Don’t Misread China’s National Security Review Mechanism on Foreign Capital M&A

Recently， reports from foreign media focused on China’s establishment of a national security review mechanism on foreign capital merge and acquisition of Chinese enterprises. There were reports saying“China sets up a review mechanism on foreign capital MA， which might mean a change in policies for oversea capitals in China”， and “foreign capital MA deals in China could be often reviewed and even be refused for the reason of threats to national security”.Actually， these are misreading of this mechanism. The purpose for China to set up a security review mechanism on foreign capital MA is to boost and regulate foreign MAs， not to reject these activities. Together with this mechanism， there are favorable policies for foreign investments.In April 2010， the State Council issued No. 9 Document titled “Opinions on Further Improving the Utilization of Foreign Capitals”. While summarized the experiences in utilization of foreign capitals after the entry into WTO， the document asked to further expand the opening-up and improve the utilization of foreign investments. Item 12 of the document asks to “encourage foreign capitals participant in reconstruction and merger reorganization of domestic enterprises， in forms of shareholding and MA”， “support publiclisted companies to have domestic and oversea strategic investors， regulate foreign capital activities in domestic securities investments and MA， carry out anti-trust reviews according to laws and regulations， and accelerate the establishment of security review mechanism on foreign-capital MA. The State Council on one hand encourages foreign investments， and needs to regulate foreign capital MA on the other. The major measure to standardize foreign capital MA activities is to carry out anti-trust reviews and security reviews. As there was no security mechanism at that time， No. 9 Document asked to “accelerate the establishment of foreigncapital MA security review mechanism”. The recently announced foreign capital MA security review mechanism is the implementation of No. 9 document.A circular from General Office of the State Council states that foreign capital MA“can help to diversify utilization of foreign investments， and plays an active role in optimizing resource allocation， boosting technological progress and improving corporate management”， and we should set up a MA security review mechanism to “guide a smooth and orderly foreign capital MA of domestic enterprises， and guard national security”. Obviously， this is in accord with No. 9 Document of 2010， reflecting the principle of focusing on both foreign-capital MA encouragement and regulation.This mechanism is helpful to standardize foreign-capital MA security review.Foreign capital MA review mechanism sets the range for security review:“foreign capital MA with military industry and supplementary enterprises， or enterprises located around key and sensitive military facilities， and other units regarding to national security; foreign capital MA with key enterprises of agri- cultural products， energy and resource， infrastructure， transportation service， technology and equipment manufacturing， with foreign investors may have the actual control”. Different with the concept of “economic security” a few years ago media extensively used， here the documents use two concepts of national security and defense security， and more specifically define the six fields concerning national security. With such a clearer regulation rules， we will not get confused with general reorganization and MA between enterprises， and easily tell corporate interest games from national security issues.Foreign capital MA review mechanism also specifically defines the procedure for security review. Foreign capital MA applicants or the relevant parties first submit a review request to Ministry of Commerce， Ministry of Commerce reports the request to interministry joint conference if the review is considered necessary， then the joint conference can start a special review procedure， or submit the event to the State Council if there is a major difference. With a defined mechanism， review on foreign capital MA will be more standardized.The review mechanism allows applicants to modify the original plan.“During the review， the applicant(s) may request for modifications in the MA plan or even revoke the deal”， which means the purpose for the mechanism is to standardize MA activities in China.Therefore， we can conclude that foreign capital MA security review mechanism is obviously helpful to regulate but not reject MA activities.Abandon conventional thoughts and boost crossborder MA with global ideasThere are different opinions about foreign capital MA with local enterprises in both domestic and abroad. In China， people are worried about the increasing MA deals， and they may be against any of the MA cases reported by media， thinking these deals would affect economic security. Meanwhile， MA with foreign companies by Chinese enterprises would cause complaints， too， as local citizens have the same feelings.We have a study on 22 foreign capital MA cases which were extensively reported by domestic media， including XCMG， Supor， Tianrun Crankshafts， Huiyuan， Danone， etc. We found that none of these has a really affect on national security. The essence of the dispute was an interest gaming between Chinese and foreign enterprises of different interest groups. Many of those MA cases didn’t succeed due to resistance， so that relevant enterprises have lost a good chance to learn experiences from transnational MA. But there are successful cases too， and all these cases tell us that the enterprises and the industries will benefit and get rapid development， taking Supor for example.As economic globalization moves on， transnational MA has become a main form of international investments. Globally， foreign capital MA accounts for 80% of foreign investments. Judging from this， we can say foreign capital MA deals in China are far less. From 2004 to 2009， China’s an actual use of foreign investments totaled about 49 bil- lion US dollars， including 9 billion US dollars (less than 2%) from MA deals. This ratio is far lower. In the future， we need to encourage MA activities， including those between foreign capitals and local enterprises， to boost transformation of economic development mode and industrial revitalization.According to the survey in oversea MA cases by Chinese enterprises， some enterprises can not only obtain self-development， but also undertake a lot of social and environmental responsibilities， which are spoken highly of by local society. For example， Zoomlion has greatly improved Italian’s attitudes towards Chinese enterprises after the acquisition of CIFA. In December 2010， president of this company won Italian President’s Award. However， Chinese enterprises also encountered resistances due to security reasons.As more Chinese enterprises are“going out”， oversea MA deals will increase quickly. 2010 saw an oversea investment totaled 59.0 billion US dollars from Chinese enterprises， of which 40% were through MA. Some countries used to set barriers for MA deals by Chinese enterprises due to so-called threats to national security. Through active communication， bearing more social and environmental responsibilities， and carrying out law-compliant oversea investments and MA， we can ease their worries and resistance.Studies show that there are some people in and out of China resist economic globalization and cross-boarder investment and MA， as they insist on the conventional theories formed in a period of war and violent revolutions. From a long-term development strategy， transnational investment and MA can help a country or region establish close mutually beneficial and win-win relation with others， and form community of common interests， so as to protect respective and common security. We should encourage and actively regulate foreign capital MA activities in China， and promote Chinese enterprises to carry out global investment and MA.(Author: Director， Research Centre for Transnational Cooperation)