China Defends National Security Rules for Foreign Investment

China’s new rules controlling foreign investment into areas related to national security aren’t protectionist and will provide clarity for companies looking to do business in China, according to the government.

The implementation of the review process “is not protectionist,” the National Development and Reform Commission said on its website Saturday in a Q&A explaining the new rules, and reviews will be “targeted,”it said. “Only by tightening controls to prevent and control security risks can we lay the foundations for a new round of opening up.”

The new regulations are linked to the gradual opening up to more foreign firms in recent years, with a revamped investment law and fewer restrictions on sectors in which overseas companies can invest. However, the conflict with the U.S. has made the situation more difficult, with China repeatedly threatening to retaliate against foreign companies.

“In some respects this is a formalization of what existed before,” said Lester Ross, a Beijing-based partner at the law firm WilmerHale, noting that a security review process for foreign investment was included in China’s 2015 National Security Law.

“One of the concerns is that national security is very broadly defined in this new announcement and the national security law,” Ross added. “Foreign companies should review their plans for investments going forward and recognize that this is an additional hurdle”.

Foreign investment involving production of military products, development of key agricultural, energy and natural resources as well as critical infrastructure and Internet technology will be subject to government review, the NDRC said. The new rules will allow government agencies to preview, deny and punish foreign investment activities in areas that are deemed as important to national security.

The new regulation was drawn up based on the country’s existing foreign investment and national security laws and jointly issued by the NDRC and the Ministry of Commerce. It will go into effect 30 days from Saturday, and more specific measures on foreign investment through stock exchanges will be issued in the future.

The security review process will be similar on those in place in countries such as the U.S. and the U.K., said Wang Huiyao, an adviser to China’s government and founder of the Center for China and Globalization. “Many countries have that and China is just following suit,” he said.

The Shanghai chapter of the European Union Chamber of Commerce said in a statement that it was concerned about the broad scope of the new rules.

“The measures narrow the scope of foreign investment and are inconsistent with China’s stated goals of further opening-up,” the chamber said.

©2020 Bloomberg L.P.

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