“NSR”) in key aspects including the competent authority, the notifiable investments, the procedures and timeframe for such review, as well as the review decisions and sanctions against violations. These are summarized below:

  • Foreign Investments – According to Article 2 of the NSR Measures, the types of investment activities carried out by foreign investors, whether directly or indirectly, which may be subject to NSR if they would impact or potentially impact the national security include the following:
    • A foreign investor, solely or jointly with other investors, invests in newly initiated projects or sets up enterprises within China.
    • A foreign investor acquires the equity interests, assets or other similar interests of a domestic enterprise.
    • A foreign investor makes investments within China by other means

By introducing a catch-all clause with reference to investments made “by other means”, the sphere of NSR is made comprehensive and far-ranging under the NSR Measures and may capture a wider range of investment activities carried out by foreign investors. In addition, according to Article 21, the NSR Measures also applies to investment activities carried out by investors from Hong Kong, Macau and Taiwan.

  • Competent Authority – Article 3 of the NSR Measures provides for the establishment of the office of foreign investment security review working mechanism (the "NSR Office") responsible for organizing, coordinating, and guiding the NSR for foreign investment. The NSR Office will be jointly led by NDRC and MOFCOM and its office will be located in NDRC.
  • Notifiable Investments – Under Article 4 of the NSR Measures, notification must be made to the NSR Office for any contemplated foreign investments into certain sensitive areas. Before receipt of security review clearance, the parties concerned shall not proceed with the contemplated investments. These notifiable investments are divided into two categories:
    • Category 1 – This category covers investment in the arms industry, an ancillary to the arms industry, or any other field related to national defense security and investment in an area surrounding a military installation or an arms industry facility. Notification of any contemplated investment that falls within this category must be made to the NSR Office for approval (regardless of whether such investment would result in the foreign investor's acquisition of actual control of the enterprise receiving such investment).
    • Category 2 – This category covers investment in important agricultural products, important energy and resources, critical equipment manufacturing, important infrastructure, important transportation services, important cultural products and services, important information technology and internet products and services, important financial services, key technology, or any other important fields, which are related to national security and which would result in the foreign investor's acquisition of actual control of the enterprise receiving such investment. Notification of any contemplated investment that falls within this category must be made to NSR Office for approval.

      Actual control” specified herein refers to cases where:
      • the foreign investor and its affiliates hold 50% or more of the equity interests in an enterprise;
      • foreign investor and its affiliates hold less than 50% of the equity interests in an enterprise, but its/their voting rights are able to materially influence the decisions of the board of directors, the shareholders meeting or the general meeting of shareholders; or
      • there are other factors allowing the foreign investors to have significant influence over the enterprise’s business decisions, human resources matters, financial matters, and technology, etc.

Comparing with the provisions in the Tentative Measures and other regulations enacted previously, the NSR Measures has extended the notifiable investments to certain new areas including important information technology and internet products and services, and important financial services.

Parties who are uncertain as to whether their contemplated investment falls within the above categories may, pursuant to Article 5 of the NSR Measures, consult the NSR Office over relevant issues before formally reporting such investment to the NSR Office.

  • Procedures and Timeframe – The procedures of the NSR specified under the NSR Measures includes
    • Notification to the NSR Office;
    • Preliminary Review – the NSR Office will decide whether an NSR is required within 15 business days of receiving the complete notification materials;
    • General Review – the NSR Office will notify the relevant party(ies) of either the result of the general review or its decision to proceed to a special review within 30 business days from the commencement of the review; and
    • Special Review – Cases with specific national security concerns will proceed to this stage. Generally, the special review would be completed within 60 business days but such period may be extended if required
  • Review Decisions and Sanctions – The NSR Office may come to the following decisions after review of the NSR reporting in relation to a specific investment: (i) approving the proposed investment if they are of the view that such foreign investment does not impact national security, (ii) prohibiting the investment if they are of the view that the foreign investment impacts national security, or (iii) approving the proposed investment with additional conditions to be fulfilled by the foreign investor if, on one hand, the foreign investment impacts national security, whilst on the other hand, the potential impact on national security can be eliminated through fulfillment of such additional conditions.

    For any violation of the NSR Measures, including any failure to notify the NSR Office of notifiable investments, submission of fraudulent materials and non-compliance with the additional conditions specified by the NSR Office, the NSR Office may order the relevant investment to be modified or unwound within a specific time limit. The relevant entity may also be blacklisted in the PRC’s national credit information system, which would in turn impact adversely on the reputation and commercial credit-worthiness of such entity. However, it is notable that administrative fine is not explicitly provided as a sanction in the NSR Measures.

Even though the NSR Measures sets out plain guidelines and statutory timetable for foreign investors to follow in the event that a NSR is triggered in a contemplated investment, issues in relation to implementation are still pending further explanation/interpretation from competent authorities. For example, NSR rules in relation to foreign investments in the purchase of securities traded in a stock exchange need to be further enacted by the China Securities Regulatory Commission. We will closely watch how the NSR Measures will be implemented in practice. Clients interested in making investments into the PRC may need to review their investment plans and consider whether the investments contemplated therein concerns sensitive areas which may trigger an NSR. Where a NSR may be required, sufficient time should be allocated for completion of the relevant notification and NSR procedures in the transaction timetable.