China has introduced a new law, “Security Review System on Mergers & Acquisitions of Domestic Enterprises by Foreign Investors”, which took effect on March 5, 2011. Several attempts in the past, by both mainland companies looking to acquire foreign firms and international firms seeking to acquire Chinese businesses, have been blocked by the Chinese Government for national security reasons. The new law introduces a formal review process that foreign investors would need to undergo, which may discourage investments into China.

The new law applies to a very wide range of industry sectors and, as with many rules of this type in other jurisdictions, it leaves enormous discretion in the hands of government agencies. The review requirement applies to proposed acquisitions of domestic enterprises or its assets where those acquisitions have a potential bearing on national security.

The new process bears some resemblance to that administered by the Committee on Foreign Investment in the United States (US CFIUS). However, China defines “national security” much more broadly. The new law sets out a formal application process for foreign companies to file a national security review when acquiring Chinese companies. It will be a much more streamlined and transparent process. A “general review” will take 35 working days at the most, and where necessary, a more intensive “special review” will follow, which may take another 60 working days.

Whilst some believe that the new application process will provide more certainty for investors and avoid any hidden surprises, others argue that the changes may generate greater uncertainty since the new law does not stipulate any value or market share criteria that will trigger the need for such an application. Without a minimum value or market share threshold, it is unclear how the China Ministry of Commerce will handle the thousands of applications which will inevitably be made.

It still remains to be seen whether the new review process will discourage foreign investors, or whether, like the US CFIUS regulations, China’s new law will provide certainty and transparency and encourage foreign investment.