Comprehensive guide to China's Dec. 19 foreign investment security review Rules
Background, EVERY Article and NOTES from your Pekingnologist
(Substack says this newsletter by the standard of Gmail is too long, so you may need to come to the web of Pekingnology to read it in full.)
On Saturday, Dec. 19, China’s National Development and Reform Commission (NDRC) and the Ministry of Commerce jointly issued 《外商投资安全审查办法》(CHN) Rules on Foreign Investment Security Review and a Q&A (CHN) introducing the background of the rules.
The Chinese mainland is an important foreign investment destination, and, according to a Bloomberg News report right before the Rules, Foreign Investment Pours Into China Despite Trade War, Pandemic in 2020.
Your Pekingnologist has yet to find an official English-language translation of the rules by Sunday noon. Also, the Rules include only 23 articles spanning 6 pages, so this is a comprehensive guide with EVERY article in original Chinese text, corresponding English-language translation (DeepL did the first draft, then manually reviewed), and NOTES from your Pekingnologist.
Please note the writer of this newsletter is neither a lawyer nor a professional on foreign investment, and he is writing here in a personal capacity, so this should in no way be regarded as official or authoritative.
Before getting to the articles, some background. Commentators on China Twitter have pointed out the Rules come at a delicate time - press reports in Europe before the weekend saying a formal conclusion of the China-EU investment agreement is now likely, with the greenlight by Brussels backed by Berlin and Paris, merely a month before the Biden administration’s inauguration.
In the Q&A by the NDRC and Ministry of Commerce, Article 35 of China’s 外商投资法 (CHN) Foreign Investment Law (ENG)- passed and published in mid-March 2019- is quoted, which says
The State establishes a security review system for foreign investment, to conduct security review of foreign investment that affects or may affect national security.
The security review decision is final.
So basically Beijing says this is NOT an ambush. Also,
China has established a security review system for foreign investors to acquire domestic enterprises since 2011.
Beijing says this is not something new - a security review for foreign investment has long been in existence, and it is merely now formularizing the rules now, which makes the whole thing more transparent.
The Q&A also cites (all these links are mine, not in the Q&A)
The United States has published Foreign Investment Risk Review Modernization Act, the European Union has published the foreign investment screening mechanism, Australia has published The Foreign Investment Reform (Protecting Australia’s National Security) Act 2020 , Germany is amending its Foreign Trade and Payments Act, Japan is amending its Foreign Exchange and Foreign Trade Act, and the UK is formulating National Security and Investment Bill 2019-21
as what Beijing does is in line with international norms.
The Q&A also twice emphasized to conduct the security review
As simple as possible to avoid excessive increase in the burden on enterprises. In accordance with the principles of necessary and reasonable, (we) set the review process and time frame. At the same time, the security review is carried out in three stages, according to the risk of the declared investment, resulting in a hierarchical and progressive setup of the security review - fewer and even fewer investments are required into the second and third stage; the opinions and decision of the review will be provided to investors in a timely fashion.
In the implementation of the Rules, we will adhere to the (principle of) seeking development and maintaining security within (the aim of) ensuring openness, (we will) conduct securitys reviews……with precision, to avoid the generalization of security review.
The key in Pekingnology is to understand the 精神 spirit of official meetings, speeches, actions, etc. And based on these paragraphs, the self-professed 精神 spirit is NOT to generalize (translate: abuse/misuse) the security review.
The Q&A adds
Q: How to implement (the national principle of) staying open and secure at the same time?
A: Over the past 40 years of reform and opening up, foreign-invested enterprises have been deeply integrated into China's economy, making a positive contribution to economic and social prosperity and stability. Looking ahead, China's open door will only be opened wider and wider, the direction of China's expansion of openness will not change, the determination to continue to optimize the business environment will not change, and the attitude of actively promoting foreign investment will not change.
The introduction of the Rules and the implementation is not engaging in protectionism, let alone retreating from openness
But your Pekingnologist’s guess is most of the readers of this newsletter won’t easily take the word - or mine here - for it. Below are the 23 Articles in Chinese, English, and my NOTES.
