China tightens controls on foreign investment - PwC China Compass
17 June, 2021
China released its Foreign Investments Security Review Measures (SRM) on December 19, 2020, in order to prevent and defuse national security risks while actively promoting foreign investment. The measures came into effect on January 18, 2021, and will have material impacts on international investors and their activities in China. This article provides a summary of the main provisions set forth in the SRM.
Foreign investment subject to security review
According to the SRM, investment activities carried out by foreign investors directly or indirectly within the territory of China are subject to a security review. This includes
- when foreign investors participate, solely or jointly with other investors, in new projects or when they establish an enterprise in China;
- when foreign investors acquire equity or assets owned by domestic enterprises through M&A transactions; or
- when foreign investors make investments in China in any other form.
Catch-all provision could impact VIE structures
It is worth noting that the third scenario serves as a catch-all provision, which may mean that certain organizational arrangements, such as variable interest equity (VIE) structures or control agreements, might also be covered by the SRM.
Industries subject to security review
Although the new measures are wide-ranging, not all foreign investments are subject to a security review. As set forth in the SRM, the security review applies to
- investments in the arms industry, an ancillary to the arms industry or any other field related to national defense, and investments in areas surrounding military installations or arms industry facilities; and
- investments in important fields relating to national security, such as key agricultural products, energy and resources, equipment manufacturing, infrastructure, transport services, cultural products and services, IT and internet products and services, financial services and key technologies, and when investors acquire an actual controlling stake in the investee enterprise.
Under the first scenario, a security review will be triggered regardless of the number of shares or equity interests obtained by foreign investors. Under the second scenario, however, a security review is necessary only when two conditions are met, i.e. foreign investment occurs in one of the designated industries, and the foreign investor actually acquires a controlling stake in the investee enterprise.
Liability
Several responses are possible in the case of violations, such as failure to report upon demand, provision of false information or failure to meet the necessary conditions. In such instances, the competent authority can demand disposal of the equity or assets in question within a specified time period and restoration of the equity or assets to their original status prior to the investment, thereby eliminating the impact on national security. It can also insert a negative credit record in the relevant credit information system maintained by the state and subject the offending parties to joint punishment in accordance with statutory provisions.
Additional provisions
Moreover, the SRM sets forth other important provisions affecting the participants and factors involved in foreign investment, such as the competent authority, the declaration mechanism and the security review procedures and timeline.
Recommendations
Given that the SRM applies across key sectors, it will have a major influence on foreign investment in China. As such, we recommend that foreign investors take the following steps:
- Assess if an investment or transaction is subject to security review prior to commencement, and, if so, ensure that preparation for the review is adequate.
- Consider consulting with the competent authority in advance, depending on the specifics of the project in question.
- Take a holistic view when planning and processing security reviews and other approval procedures, such as merger controls, SASAC approval, NDRC ratification, etc., to ensure the entire process proceeds efficiently and effectively.
- Have a contingency plan in place in case a security review fails or is approved subject to conditions, as the authorities’ decision is final.
Related content
Contact us
Partner, Leiter China Business Group Deutschland und Europa, PwC Germany
Tel: +49 175 9365782
Follow us
