China has moved to strengthen its review of foreign direct investments in 2020

9 min read

The PRC Foreign Investment Law (FIL) and its implementation regulations, which establishes the new foreign investment regulatory framework in China, came into effect on January 1, 2020. In addition to escalating the national security review (NSR) system from a set of circulars issued by the State Council and the Ministry of Commerce (MOFCOM) to national law level, the FIL also expands the scope of NSR to capture transactions between two foreign parties as long as there is a Chinese company or Chinese interests involved (a "transaction with China Interests").

In September 2020, MOFCOM promulgated the provisions on the Unreliable Entity List (UEL), pursuant to which foreign individuals and entities listed on the UEL may be restricted or prohibited from investing in China.

The new law is in addition to the existing scope of the NSR, which covers any foreign acquisition of a domestic enterprise. The detailed implementation rules of the NSR standards and the process for transactions with China interests have yet to be released.

In September 2020, MOFCOM also promulgated the provisions on the Unreliable Entity List (UEL), pursuant to which foreign individuals and entities who are on the UEL may be restricted or prohibited from investing in China. The detailed implementation rules and the proposed list of the unreliable entities have yet to be released.

China has also promulgated the Measures for Cyber Security Review to strengthen its national security regulatory regime in 2020, but various rules under the cybersecurity regulatory regime are subject to further clarification from the relevant authorities.



In 2011, a ministerial review panel (MRP) was established by MOFCOM and the National Development and Reform Commission (NDRC) pursuant to a set of rules issued by the State Council in the same year (the "2011 Rules"), and is responsible for conducting national security reviews of foreign investments in Chinese domestic enterprises.

China is expected to issue implementing guidelines and more detailed implementation regulations to govern national security review for foreign investments, but has yet to issue any so far. On July 1, 2015, China also promulgated the PRC National Security Law (the NSL), which is China's most comprehensive national security legislation to date. However, the NSL's provisions do not detail how the security review processes and measures will be implemented by the relevant agencies and local authorities.



Under the 2011 Rules, the MRP has the ability to review any foreign investment transaction following a voluntary filing by the parties to the transaction, a referral from other governmental agencies or a report from third parties. A foreign investor must apply for national security review of the transaction if the investor acquires equity in or the assets of a domestic enterprise in China in certain sectors.

The 2011 Rules and relevant laws do not explicitly exclude transactions with China interests from the scope of national security review, but in practice and under the rules relevant to such application filings, such transactions are generally considered not to be subject to the national security review requirements.

The 2020 FIL reiterated that China will establish a security review system for foreign investment under which security review may be conducted for any foreign investment that affects or may affect national security. More importantly, the FIL provides that NSR review shall apply to all "foreign investment" that "affects or may affect national security," and as the definition of "foreign investment" includes transactions with China interests, the FIL essentially expands the scope of NSR.

Although detailed implementation rules of the NSR standards and process for such transactions with China interests have yet to be released, the NDRC has already started monitoring transactions with China interests from an NSR perspective. In practice, MOFCOM would notify NDRC during the antitrust filing process of any transactions (including for transactions with China interests) with potential national security concerns, and NDRC will request the relevant parties to provide relevant information and initiate the NSR process if it confirms there is a national security concern.



MOFCOM has circulated an unofficial list of industries for which a national security review for a foreign investment transaction is likely to be triggered. These industries are mainly military or military-related products or services, national defense-related products or services, agricultural products, energy, resources, infrastructure, significant transportation services, key technology and heavy equipment manufacturing. However, since the list is unofficial, it may have only reference value to the determination of whether filing is required.

The scope of review focuses on the overall risk profile and impact that M&A transactions may have on China's national security, defense, economy and the public interest.

Foreign investments in free trade zones are subject to broader national security review rules. In addition to the industries listed under the 2011 Rules, foreign investments in the industries related to culture and information technology products and services are within the scope of national security review.