第一条 为了适应推动形成全面开放新格局的需要，在积极促进外商投资的同时有效预防和化解国家安全风险，根据《中华人民 共和国外商投资法》《中华人民共和国国家安全法》和相关法律， 制定本办法。
Article I In order to meet the need to promote the formation of a new pattern of comprehensive opening, in the active promotion of foreign investment while effectively preventing and resolving national security risks, according to the Foreign Investment Law of the People's Republic of China (CHN) (ENG)and the National Security Law of the People's Republic of China (CHN) (ENG) and related laws, (we) draft this Rules.
NOTE: The 《中华人民共和国国家安全法》National Security Law cited here is NOT the recent one on HK.
第二条 对影响或者可能影响国家安全的外商投资，依照本办法的规定进行安全审查。本办法所称外商投资，是指外国投资者直接或者间接在中华人 民共和国境内(以下简称境内)进行的投资活动，包括下列情形:
Article II For foreign investment that affects or may affect national security, security review is conducted in accordance with the provisions of the Rules.
Foreign investment referred to in the Rules are foreign investors’ investment activities, directly or indirectly, in the territory of the People's Republic of China, including the following circumstances:
(1) foreign investors, alone or jointly with other investors, invest to establish new projects or enterprises in the territory;
(2) foreign investors, through mergers and acquisitions, acquire equity or assets belonging to enterprises in the territory;
(3) foreign investors invest in the territory through other means
NOTES: basically every method of investment is covered, especially given (3)
第三条 国家建立外商投资安全审查工作机制(以下简称工作机制)，负责组织、协调、指导外商投资安全审查工作。 工作机制办公室设在国家发展改革委，由国家发展改革委、商务部牵头，承担外商投资安全审查的日常工作。
Article III The State establishes a working mechanism for foreign investment security review, responsible for organizing, coordinating, and guiding the work of foreign investment security review. The Office of the working mechanism is located in the NDRC, led by the NDRC and the Ministry of Commerce, to undertake the day-to-day work of foreign investment security review.
1) One key rule in doing business is to locate who is responsible and more importantly which exact 办公室 office is specifically responsible.
In the security review, NDRC and the Ministry of Commerce are your Daddies. The NDRC is your Big Daddy, since the Office of the working mechanism is located there.
2) Note the highlighted word associated with the working mechanism: 牵头 led. The word here is NOT 组成 composed of, it’s 牵头 led. Plus, there is no description of which (other) govt departments compose the full working mechanism.
Use some common sense - speculation, I mean - and it’s possible the full working mechanism involves other government departments, but the day-to-day work is led by the Daddies. For example, if your investment concerns agriculture and is found by the Office to affect or may affect national security, maybe the Office will decide to involve the Ministry of Agriculture.
Article IV Of the following scope of foreign investment, foreign investors or domestic related parties (hereinafter collectively referred to as the Parties) shall take the initiative to declare to the Office of the working mechanism before the implementation of the investment:
(1) investment in military industry, support in military industry, and other areas related to national defense security as well as in the surrounding areas of military facilities and military industrial facilities.
(2) investment in important agricultural products, important energy and resources, major equipment manufacturing, important infrastructure, important transportation services, important cultural products and services, important information technology and Internet products and services, important financial services, key technologies and other important areas that concern national security, AND obtain the actual control of the invested enterprises.
The actual control of the invested enterprises, in the second item (2) of the preceding paragraph, includes the following cases:
(1) the foreign investors hold more than 50% of the enterprise's equity;
(2) the foreign investor holds less than 50% of the enterprise's equity, but the voting rights it enjoys can have a significant impact on the board of directors, shareholders' meeting or shareholders' meeting resolutions;
(3) other scenarios where foreign investors can have a significant impact on the business decisions, personnel, finance, technology
For foreign investment OUTSIDE the scope of the first paragraph of Article 4 (hereinafter referred to as the scope of declaration), the working mechanism office has the power to require the Parties to declare.
1) First of all, check if your investment is military-related. Foreign investment into Chinese military industries may be rare, but the first keyword is 军工配套 (maybe not accurately) translated above as support in military industry. There is no definition of 配套 support here. So, check if your investment target produces things that are used in military equipment. Remember, even if your investment doesn’t take actual control, you still have to declare if it’s military-related.
