China's National Security Review: Motivations and the Implications for Investors

By Hartge, Cathleen Hamel | Stanford Journal of International Law, Winter 2013 | Go to article overview

China's National Security Review: Motivations and the Implications for Investors


Hartge, Cathleen Hamel, Stanford Journal of International Law


Foreign direct investment in China has been a bright spot in the midst of a global recession. The economic powerhouse attracted a record $244 billion in foreign direct investment in 2010, up more than eighty percent from the previous year's total of $131 billion. Over the past decade, twenty percent of foreign direct investment to developing countries has gone to China. While these investment dollars generate significant economic benefits, they have also aroused concerns among Chinese leaders that they pose a potential threat to China's national security.

Responding to these concerns, on February 3, 2011, China announced a formal process for reviewing mergers and acquisitions (M&A) of domestic companies by foreign investors for national security implications. Theories abound among commentators as to China's motivations in announcing a new national security review mechanism. Some analysts have expressed concern that China will use the review process to make it increasingly difficult for foreign investors, especially those from countries that have traditionally restricted Chinese investment in their own economies, to carry out M&A transactions in China. But this Note demonstrates, though historical analysis and a comparison of the U.S. and Chinese systems, that China merely seeks to clarify its investment regulations and that investors will benefit from this development. Although the Chinese system is far from perfect, it will at least systematize what has been, until now, an ad-hoc review process.

INTRODUCTION

I. CHINA'S GRADUAL, INCREMENTAL DEVELOPMENT OF A NATIONAL
SECURITY REVIEW SYSTEM

   A. The National Security Review Has Existed for Years, and Its
   Evolution
Has Been Shaped by Genuine Economic Security Concerns

1. The Journey Towards a Formal National Security Review Begins:
From the 2003 Interim Provisions Through the 2008 Anti
Monopoly Law

2. China Takes the Final Step in 2011: From the State Council's
Circular Six Through MOFCOM's Clarifying Regulations

   B. China's Past Responses to Prior Investments Show that Its
   Government
Has Been Primarily Motivated by a Desire to Protect Its Economic and
Security Interests

   C. As an Extension of Existing National Security Review Law, the New
Rules and Regulations Will Bring Greater Predictability and
Transparency to the System

II. CHINA'S NATIONAL SECURITY REVIEW AND CFIUS: CUT FROM THE SAME
CLOTH

   A. A Brief Introduction to CFIUS

   B. Comparison Between CFIUS and China's New Mechanism

      1. Review Bodies

      2. National Security Review Process

      3. Sectors of Focus

      4. Transactions Subject to Review: Covered Transactions and
      Foreign
Control

      5. Criteria for Evaluation

      6. CFIUS in Practice--And What It May Tell Us About the Chinese
System

III. AMBIGUITIES OF CHINA'S NATIONAL SECURITY SYSTEM: IMPLICATIONS
FOR INVESTORS, AND RECOMMENDATIONS TO IMPROVE THE LAW

   A. Additional Delays for Investors

   B. Uncertainty Regarding Retroactivity

   C. Complex Relationship with Existing Investment Regulations and
Reviews

   D. Broad Definition of Industry Sectors and Transaction Types
   Triggering
Review

   E. Anti-Circumvention Principles
CONCLUSION

APPENDIX A: CHINA'S NATIONAL SECURITY REVIEW PROCESS

APPENDIX B: RESULTS OF CFIUS NOTIFICATIONS, 1988-2010

APPENDIX C: FLOWCHART ILLUSTRATING CFIUS REVIEW PROCESS

INTRODUCTION

Foreign direct investment in China has been a bright spot in the midst of a global recession. The economic powerhouse attracted a record $244 billion in foreign direct investment in 2010, up more than eighty percent from the previous year's total of $131 billion. (1) Over the past decade, twenty percent of foreign direct investment to developing countries has gone to China. (2) While these investment dollars generate significant economic benefits, they have also aroused concerns among Chinese leaders that they pose a potential threat to China's national security. …

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