Foreign investors into China to face "security reviews" under proposed foreign investment law

Since 2011 foreign investors have faced a  security review process when investing in industries that could have an impact on national security in China, but the change will enshrine the process in law.

The scope of national security review seems to be expanded under the new law. According to China Daily foreign investment into defence, energy, grain, information technology and some other areas would be subject to the review process. Government agencies, industry associations and companies in the same industry or the supply chain will be able to apply to the joint ministerial group to have other proposed investments reviewed, it said.

Investors would also be able to "proactively" apply for the review process if they felt that their investment could be caught by the new rules.  

In a statement on its website, MOFCOM said that the new law would promote China's economic development while creating "a more stable, transparent, predictable legal environment for foreign investment. The full text of the draft law is available on its website in Chinese, and is open for consultation until 17 February.

The China (Shanghai) Pilot Free Trade Zone already operates a 'negative list' system, . Elsewhere in China, foreign investment is governed by the Foreign Investment Guidance Catalogue, which categorises different business activities as encouraged, restricted, prohibited or permitted for the purposes of foreign investment. In its latest update to the guidance catalogue, China's National Development and Reform Commission (NDRC) said that it would cut the number of sectors where foreign investment is limited to 35 from 79, opening up areas such as real estate, steel and oil refining.

The new law would also change the basis on which different companies are classified as 'foreign', according to China Daily. Businesses would no longer be regulated based on their ownership but rather on 'who is in control', meaning that foreign businesses on the Chinese mainland that are controlled by overseas investors will now be classed as 'foreign', rather than 'Chinese', China Daily said.

Corporate law expert Dr. Bernd-Uwe Stucken of Pinsent Masons, the law firm behind Out-Law.com, said that the 'limited approval and comprehensive reporting' mechanism set out in the new law would ease restrictions on foreign investors compared to the current case-by-case approval system.

"The draft foreign investment law is an important development towards China's goal to reform the foreign investment-related approval system, particularly given the challenges China faces in terms of slowdown in economic growth," he said. "It also leads to discussions on other issues including variable interest entity (VIE) structure, security review and foreign exchange controls."

Although the Chinese government had not set out a clear timetable for finalising and introducing the new law, "formal adoption in 2015 is a possibility", he said.