Foreign investment: China’s Security Review Measures - PwC China Compass

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.

The SRM will have a major and far-reaching impact on foreign investment

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.

Key articles

There are 23 articles in the SRM. Key articles include:

Foreign investment types subject to security review
Article 2 of the SRM describes the investment activities carried out by foreign investors directly or indirectly within the territory of China that are subject to security review. 

Sectors subject to security review
Not all foreign investments may be required to pass a security review. Article 4 of the SRM gives an overview of the sectors for which a review is needed when a foreign investment is made. 

Security review authority
A working mechanism for the foreign investment security review is to be established in accordance with the SRM, and a Working Mechanism Office is to be set up under the supervision of the NDRC.

The new measures could result in severe legal consequences

Review declaration mechanism
Under the SRM, the security review procedure may be triggered by:

• Voluntary reporting prior to the commencement of investment for any investment subject to a security review
• The Working Mechanism Office issuing a demand for reporting within a set time period
• Suggestions for a security review made to the Working Mechanism Office by relevant government agencies, enterprises, social groups or the general public 

Security review procedures
The procedure, timetable and documents to be submitted for a review are set forth in the SRM. 

Violation liability
Any violation of the relevant SRM requirements may result in severe legal consequences for foreign investors and the projects they are investing in.