China publishes new rules on review of foreign investments, citing national security
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China publishes new rules on review of foreign investments, citing national security

China’s National Development and Reform Commission (NDRC) published new rules governing foreign investment on Saturday that establish an approval process for foreign investment in industries critical to national security, including energy and infrastructure.

In a Chinese-language Q&A, the Commission defended the new rules as not protectionist, arguing that major European and North American economies, including the US, have similar national security approval processes. The United States Foreign Investment Risk Review Modernization Act of 2018 expanded the types of transactions that impact national security, including foreign purchases of property near sensitive military installations and purchases of stock which would result in foreign control of a domestic corporation.

The new security rules establish a three-tiered system of review, with the majority of transactions projected to be approved at the first level. If transactions impact critical industries or otherwise require additional review, they will advance into stricter levels of scrutiny. Like other review mechanisms, this is expected to interpret national security broadly, and firms doing business in China should expect additional regulatory hurdles for major transactions, according to Lester Ross, a partner at WilmerHale’s Beijing office.

The new security rules were promulgated on December 19, 2020, and take effect January 18, 2021.

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