Also, check the location of your investment. Is it near any military or military industry facilities? The word is 周边地域 surrounding areas, but there is no mentioning of an exact distance.
2) Check the industries of your investment if it’s taking actual control as defined in the Article. Even 重要文化产品与服务 cultural products and services are mentioned. And there is the word 关键技术 key technology, where there is no mentioning of its definition.
3) If your investment doesn’t take actual control, even if it’s in one of all the IMPORTANT areas, the default action is no declaration. But 工作机制办公室有权要求当事人申报 the Office of the working mechanism has the power to require the Parties to declare.
4) It’s very notable that there are NO numbers here. It does NOT establish a numerical threshold, say, 30 million US dollars or 100 million US dollars. One interesting and highly speculative scenario would be: if there are simply too many declarations in the future, would some numerical threshold be established in practice?
Article 5 Before the parties declare foreign investment to the Office of the working mechanism, they may consult with the working mechanism office on relevant issues.
NOTE: This is very helpful for you. Got a question? Ask your Big Daddy.
Article 6 The Parties in declaring foreign investment to the Office of the working mechanism shall submit the following materials:
(1) book of declaration;
(2) the investment plan;
(3) the statement on whether foreign investment affects national security;
(4) other materials specified by the Office of the working mechanism.
The Book of Declaration should include the name of the foreign investor, its residence, the scope of the business, the basic facts of the investment and other matters specified by the Office to receive and transmit the materials specified in the first paragraph of this article.
1) 工作机制办公室规定的其他事项 other matters specified by the Office needs to be in 申报书 Book of declaration, so you’d better ask the Office beforehand.
2) It’s possible you don’t deliver your declaration directly to the Office, but through provincial-level government departments, so you gotta ask the Office which exact provincial department that would be; and it would be prudent to ask the specific provincial department what they prefer.
第七条 工作机制办公室应当自收到当事人提交或者省、自治 区、直辖市人民政府有关部门转送的符合本办法第六条规定的材料之日起15个工作日内，对申报的外商投资作出是否需要进行安全审查的决定，并书面通知当事人。工作机制办公室作出决定前，当事人不得实施投资。 工作机制办公室作出不需要进行安全审查决定的，当事人可以实施投资。
Article VII The Office of the working mechanism shall, within 15 working days from the date of receipt of the materials from the Parties or from the relevant departments of the people's governments of provinces, autonomous regions and municipalities in forwarding the materials, make a decision if the declared foreign investment requires a security review, and notify the Parties in writing. The Parties shall not implement the investment before a decision. The Parties can implement the investment if the Office decides a security review is not required.
NOTE: Pretty straightforward language. 15 working days and the best-case scenario is you don’t need a security review.
Article VIII The foreign investment security review is divided into the general review and the special review. If the Office of the working mechanism decided to conduct a security review, it should complete the general review within 30 working days from the date of the decision of the general review. During this review period, the Parties shall not implement the investment.
After the general review, if the declared foreign investment is found NOT to affect national security, the working mechanism Office shall make a decision that it passed the security review. If the foreign investment is found to affect or may affect national security, the Office of the working mechanism shall make a decision to initiate a special review. Any decision made by the Office of the working mechanism shall be notified in writing to the Parties.
NOTES: Also straightford language. Unfamiliar with the national security review mechanism in other countries, but 30 working days for a general review doesn’t seem very lengthy?
(二)申报的外商投资影响国家安全的，作出禁止投资的决定; 通过附加条件能够消除对国家安全的影响，且当事人书面承诺接受 附加条件的，可以作出附条件通过安全审查的决定，并在决定中列明附加条件。
特别审查应当自启动之日起 60 个工作日内完成;特殊情况下，可以延长审查期限。延长审查期限应当书面通知当事人。审查期间， 当事人不得实施投资。
Article IX When the Office of the working mechanism decides to start a special review of the declared foreign investment, the special review shall be conducted in accordance with the following provisions, and notify the Parties in writing:
(1) the declared foreign investment is found not to affect national security, and a decision in it passing the security review;
(2) the declared foreign investment is found to affect national security, and a decision to prohibit investment; (or) a conditional pass with conditions, if those conditions can eliminate the effects on national security AND the Parties undertake in writing to accept the conditions;
The special review should be completed within 60 working days from the date of its initiation; under special circumstances, the special review period can be extended. Extension of the special review period should be notified in writing to the Parties. During the special review period, the Parties shall not implement the investment.
