China has implemented a sweeping New Law authorizing National Security Reviews of Foreign Investments, just as overseas money pouring into the country is set to reach record highs.

The new regulations on Monday also come as Beijing has seen recent Chinese investments overseas come under increased scrutiny.

The Measures for the Security Review of Foreign Investment, drawn up by the National Development and Reform Commission (NDRC) and the Ministry of Commerce, bring together China’s previous trade rules while widening the scope of what overseas transactions should be reviewed.

According to the law, essentially any field is now subject to review, with particular emphasis on military-related areas and acquisitions that give foreign companies control over Chinese firms.

“Without introducing radical changes to the previous regulatory guidance, the measures expand the list of industries’ foreign investments that will be subject to security review,” said a report by international law firm Paul, Weiss, Rifkind, Wharton & Garrison.

“Helpfully, the measures set out a clear declaration and clearance process, including statutory timetables within which applications are to be processed. However, whether the actual processing time will adhere to the statutory timetables will need to be tested in practice,” the report said.

The law bears notable similarities to the Committee on Foreign Investment in the U.S., or CFIUS, according to a note by law firm Denton’s. Applicants may be foreign investors or domestic partners, and the stages of 15 working days to determine if a review is necessary and 30 days for an initial decision are not far off from CFIUS’s 45-day decision period.

Nevertheless, it is more rigorous and broad than CFIUS, Denton’s said, in that it applies not only to mergers and acquisitions and other types of investment such as securities, trusts, and convertible debts. The text states that acquisition of publicly listed shares in Chinese companies will be subject to security review if such actions could impact national security.

Implementation of the new rules comes amid both political and financial pressures between China and some of its biggest trading partners.

The Trump administration’s trade war with China was just one, albeit the largest of Beijing’s recent such disputes. It continues to spar with Australia over a range of issues, and has imposed tariffs on some of Australia’s most lucrative exports. Meanwhile, China’s sprawling Belt & Road Initiative has been plagued by indebted borrowing partners and moves by the U.S. and other countries to counter the infrastructure-driven pact.

China has repeatedly insisted that its new rules simply bring it in line with review practices in developed countries. In written responses to media questions last month, the NDRC noted that, “In recent years, major countries in the world have successively introduced or honed their own foreign investment security review systems” specifically singling out the U.S., Australia, Germany, and Japan.

“The new Chinese National Security Review Law is looking for middle ground between retaliating against U.S. restrictions on investments from China, and attracting valuable U.S. investments into China,” Peter A. Petri, the Carl Shapiro Professor of International Finance in the Brandeis International Business School, told Barron’s Tuesday.

“Under the 2018 Foreign Investment Risk Review Modernization Act, the Trump administration sharply increased the scope and severity of U.S. reviews, causing Chinese investments into the United States to fall from $23 billion in 2017 to just $3 billion in 2019,” he said.

Meanwhile, China is set to see record high foreign direct investment. As of November 2020, FDI had already hit $129 billion, according to Chinese government data, on pace to surpass the $138 billion and $135 billion for all of 2019 and 2018, respectively. Full-year data for 2020 are scheduled to be released next week.

The revised guidelines went into effect the same day China announced results of its 2020 GDP growth. At an official rate of 2.3%, it is the only major economy that expanded last year, after rapidly containing the coronavirus outbreak and restarting production at factories across the country.

Brandeis’s Petri cautioned that actual implementation of the law may be tempered by practical or political considerations.

“China does not want to retaliate tit-for-tat, it still welcomes U.S. investment, especially from technology companies. But it does want more leverage. For example, when the United States pressured ByteDance to sell TikTok in 2020, the Chinese government jumped in to announce that it will have the last word on selling technology assets, in that case TikTok’s artificial intelligence algorithms,” he said.

“The ultimate effect of these rules, how strictly they will be enforced will depend on the overall health of the U.S.- China Relationship in the coming days.”

Author: Tanner Brown