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National Security Review of Foreign Investment in China: One Decade Later

In March 2019, the long-awaited Foreign Investment Law (FIL) of China was promulgated, effective since January 2020.[i] Subsequently, a number of implementing rules have been adopted to substantiate the succinct provisions in the FIL which is intended to act as a guiding legislation in China's foreign investment regulatory regime.

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Dr Cheng Bian
Academic Researcher, Erasmus School of Law, Erasmus University Rotterdam

EUPLANT logo sat above the Erasmus+ logo which states 'with the generous support of the Erasmus+ programme of the European UnionChina’s national security review of foreign investment was originally established in 2011, which was envisaged in a Notice issued by the State Council and implementing Provisions adopted by Ministry of Commerce (MOFCOM).[ii] The Measures for the National Security Review of Foreign Investment (the Measures) were adopted in December 2020 and applicable since January 2021,[iii] to implement Article 35 of the FIL, which calls for the establishment of a national security review for foreign investment. Now that the Measures have updated and replaced the rules which inaugurated the review system a decade ago, the ‘new’ review rules are also referred to as China’s ‘national security review version 2.0’.[iv] To shed some light on China’s national security review mechanism of foreign investment that has evolved for a decade, this blog post aims to highlight its policy background, the substantive and procedural review framework, and remaining ambiguities in law and practice.

The promulgation of the Measures is not a legislative spur of the moment, but should be understood in the broad context of China’s evolving foreign investment regulatory regime. Prior to 2016, China’s foreign direct investment (FDI) regulatory regime was largely characterized by rigorous and burdensome government control on market entry. The Catalogue of Industries Guiding Foreign Investment (the Catalogue) was divided into three groups: Prohibited Sectors, where foreign investors were rejected from market entry; Restricted Sectors, where foreign investment was only allowed to enter under specific conditions such as mandatory joint venture requirements; and Encouraged Sectors, where foreign investment is sought after and may enjoy preferential treatment.[v] All other sectors not listed in the Catalogue were regarded as Permitted Sectors. In addition, all foreign investments including both greenfield investment and foreign takeovers, regardless of the sectors involved (except the Prohibited Sectors), were required to undergo a case-by-case approval for market entry. Since 2016, the narrative began to shift from the previous prohibition, restriction and control to investment liberalization, as piecemeal reform began to take place, and eventually led to the formal adoption of the FIL. From 2016 to 2020 and thereafter, China’s FDI market entry regime was featured by an unprecedentedly liberalized narrative, represented by a pre-establishment national treatment to all foreign investment, unless the investment is to be made in the Negative List for Foreign Investment.[vi] Accordingly, China’s original and new national security review systems were adopted in the context of the previous controlled and current liberalized FDI laws and policies respectively. In the previous controlled environment, there was some concerns over the necessity of a national security review, because the case-by-case approval regime already provided the instrument to examine and control the market entry of all foreign investment, hence an additional review on national security grounds would appear to be excessive.[vii] However, under the current liberalized market entry scheme, as the case-by-case approval was repealed and replaced by pre-establishment national treatment, the necessity for a national security review of foreign investment has become stronger and more rational because it can act as a last line of defense to protect China’s national security. As a result, the liberalized foreign investment law and policy have paradoxically provided a stronger justification for a national security review system that potentially poses a restrictive effect to foreign investment.

Regarding the review framework, as was the case in the 2011 rules, the Measures do not define the concept of ‘national security’. Presumably, a reference can be made to China’s National Security Law adopted in 2015, which includes (but is not limited to) 11 aspects of security, to understand the national security in the foreign investment context.[viii] The Measures stipulate that, all direct and indirect foreign investments, including greenfield, mergers and acquisitions, and other means of investment, should be subject to review, as long as national security is at risk or may be at risk. This is more extensive than the original review framework that only involved foreign takeovers as the subjects of review. There is also a list of sectors subject to review, including defense and military (including investment in the vicinity of military installations), important agricultural products, important energy and resources, critical equipment manufacturing, important infrastructure, important transportation, important cultural products and services, important IT and Internet products and services, important financial services, key technologies, and other important sectors. The list of sectors apparently only serves an exemplary purpose and does not guarantee an exemption of review for non-listed sectors, because ‘important’ is not defined and subject to interpretation, and there is also the catch-all phrase ‘other important sectors’. Compared with the 2011 rules, the current review adds cultural, IT and financial sectors subject to review. In the new review framework, the ‘Working Mechanism’, which is led by National Development and Reform Commission (NDRC) and MOFCOM and may involve other ministries if necessary, sets a permanent office in the NDRC, and supersedes the previous Joint Conference, which was an inter-ministerial ad hoc mechanism convened only when a specific case for review occurred. The review procedure consists of a general review of 30 working days followed by a special review of 60 working days, but subject to extensions in ‘exceptional cases’ and suspension when collecting additional information, and leads to the result of approval, approval with conditions, and rejection. It is apparent that the new review system is much broader in scope compared with the original one, which can be explained by a desire and the need for a review system that is broad in coverage and leaves a wide margin of maneuver in enforcement. Again, this shift to the current tougher review regime of foreign investment can be understood as a last line of defense to protect China’s national security under the principled liberal context of the FIL.