1) Even if your investment gets into the special review, theoretically you can still pass it without conditions;
2) Otherwise, there is the conditional pass or the rejection. The 60 working days do not seem very long, but the catch is it can be extended and the Rules doesn’t cap the length of the extension in black and white here.
第十条 工作机制办公室对申报的外商投资进行安全审查期间，可以要求当事人补充提供相关材料，并向当事人询问有关情况。 当事人应当予以配合。当事人补充提供材料的时间不计入审查期限。
Article X Within the security review period, the Office of the working mechanism can ask the parties to provide additional relevant materials and interview the Parties. The Parties shall cooperate. The time the Parties spend in providing additional relevant materials does not count in the review period.
NOTE: Do your homework well before the review even starts: prepare additional documents in hand as well as for an interview, as you may be required to cost your own time here.
Article XI During the security review of the Office of the working mechanism of the declared foreign investment, the Parties can modify the investment program or cancel the investment.
If the Parties modify the investment program, the review period restarts from the date of receipt of the revised investment plan; if the Parties cancel the investment, the Office terminates the review.
NOTE: Prepare a Plan B beforehand?
Article XII When The Office of the working mechanism declares a pass in the security review, the Parties can implement the investment. If the decision is to prohibit the investment, the Parties shall not implement the investment; if the investment has been implemented, there shall be divestment of equity or assets, or other necessary measures, to revert to the state as in prior to the investment, to eliminate the effect on national security. If it’s a conditional pass, the Parties shall implement the investment in accordance with the conditions.
NOTE: Don’t do it before the decision, because the consequences won’t be a (hefty) fine - the Chinese government will ask you to walk back to where everything was before the investment.
Article XIII The implementation of the security review decision will be supervised by the Office in conjunction with the relevant departments and regional people's governments; the implementation of a conditional pass can be verified by requiring the submission of relevant materials in writing, on-site inspection, etc., to ensure the conditions are implemented.
NOTE: speaks for itself.
第十四条 工作机制办公室对申报的外商投资作出不需要进 行安全审查或者通过安全审查的决定后，当事人变更投资方案，影响或者可能影响国家安全的，应当依照本办法的规定重新向工作机制办公室申报。
Article XIV After the Office makes a decision of not requiring a security review or a pass in the security review, when the Parties change the investment program which may affect or may affect national security, they shall, in accordance with the provisions of the Rules, re-declare to the Office.
NOTE: speaks for itself.
Article XV Relevant (Party/State?) Organs, enterprises, social groups, the public and others can submit recommendations to the Office to initiate a security review if they believe the foreign investment affects or may affect national security.
NOTE: This brief Article is a wild card. Too many outside parties can submit their recommendations. And it does not say if or how the Office will receive the recommendations, weigh them, and decide on them. So you should want to make friends with everyone. A piece of advice: do a lot of good public relations work beforehand, try to avoid negative press reports which is usually the most plausible lead to the “recommendations” you don’t want to see.
And theoretically, this can be used as a weapon by market competitors that don’t want to see foreign investment coming: make or incentivize others to make the “recommendations.”
第十六条 对申报范围内的外商投资，当事人未依照本办法的规定申报即实施投资的，由工作机制办公室责令限期申报;拒不申 报的，责令限期处分股权或者资产以及采取其他必要措施，恢复到投资实施前的状态，消除对国家安全的影响。
Article XVI For foreign investment within the scope of declaration, if the Parties do not declare in accordance with the provisions of these Rules, the Office of the working mechanism shall order a deadline for declaration; if the Parties refuse to declare upon order, there shall be divestment of equity or assets, or other necessary measures, to revert to the situation as in prior to the investment, to eliminate the effects on national security.
