China: New Review Procedures for Foreign Investment in China

Last Updated: 16 February 2011

Article by Hannah C. L. Ha , Xiang Yang Ge and Gerry P. O'Brien

Originally published 16 February 2011

Keywords: foreign investment, China, security review process

On 3 February 2011 a new circular entitled Circular of the General Office of the State Council on the Establishment of a Security Review System Regarding Mergers and Acquisition of Domestic Enterprises by Foreign Investors was published by China's State Council. The circular provides for the implementation of certain national security review processes that are referenced in the Anti-Monopoly Law (AML), and which will operate in parallel to the AML's anti-monopoly merger review provisions (Anti-Monopoly Merger Review).

Specifically, the circular establishes a multi-agency panel (Panel) that will assess the extent to which a proposed foreign investment in, or acquisition of, a domestic Chinese enterprise raises certain national security or related concerns (Security Review). After completing a Security Review in relation to a proposed transaction, the Panel will effectively have the power to block the deal, or impose conditions on it, if it considers that such measures are appropriate to address the identified concerns.

Key aspects of the new Security Review process are summarised in this legal update.

Transactions to which a Security Review will apply

According to the circular, the Security Review process will apply to transactions that:

  1. result in a domestic Chinese enterprise coming under foreign control; and
  2. concern a relevant industry sector in China (Security Review Sector).

The circular outlines several types of transaction that may result in a Chinese enterprise coming under foreign control (such as where a foreign investor purchases an equity interest in a domestic enterprise, or incorporates a foreign-invested enterprise to purchase and operate the assets of a domestic enterprise), and specifies that a foreign business operator intending to implement such a transaction is required to apply to China's Ministry of Commerce (Mofcom) to ascertain whether a Security Review is required. Nothing in the circular suggests that such applications need only be made where the proposed transaction clearly relates to a Security Review Sector. However, it is possible that later implementation guidelines and regulations will address this issue and provide more clarity on exactly how and in what form notifications should be made.

Once it receives a relevant application, Mofcom will confirm whether the proposed transaction qualifies for a Security Review. This will necessarily involve consideration of whether the proposed transaction concerns a Security Review Sector. If so, Mofcom will submit the case to the Panel within five days for commencement of the Security Review.

When will a domestic Chinese enterprise be considered to come under foreign control?

As noted above, the circular refers to the acquisition by a foreign investor of an equity interest in a domestic enterprise as one of the types of transactions that may result in a Chinese enterprise coming under foreign control. In this context, it is noted that the circular specifies that a domestic Chinese enterprise will be deemed to be foreign-controlled once:

  1. the total shareholding of a single foreign investor (including its parent company and subsidiaries) exceeds 50 percent, or once the total shares of several foreign investors exceed 50 percent; or
  2. notwithstanding that the total shareholding in the domestic Chinese enterprise by foreign investors is 50 percent or less, those foreign investors have control over the management and operation of the domestic Chinese enterprise via the holding of relevant voting or other rights.

The circular confirms that investors located in Hong Kong, Macau and Taiwan will be considered to be foreign investors for the purposes of the Security Review process.

It is noted that little guidance is provided in the circular regarding the circumstances in which voting or other rights accompanying minority shareholdings will be considered to provide the minority shareholder with control over the invested enterprise. This mirrors the situation under implementation guidelines pertaining to an Anti-Monopoly Merger Review, which form of review is also usually only triggered if control is acquired over a target enterprise.

What are the relevant Security Review Sectors in China?

According to the circular, the Security Review process will target M&A deals concerning Chinese enterprises operating in any of the following Security Review Sectors: national defence, key agricultural products, key basic infrastructure, key energy and resources, major equipment manufacturing, key technology, and key transportation services.

Notably, some of these Security Review Sectors overlap with the nine "pillar industries" announced by China's State Council and State Assets Supervision and Administration Commission in December 2006 as sectors in which state-owned enterprises should play a leading role.

The circular also states that the PRC government will issue separate security review regulations for foreign companies engaged in relevant foreign investments in or acquisitions of domestic financial institutions, but when these regulations may surface remains unclear.

Government agencies, trade associations, competitors, suppliers and other related parties may also refer foreign investment or acquisition transactions to Mofcom for Security Review.

What will the national Security Review process focus on?

Article II of the circular sets out four broad areas that will be the focus of a Security Review. These are the proposed transaction's impact on (i) national security, (ii) the stable operation of the national economy, (iii) basic social order, and (iv) the research and development capabilities of key national security technologies.

In relation to national security, the circular indicates that Security Review will, in particular, consider the effect of the relevant transaction on the target enterprise's ability to produce goods for the domestic market, services, equipment, and facilities relating to national security. No elaboration is provided in relation to the other areas of focus mentioned in the circular.

The broad terminology used in the circular, and in particular, the ability of the Panel to make reference to the impact of a transaction on the stable operation of China's economy and social order, will allow the Panel wide discretion to scrutinise and restrict foreign investment in China that is seen to be at odds with the country's unique socialist market economy and social development goals.

Further, while the scope of Security Review Sectors is limited, it is noted that the Anti-Monopoly Merger Review already allows Mofcom to consider the impact of any proposed transaction (whether or not conducted inside China) on China's national economic development and industrial policy goals. Indeed, there is speculation that such considerations played a key role in Mofcom's only prohibition decision under the Anti-Monopoly Merger Review system so far - the veto of Coca-Cola's proposed acquisition of China's Huiyuan Juice Group in March 2009.

