China to Set Up Foreign Investment Review Board

By Zhang Bin, Ren Qian
Published: 2010-03-25

News, Cover, Issue 461, March 22, 2010
Translated by Tang Xiangyang
Original article: [Chinese]

China is planning to establish a foreign investment review board, the agency will be similar to the Committee on Foreign Investment (CFIUS) in the United States, and will regulate foreign mergers and acquisitions which impact on China's national security, a source revealed to an EO reporter.

The agency will be similar in structure to an "inter-ministerial joint conference," and would likely include representatives from the National Development and Reform Commission (NDRC), Ministry of Industries and Information Technology (MIIT), Ministry of Commerce (MOC), Commission for Science and Industry for National Defense and other ministerial agencies. The party responsible for its coordination will likely hold vice-premier level status.

The Ministry of Commerce, along with the Legislation Office of the State Council and National Development and Reform Commission, submitted a document recommending the establishment of the new agency to the State Council before this year's "two sessions." It's believed that the new agency will be launched later this year.

On March 5, during Premier Wen Jiabao's delivery of this year's government work report, the premier announced that, "China will encourage Chinese enterprises to re-organize, reform and merge, while speeding up the founding of an agency to review these foreign mergers and acquisitions."

"The fact that the submission was passed to the State Council before the 'two sessions' and that the premier mentioned the establishment of a new agency in his presentation of the government work report, makes it even more likely that it will be established this year," one source predicted.

"In 2008, the Ministry of Commerce founded an Anti-monopoly Bureau, but this only pays attention to the market concentration of particular enterprises and does not look into questions of industrial or national security," the source continued. The proposed "higher level agency" will be responsible for reviewing these kinds of concerns.

"The new agency will work independently of the current anti-monopoly investigation system," the above source revealed.

Stating that the Ministry of Commerce's anti-monopoly review of foreign mergers and acquisitions is only focused on the level of influence that certain mergers and acquisitions may have on competition, not on national nor industrial security.

The source said: "The agency will judge M&A activity on a case-by-case basis depending on the sector in which the deal is taking place as well as the size of the deal. A list of strategic and sensitive industries has been drawn up; but due to the large discrepancies between the sensitivity of industrial sectors, there will be no universal standard that dictates how big a deal or what percentage of market share needs to be involved before a review is considered necessary."

As for the approval process under any possible future foreign investment review board, "[The process] will basically be the same as before, we are merely adding one extra procedure." Another source who has glimpsed the list of strategic and sensitive industries said, "It contains many sectors which are specifically categorized, but according to international practice, it is not considered necessary to make the list public."

Ma Yu, Director of the Foreign Investment Research Office of  the Department of Commerce's Research Center, an academic who has not been in favor of establishing such an agency argued, "Based on current regulations, local governments have been authorized to approve foreign mergers and acquisitions valued at less than 30 million yuan in. With local governments excluded from the review agency, how can we be certain it will be managed properly? This is a real problem which lacks a solution so far."

Other Systems

In fact, many countries have also established similar foreign investment review boards to evaluate the effect of mergers and acquisitions involving foreign companies on national security.

The Committee of Foreign Investment in the United States (CFIUS) stretches over 13 departments. It's authorized to monitor and evaluate mergers and acquisitions involving foreign companies that take place in America and, if necessary, will report to the President who ultimately decides whether or not to allow a deal to go ahead.

Since 1988, America's CFIUS has dealt with 1,500 mergers and acquisitions, only 25 of which have been flagged for investigation.

History of Attempts to Establish a Foreign Investment Review Board in China

In January 2007, a think tank under the NDRC proposed in a report that China establish a non-specialized agency consisting of people from the NDRC, the Ministry of Commerce and the Ministry of Finance to evaluate foreign mergers and acquisitions. This proposal was similar to a "foreign mergers and acquisitions review commission" and served as the prototype of the proposed national security review agency.

The report also suggested that "the government should intensify supervision and regulation of foreign mergers and acquisitions in strategic industries such as petrochemicals and mining, heavy equipment manufacturing, the cultural and financial sectors and information industry."

The EO has learned that the official proposal recommending the establishment of a national security review agency had been completed as early as 2009. At that time, a source within the Ministry of Commerce told the Economic Observer that it was possible that the agency would be established that year. However, possibly due to the effects of the global financial crisis, the project was shelved.

China's Ministry of Commerce spokesman Yao Jian indicated that China's Foreign Direct Investment (FDI) hopes to reach or slightly exceed 90 billion US dollars this year, a similar level to that witnessed in recent years.

Arguments For and Against

Mao Zhongwen, Deputy Secretary General of China's Construction Machinery Industries Association, said the earlier the agency is founded, the better. But he also expressed doubts: "Industries have various sizes and characteristics, it's difficult to determine accurately the monetary value in which a merger or acquisition will affect national security. Besides, circumstances change, will the standards used to review M&A deals also change?"

He went on to say, "Even within one single industry, the situation can vary depending on the phase of industrial development. In the initial phase, foreign mergers and acquisitions are needed to help integrate the entire industry  and therefore M&A activity should be encouraged. However, when sectors have matured, for example, when 70 to 80 percent of the whole sector is occupied by three to five enterprises, mergers and acquisitions should not be encouraged."

Zhang Yansheng, a researcher from the NDRC's International Economic Research Institution, said that it is important whether or not the review can effectively supervise the market economy and safeguard national security.

A lawyer told the EO: "I don't think that all foreign mergers and acquisitions will be reviewed by the proposed agency; it's only targeted at mergers and acquisitions which might influence industrial or national security. There won't be too many, otherwise it will harm the efficiency or the review system."

However Ma Yu went on to explain the difficulty of establishing the agency: "In China, foreign enterprises need to get official approval before entering into an M&A, but in America there is no such requirement. So, while the United States may let those small deals go ahead and only focus on the large deals, it's difficult for China to do the same."