Foreign investment: China’s Security Review Measures take effect

from Felix Sutter, President of the Swiss Chinese Chamber of Commerce (SCCC)

The Chinese government’s Security Review Measures (SRM) demonstrate that it will continue its “two-handed approach” – promoting foreign investment while addressing security issues – in order to take the country’s opening to the next level. With that, it is following in the footsteps of numerous nations that have recently adopted similar mechanisms.

In the past years, major countries and regions throughout the world have introduced or strengthened their security review systems for foreign investment. Examples include the Foreign Investment Risk Review Modernization Act in the US, the Framework Regulations on Foreign Direct Investment in the EU, and the recent draft National Security and Investment Bill in the UK.

Reviews to defuse national security risks

The National Development and Reform Commission (NDRC) and the Ministry of Commerce jointly released the SRM for Foreign Investment on December 19, 2020, with the aim to effectively prevent and defuse national security risks while actively promoting foreign investment. The measures are based on the Foreign Investment Law of the People’s Republic of China and require foreign investors to pass relevant reviews relating to national security issues when investing in specific areas. The SRM came into force on January 18, 2021 and will result in a range of significant changes.

Given that the SRM will be applicable across numerous key sectors, the measures’ adoption and implementation will have a major and far-reaching impact on foreign investment in China. As such, it is recommended that

• foreign investors thoroughly assess whether an investment project or transaction is subject to security review before commencing it, and be well prepared by drafting the relevant documents and taking into account the timeframes involved;
• given the existence of catch-all provisions relating to foreign investment types and the sectors subject to review, foreign investors may consider consulting in advance with the Working Mechanism Office (as provided for in the SRM; see below), depending on the specifics of the project or investment in question;
• as Chinese governmental authorities aim to introduce and provide one-stop services to businesses to improve efficiency, investors should take a holistic view in planning and processing security reviews and other approvals – such as merger control, SASAC approval, NDRC ratification, etc. – to move the respective projects forward efficiently;
• since the security review decisions are final, investors need to develop a contingency plan in case a review fails or is passed subject to conditions, and investors would be well advised to manage and reduce legal and business risks by using contractual terms or by adopting other remedial measures;
• more generally, investors should be aware of newly adopted rules and regulations, cautiously consider the investment plan and site selection for entities and, if necessary, analyze the legal and tax implications of any structures and arrangements requiring adjustment.