Future implementation of the Measures is complicated by at least two ambiguities. First, it is not entire clear how national security review of foreign investment will apply in juxtaposition to various sectoral national security review mechanisms in Chinese law. Just to name a few, China has adopted a ‘seed national security review’ for foreign takeover of a Chinese seed company.[ix] China also adopts a ‘cyber national security review’ for the operators of critical information infrastructure administered by the Cyberspace Administration of China.[x] And there is a national security review for construction projects such as infrastructure (airports, seaports, docks, customs, networks, and so on) which is based on provincial regulations and administered by local Departments of State Security.[xi] When national security is involved, it remains unclear if a foreign investment in the above specific sectors should undergo the general national security review of foreign investment, or the sectoral national security review, or both review procedures.

A second ambiguity is the lack of judicial or administrative redress to the review outcome, which may be inconsistent with China’s obligations under international investment agreements. According to the FIL, all decisions made from China’s national security review of foreign investment is final and are not subject to any administrative or judicial review. In the preliminary concluded EU-China Comprehensive Agreement on Investment (CAI) however, the parties are required to ‘establish or maintain judicial, quasi-judicial, or administrative tribunals or procedures for the purpose of the prompt review and, where warranted, correction of final administrative actions regarding matters covered by this Agreement…’[xii] As the CAI covers the matter of market access and establishment of investment, this would mean that China’s national security review of foreign investment, which is a procedure of market access, is not consistent with the treaty obligation in the CAI to provide legal recourse to administrative actions and outcome, such as the decision made by the NDRC in a national security review. Certainly, this depends on when and how the final texts of the CAI will be concluded and formally ratified in the future.

In sum, in the context of a transformation from a controlled to a more liberalized foreign investment law and policy at large, China’s national security review of foreign investment appears to have gained more legitimacy and stronger justification. In the meantime, the implementation of the new review system may be challenged by the ambiguities within the domestic legal system and international investment agreement obligations. To date, China’s national security review was only initiated once since 2011, suggesting that the Chinese government is acting in extreme prudence. However, because of the broad language adopted in law and the potential vagueness in practice, it is likely that the Chinese authorities will be flooded with consultations from foreign investors regarding whether or not their investment would warrant a national security review.

Footnotes

[i] 中华人民共和国外商投资法 (Foreign Investment Law of China) (Promulgated by the NPC on 15 March 2019, effective on 1January 2020). For a detailed discussion, see previous blog Cheng Bian, ‘China’s Foreign Investment Law and Its Implementing Regulations: Promises and Pitfalls’, 10 March 2020, https://www.qmul.ac.uk/euplant/blog/items/chinas-foreign-investment-law-and-its-implementing-regulations-promises-and-pitfalls.html#_ftn1

[ii] 国务院办公厅关于建立外国投资者并购境内企业安全审查制度的通知 (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) (Promulgated by the General Office of the State Council on 3 Febru­ary 2011, effective on promulgation). 商务部实施外国投资者并购境内企业安全审查制度的规定 (Provisions of the Ministry of Commerce on the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors) (Promulgated by the Ministry of Commerce on 25 August 2011, effective on 1 September 2011).

[iii] 外商投资安全审查办法 (Measures for the National Security Review of Foreign Investment) (Promulgated by the NDRC and MOFCOM on 19 December 2020, effective on 18 January 2021).

[iv] Ping Xu et al., ‘China Releases National Security Review Rules Version 2.0’, King and Wood, China Law Insight, 23 December 2020, https://www.chinalawinsight.com/2020/12/articles/corporate-ma/ma/china-releases-national-security-review-rules-version-2-0/.

[v] 外商投资产业指导目录 (Catalogue of Industries for Guiding Foreign Investment) (1995) (1997) (2002)

(2004) (2007) (2011) (2015) (2017) (All repealed).

[vi] 外商投资准入特别管理措施 (负面清单) (2020) (Special Administrative Measures for Market Access of Foreign Investment - Negative List for Foreign Investment 2020) (Promulgated by NDRC and MOFCOM on 23 June 2020, effective on 23 July 2020).

[vii] Vivienne Bath, ‘Foreign Investment, the National Interest and National Security: Foreign Direct Investment in Australia and China’, Sydney Law Review, Vol. 34, Issue 5 (2012), pp. 5-34.

[viii] 中华人民共和国国家安全法 (National Security Law of China) (Promulgated by the NPC on 1 July 2015, effective on promulgation).

[ix] 中华人民共和国种子法 (Seed Law of China) (Promulgated by the NPC on 4 November 2015, effective on 1 January 2016), Article 62.

[x] 中华人民共和国网络安全法 (Cybersecurity Law of China) (Promulgated by the NPC on 7 November 2016, effective on 1 June 2017), Article 35.

[xi] For an overview of these provincial legislation, see 国家安全部建审许可服务网 (Construction Projects Review and Approval Network of the Ministry of State Security), Local Legislations, http://www.jsxk.gov.cn/manage.html.

[xii] EU-China Comprehensive Agreement on Investment, 22-01-S2021, Section III, Article 6.1.