China's government is formalizing a process for reviewing foreign acquisitions of local companies for national-security concerns, though many questions remain over how and when Beijing will use its authority to block mergers.
In organizational plans published last week, the government said it will establish a 'joint ministerial meeting' system -- apparently a kind of committee -- for investigating security concerns arising from foreign companies' acquisitions in China.
'It looks like a national-security review mechanism similar to CFIUS in the U.S., where several ministries are involved,' said Michael Han, a lawyer for Freshfields Bruckhaus Deringer LLP in Beijing, referring to the Committee on Foreign Investment in the U.S., a 12-agency panel that vets foreign deals for security concerns. 'We still have not seen any rules on how the national-security review will operate,' he said, adding that he hopes the government will clarify its plans.
The group will be formed by the National Development and Reform Commission and the Ministry of Commerce as well as other, unspecified ministries, the documents said. Those two agencies led past ad hoc investigations of security issues in mergers, so the new system may not mean a change of approach.
The creation of the review process continues the reshaping of the Chinese legal landscape for mergers brought by the passage of new antitrust legislation. The Antimonopoly Law, which took effect this month, provides for a government review of any national-security concerns raised by foreign investors' acquisitions in China, a process that is separate from an antitrust probe. The Ministry of Commerce is in charge of reviewing mergers for their impact on competition, and will also be foreign companies' main point of contact for the joint security review.
How to determine what counts as a legitimate national-security concern that justifies scuttling a business deal is a difficult question in any country, and China doesn't have a clear track record. The vagueness of the provisions for the national-security review has caused worries that the process could be abused.
'Many fear that this separate review could be used to protect domestic competitors rather than to address only bona fide national-security issues,' according to an analysis of the Antimonopoly Law by the Jones Day law firm.
The Ministry of Commerce referred inquiries to the Development and Reform Commission, which didn't respond to repeated requests for comment.
Chinese critics of foreign investment have been quick to invoke what they call security concerns in past deals. For instance, Carlyle Group spent more than two years trying to acquire a Chinese construction-equipment maker, Xugong Group, but was dogged by loud domestic criticism, some of it from competing firms. The deal never received government approval, despite revisions, and was recently withdrawn.
Top government officials have repeatedly said that China's policy of welcoming foreign investment hasn't changed, though they do encourage investment in some industries and discourage it in others. China bans foreign investment outright in several industries that are considered sensitive, including weapons manufacturing, most forms of media and some kinds of mining.
China has long been one of the world's biggest recipients of foreign investment, and international companies continue to boost their presence in the country. Foreign direct investment in China, as of the end of July, was up 45% from the same period last year to $60.7 billion.
Chinese investment has also been a focus of security concerns in the U.S. CFIUS, the security-review panel, this year rejected the proposed acquisition of network-equipment maker 3Com Corp. by Bain Capital Partners LLC and China's Huawei Technologies Co.
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