On December 19, 2020, National Development and Reform Commission, and the Ministry of Commerce of PRC have jointly released the Measures for the Security Review of Foreign Investments  ("Measures"), which will be effective in the coming January, 2021.

    The Measures is a cornerstone of China's practice of national security review of foreign investments. In according to principles of the government authorities, it shows China is catching up with western nations on national security legislation; this regulation is targeted to identify and resolve national security risks, protect China's economy without causing damage to foreign investment.

       China has been enforcing foreign investment security review for almost a decade.

     In 2011, the General Office of the PRC State Council released the notice on Establishment of Security Review System Pertaining to Mergers and Acquisitions of Domestic Enterprises by Foreign Investors ("2011 Notice"). The 2011 Notice is limited to mergers and acquisitions, and a system for interministerial conference is established to undertake security review. This conference is headed by the National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOC").

       In 2015, the State Security Law is effective on the date of its promulgation.

     Further in 2015, the General Office released the notice for the Trial Measures on National Security Review for Foreign Investments in Pilot Free Trade Zones  ("2015 Measures"). According to the 2015 Measures, security review will be conducted on "which involve sensitive investment entities, sensitive targets for mergers and acquisitions, sensitive industries, sensitive technologies or sensitive areas." However, the 2015 Measures only applied to the investment in the free trade zones, including those in Shanghai, Guangdong, Tianjin and Fujian.

     On January 1, 2020, the Foreign Investment Law is effective, which provides that foreign investors and foreign-funded enterprises shall not jeopardize China's security or damage public interests, and the security review shall be conducted for foreign investment affecting or likely affecting the national security.

       From our point of view, the investors have to pay attention to the Measures in addition to the  said laws and regulations, as well as the existing Foreign Investment Industry Catalog and the Market Entrance Negative List.

       The Measures consists of 23 articles, establishes a review system based on previous practices.

      The Measures establishes The Working Mechanism Office to be responsible for the routine work of the national security review, including organizing, coordinating and guiding. The Office is set up under NDRC, headed by NDRC and MOC. The Office also has the right to require the investment parties to make declaration for such investment.

     It is crucial for foreign investment parties to make declaration to the Office regarding investment involving in concerning industries and areas. Fail to take the initiative to declare may face administrative punishment, and such investment will as well be revoked to eliminate its impact on the national security.

Who Shall Be Subject to the Security Review, and How

      Prior to the investment, foreign investors or domestic parties shall take the initative to declare to the Office, if the foreign investment falls within the following scope:

      1. Investments in military, military supporting or relevant to national security, and investments in area surrounding military facilities or military industry facilities. 

    2. Investments in national security related important agricultural products, energy and nature resources, equipment manufacturing, infrastructure, transport service, culture product and services, information technology and internet product or service, financial services, technology and other matters; provided that the foreign investors are obtaining actual controlling state in the investee enterprises.

     The Measures provides a three-step progress for the review. This mechanism carves out the investment which may in fact concerns the Chinese national security, while most foreign investment will pass the review in the first phase.

      The first phase is preliminary review: the Office will, within 15 days from the date of its receiving of the materials submitted by the parties, decide whether the security review will begin.

      The second phase is general review. The Office shall complete general review within 30 working days from the date of the decision. The parties shall not proceed with the investment during the review period.

      If the Office deems necessary, it may initiate the special review, which shall be completed within 60 working days from the date of decision. If a foreign investment falls in the scope of the special review, the investment parties may still have a chance to pass, by submitting supplement documents, revising investment plans, or committing to the conditions adopted by the Office.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.