China Bolsters Foreign Direct Investment FDI Review Framework

The People’s Republic of China (PRC or China) established a foreign investment security review in 2011 that focused exclusively on the merger and acquisition of domestic companies by foreign investors in a notice issued by the State Council (the 2011 Notice)1. On December 19, 2020, the National Development and Reform Committee (NDRC) and the Ministry of Commerce (MOFCOM) jointly released the Measures on Foreign Investment Security Review (the Measures) that expand the scope of such reviews. The Measures have taken effect from January 18, 2021, and will be enforced by a “working mechanism” to be jointly established by NDRC and MOFCOM (the Working Mechanism).

Here, we take a closer look at the key sections of the Measures:

Foreign Investment Subject to National Security Review

The Measures cover almost all direct or indirect investment activities by foreign investors in China, including greenfield investments and joint ventures. The complete list of covered investments are:

  • Establishment of new projects and new entities by foreign investors

  • Acquisition of equity or assets of domestic companies by a foreign investor

  • Other forms of investment made by a foreign investor in China

The last point is exceptionally vague. Under the 2011 Notice and the relevant rules applicable in free trade zones, “other forms of investment” is interpreted to include structures such as control through agreements (or the so-called VIE structure), nominee shareholding, trust arrangement, offshore transaction, leasing and subscription of convertible bond.

Industries Subject to National Security Review

In addition to the forms of investment, the Measures significantly expand the list of industries in which foreign investment will be subject to national security review. These include “critical cultural products and services, critical information technology and internet products and services, and critical financial services”.

The Measures divide the industries subject to national security review into two categories: (i) military-related industries regardless of the element of…