第十七条 当事人向工作机制办公室提供虚假材料或者隐瞒有关信息的，由工作机制办公室责令改正;提供虚假材料或者隐瞒 有关信息骗取通过安全审查的，撤销相关决定;已经实施投资的， 责令限期处分股权或者资产以及采取其他必要措施，恢复到投资实施前的状态，消除对国家安全的影响。
Article 17 If the Parties provide false information or conceals relevant information from the Office of the working mechanism, the Office shall order correction; if false information is provided or (real) information is concealed to pass the security review, the relevant decision shall be revoked; if the investment has been implemented, the Parties shall be ordered to divest equity or assets, or other necessary measures, to revert to the situation as in prior to the investment, to eliminate the effects on national security.
第十八条 附条件通过安全审查的外商投资，当事人未按照附 加条件实施投资的，由工作机制办公室责令改正;拒不改正的，责 令限期处分股权或者资产以及采取其他必要措施，恢复到投资实施 前的状态，消除对国家安全的影响。
Article 18 For a conditional pass, if the Parties do not implement the investment in accordance with the conditions attached, the Office of the working mechanism shall order a correction; failing to correct will lead to an order to divest equity or assets and taking other necessary measures to revert to the situation as in prior to the investment, to eliminate the effects on national security.
NOTE: For foul play, it doesn’t mention a (hefty) fine - just go back to where everything was before the investment.
第十九条 当事人有本办法第十六条、第十七条、第十八条规 定情形的，应当将其作为不良信用记录纳入国家有关信用信息系统，并按照国家有关规定实施联合惩戒。
Article 19 If the Parties’ conduct triggers the scenarios specified in Article 16, Article 17 or Article 18, their conduct shall be included as a bad credit record entry into the relevant national credit information system, and be jointly disciplined in accordance with relevant regulations.
NOTE: Here is the big consequence for foul play - notice the last words 联合惩戒 jointly disciplined, part of China’s social credit system. Now, much ink has been spilled on China’s social credit system but you’re welcome to check the latest changes to it in our Nov. 27 newsletter.
In a most recent move, the General Office of the State Council 国务院办公厅 has formularized those changes and put them in a new document on the social credit system (CHN) published on Dec. 18.
Article 20 The staff of state organs in the work of foreign investment security review will be disciplined if found to engage in abuse of power, dereliction of duty, corruption, disclosure of state secrets or commercial secrets known to them; They shall be held criminally responsible it their conduct constitutes a crime.
Article 21 For investment from investors in Hong Kong Special Administrative Region, Macao Special Administrative Region and the Taiwan region, if it affect or may affect national security, the review shall be implemented with reference to the Rules.
NOTE: no exception here. Again, the Rules of the security review here should not be mixed with the recent national security law in HKSAR - they are not the same thing.
Article 22 For foreign investors’ purchasing of domestic companies’ shares through the stock exchanges, or other securities trading venues approved by the State Council that affects or may affect national security, the specific measures for the application of the Rules shall be drafted by the State Council securities regulatory authorities in conjunction with the Office of the working mechanism.
1) Your Pekingnologist isn’t able to tell from the language here if the stock exchanges include only Chinese mainland ones (Shanghai and Shenzhen), or they include HK, NYC, London, etc. Because there the article didn’t prefix it with a “domestic” or “Chinese mainland” here.
2) However, the Rules is applicable to the share purchasing via stock exchange - just that there will be specific measures drafted by 中国证监会 China Securities Regulatory Commission (which is the State Council securities regulatory authorities in the article) together with the Office of the working mechanism. Details in those specific measures will be important.
Article 23 This Rules shall come into force thirty days after the date of publication.
NOTE: It’s published on Saturday, Dec. 19, 2020.
Forgot to highlight earlier: the decision of the security review, according to Article 35 of the Foreign Investment Law (CHN)(ENG) cited above, is NOT up to any judicial review - this is it.
Your Pekingnologist generally believes the best news out of this Rules is its stated spirit 精神 and the timeframe it sets - the 15, 30, and 60 working days sound impressively fast - except when your investment falls in the unspecified extended period. But do beware of third-parties make “recommendations” to mess with you.
Again, this whole writing is neither official nor authoritative. You’ll have to judge its quality by yourself.
Penned by Zichen Wang, founder of the newsletter Pekingnology. You’re welcome to get in touch.