Composition of the Panel

According to the circular, the new Panel that will conduct Security Review (the full name of which is the 'Cross-Ministry Joint Panel System for Security Review of Foreign M&A of Domestic Enterprises') will be officially led by China's chief administrative authority, the State Council. However, the circular indicates that the actual process of review will mainly be conducted by representatives of Mofcom and the National Development and Reform Commission (NDRC). As described below, the State Council's role will, it appears, be limited to considering cases where the opinion of the Panel is divided.

Security Review process and timing

Security Review will occur in either one or two stages, mirroring the review process that applies for Anti-Monopoly Merger Review.

Once the Panel commences Security Review in relation to a proposed transaction, the initial general review process can last up to 30 business days.

This process of general review will be conducted by collecting written comments from relevant government agencies. According to the circular, if all relevant agencies that the Panel consults in relation to a proposed transaction deem that it will not affect national security, the Panel will notify Mofcom in writing and effectively clear the transaction to proceed (subject to any other required regulatory approvals, such as Anti-Monopoly Merger Review approval).

Applications that fail to receive approval during the general review (i.e. one or more agencies consulted by the Panel believe relevant security issues are raised by the proposed transaction) will face an additional special review period of up to 60 business days. The special review process will consist of specific security assessment by the Panel itself. If, at the end of such assessment, the Panel are "largely unanimous" in their decision, they will advise Mofcom in writing. If there are "significant differences in opinion" within the Panel, the case will be submitted to the State Council for consideration.

The outcome of Security Review cases will be communicated to relevant parties by Mofcom.

Relationship with the AML and other regulatory approval processes in China

As noted at the beginning of this legal update, it appears the Security Review process will run in parallel to any Anti-Monopoly Merger Review. Accordingly, where a foreign investor proposes to acquire or take a relevant stake in a domestic Chinese enterprise, and that transaction triggers the mandatory anti-monopoly pre-notification provisions in Chapter IV of the AML, then it appears two notifications may need to be made - one to Mofcom's Anti-Monopoly Bureau and one to a separate part of Mofcom involved in referring cases to the new Panel.

In some cases, for example where the turnover of the parties involved in a relevant transaction does not trigger the mandatory anti-monopoly pre-notification provisions, only notification to the latter may be required.

Parallels with other regimes

China is not alone in implementing a Security Review process. Many countries, including the U.S., Canada and Australia have already provided government agencies with the power to block or impose conditions on foreign investment proposals which are deemed to raise national security concerns.

In this context it is interesting to note that the Committee on Foreign Investment in the United States (CFIUS) has, at the date of writing, raised concerns about the national security implications of the acquisition by China's Huawei Technologies Co. of the assets of U.S. company 3Leaf Systems. Some press reports have suggested there is a strong likelihood the acquisition will now be disallowed.

Previous CFIUS reviews have resulted in the abandonment of several transactions involving PRC investors seeking to acquire U.S. businesses or assets, and Australia's Foreign Investment Review Board has also rejected several proposed deals in recent years that would have provided Chinese enterprises with significant interests in Australian mining and resources enterprises.

In this context, some analysts have expressed concern that the Panel may be tempted to wield its powers under the Security Review process in a way that is as much about reacting to the decisions of foreign security regulators as it is based on genuine appraisal of the security issues that may be raised by specific deals.


The new circular implements a further layer of regulation and review for foreign investments in China, and the international community will watch closely to see the extent to which the Panel takes advantage of its broad powers to identify security-related concerns arising from proposed transactions and then block or impose conditions on them. For now, companies looking to make acquisitions in China or acquire control of domestic companies, particularly in sensitive sectors, will need to be aware of the need to apply to Mofcom for Security Review and approval of relevant deals, and consider how this process may impact the timing and overall prospects of such deals.

However, it must also be recognised that the Chinese authorities already possess a broad range of powers to curb foreign investment, including via the Anti-Monopoly Merger Review process, the Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (which allow Mofcom to challenge transactions in which foreign investors will acquire control of domestic entities in key economic sectors or affecting national economic security or famous Chinese brands) and other regulatory approval mechanisms. These mechanisms have also been used to force or pressure the abandonment of a number of major foreign investment proposals in China, including the previously mentioned Coca-Cola/Huiyuan deal and the bid by U.S. private equity firm Carlyle Group to buy a stake in China construction equipment manufacturer Xugong Group in 2005.

Accordingly, while the Security Review process may not add another layer of regulation to inbound deals and raise the prospect of transaction delays, it is unlikely to significantly alter the existing risk profile for foreign investment in China.

Usefully, introductory wording in the new circular expressly recognises that foreign M&A and investment in China "has promoted the diversification of foreign investment utilisation and contributed to the optimisation of resource allocation, technology improvements, and the development of enterprise management". While it remains to be seen whether the Panel's decisions will demonstrate an ongoing recognition and support of such benefits from foreign investment, foreign businesses will be encouraged by the inclusion of such wording in the circular and the fact that since its publication NDRC officials have been keen to publicly stress that China will not use the Panel as a weapon to block normal foreign investments.

Finally, with the new process set to commence on 5 March 2011, it remains unclear whether it will apply to proposed transactions already awaiting Anti-Monopoly Merger Review at that time. It is suggested that consultation with Mofcom should occur in relation to any such transactions to obtain clarity. In the interim, it is hoped that the Chinese authorities will quickly publish implementation guidelines and regulations to clarify other key matters- such as the precise circumstances in which foreign investors need to apply to Mofcom regarding Security Review, and how and in what form such notifications should be made.

Learn more about our PRC offices, Antitrust & Competition and Mergers & Acquisitions practices.

Visit us at

Copyright 2011. JSM, Mayer Brown International LLP and/or Mayer Brown LLP. All rights reserved. Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: JSM, a Hong Kong partnership, and its associated entities in Asia; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and Mayer Brown LLP, a limited liability partnership established in the United States. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.