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China quietly tightened screening of foreign investments

Inkstone logo Inkstone 16/5/2019
a person wearing a military uniform © EPA-EFE/Roman Pilipey

China's powerful central planning agency quietly had its remit expanded last month to govern whether foreign investments in the country threaten national security.

Experts say that the new powers, together with a new article in China's foreign investment law, enable Beijing to make strong legal cases against American firms investing in the country amid an escalating US-China trade war.

China's National Development and Reform Commission is now charged with reviewing foreign investments to ensure they are in line with "economic security." The state planner's authority has been strengthened in the process.

This signals a big change in the national security review process for foreign investors, especially in sectors that China deems sensitive, analysts and lawyers said.

The commission's new responsibilities have drawn comparisons with the Committee for Foreign Investment in the United States (CFIUS), the inter-agency group that vets foreign investment.

The Chinese version, however, has a broader remit, analysts said.

The new national security review process offers a legitimate channel through which to bar foreign firms from investing in the country.

The commission's broadened authority is also derived from China's new foreign investment law, enacted in March, which allows authorities to treat foreign firms the same way Chinese firms are treated abroad.

"This article provides the legal basis for China to launch investigations and sanctions against companies based in the US, or possibly Europe, similar to the steps the Trump administration has taken [against] ZTE and Huawei," said Sherry Gong, a partner with law firm Hogan Lovells in Beijing.

The foreign investment law is ostensibly aimed at attracting overseas investors to China by promising better intellectual property rights protection and prohibiting forced technology transfers.

But details were lacking of the approval requirements and other processes, scholars said.

China's definition of "national security," meanwhile, is broader than the one used by CFIUS. It includes economic concerns such as the impact of an investment on domestic capacity, overall economic growth, social order, and domestic research and development capabilities, according to a report by US law firm Jones Day.

Representatives of foreign businesses in China have said they are concerned over the general vagueness and subjectivity of the foreign investment law.

The American Chamber of Commerce has expressed its apprehension over the broad scope of China's proposed national security review, included within the foreign investment law.

It contains a generic clause, noting there will be a review of any foreign investments that may have a bearing on China's national security, and decisions of the review process will be final.

The language suggests that Beijing will maintain broad authority to intervene in investments that "may affect national security" without laying out clear criteria or a clear appeals process, according to Austin Lowe, an Asia Group analyst based in Washington.

"If review authority is granted to the NDRC, which oversees economic planning, then it may suggest the reviews will be influenced by economic security considerations, as well," Lowe said, referring to the National Development and Reform Commission.

This view fits in with the rhetoric of Chinese President Xi Jinping, who has repeatedly stressed the importance of political, economic, territorial, social and cybersecurity along with giving the state a bigger role than the private sector in the economy.

While the commission's new, broader remit was a significant change, it had always been "part of the picture in the national security review regime," said Barbara Li, a partner with law firm Norton Rose Fulbright in Beijing.

Previously, it shared responsibility with the Ministry of Commerce, through a joint committee that examined all applications.

"This does not exactly mean [Beijing] will take a stricter approach. And it sounds unlikely that Mofcom will not be involved [at all] in the national security review [process] either," Li said.

This story originally appeared on Inkstone, a daily multimedia digest of China-focused news and features. Like what you see? Sign up for our newsletter, download our app, or follow us on Twitter and Facebook.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.

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