The national security review rules for free trade zones have expanded the review scope of foreign investments to include greenfield investments and investments through offshore and other contractual agreements that affect or may affect national security.



In practice, the timeline and details of the national security review process in China are not clear as information related to each individual application is not publicly available. Based on the 2011 Rules, the timeline is as follows:

  • MOFCOM will submit an application to the MRP for review within five (5) working days if the application falls within the scope of review
  • MRP will solicit written opinions from relevant departments to assess the security impact of the transaction. It could take up to 30 working days to complete the general review process
  • MRP will conduct a special review of the application if any written opinion states that the transaction may have security implications and will conduct a more detailed security assessment of the overall impact of the transaction. A final decision from the review panel will be issued within 60 working days of the start of the special review



Generally, the possible outcomes of a national security review are as follows:

  • The investment may be approved by MOFCOM, including with mitigation conditions
  • The MRP will terminate a foreign investment project if it fails the national security review
  • If the Chinese government has national security concerns about a transaction that is not submitted for approval, parties could be subject to sanctions or mitigation measures, including a requirement to divest the acquired Chinese assets
  • A foreign investor may withdraw its application for national security review only with the MRP's prior consent
  • Decisions resulting from a national security review may not be administratively reconsidered or litigated



In September 2020, MOFCOM promulgated the provisions on the Unreliable Entity List (UEL), pursuant to which foreign individuals and entities listed on the UEL may be restricted or prohibited from investing in China. The provisions state that the working group (工作机制), which is responsible for formulating the UEL, would consider various factors, such as the potential harm to state sovereignty, national security, national interests and Chinese entities/individuals, in determining whether to include a foreign entity/individual into the UEL.

Implementation of the provisions on the Unreliable Entity List falls primarily under the directive of MOFCOM, and MOFCOM could also involve other relevant departments to form the "working group" that gives MOFCOM broad discretion in deciding whether to place a foreign entity on the UEL.

MOFCOM has not yet released the UEL as of the date of this article. The consequence of being on the list is that foreign entities or individuals may face one or more of the following:

  • Restriction or total ban on trading and investing in China
  • Restriction or revocation of work permits or residence authorization
  • Imposition of monetary fines according to the severity of the circumstances
  • Other penalties or measures at the discretion of the working mechanism

Given the tough consequences, foreign investors should be mindful of the new developments relating to the provisions on the UEL.



In addition to the existing rules on trans-border data transmission control, the Cyberspace Administration of China (CAC) and other 11 ministerial-level regulatory authorities have jointly finalized and promulgated the Measures for Cyber Security Review (Measures for CSR), which came into force on June 1, 2020.

The Measures for CSR replace the Measures for the Security Review of Network Products and Services and provide detailed provisions regarding the security review standards for purchasing network products or services by critical information infrastructure operators that may affect national security.

The measures focus on evaluating whether the purchase of certain products or services will cause national security risks by considering certain factors, such as whether the network product or services will damage or divulge the data of critical information infrastructures, whether the disruption of supply of network products or services will harm the continuity of critical information infrastructures and the safety, openness, transparency and reliability of the network products or services. The measures also provide details of the materials and information to be submitted for cybersecurity review and the timeline of cybersecurity review.



The promulgation of the FIL and UEL indicates that China is making a strong effort to implement a more structured and comprehensive system to keep a closer eye on transactions that might have national security implications. However, it is unclear what direction China's national security review will take, as implementation measures have not been released.

Foreign investors should continue to be mindful of the NSL, FIL and UEL, and pay special attention to transactions that might fall within the industries that are more likely to trigger national security concerns for MOFCOM. Non-Chinese buyers should also be cautious when completing transactions before obtaining national security approval, as they might be forced to divest the acquired assets if the transaction ultimately fails the security approval process.

Due to enforcement uncertainties and the broad scope of captured industries, foreign investors interested in sensitive industries often schedule voluntary meetings with MOFCOM officials to determine the national security review risk before commencing the formal application process.



This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2020 White & Case LLP