China’s National Development and Reform Commission (NDRC) has announced new details for foreign investment screening on the basis of national security, amid rising scrutiny of cross border deals worldwide. 

The 23 articles in the ‘National Security Review’ (NSR), published on December 19, cover investments in sectors ranging from defence and technology to infrastructure, transport and financial services. 


This follows the US’s decision to add a string of Chinese companies, including state-owned semiconductor giant SMIC, to a trade blacklist on December 18, as the Trump administration continues to focus its attention on the chip industry

“Not protectionism”

China’s new regulations come alongside efforts to open up the Chinese economy to foreign investment, with the NDRC stressing in a statement that this is “not protectionism” nor is it “retrogression in opening up”. The measures are to be officially implemented within 30 days of the announcement. 

The commission added that “opening to the outside world without security guarantees is unsustainable”, insisting that similar foreign investment review mechanisms have been brought in by other large economies such as the US, Australia, Germany, Japan and the UK.

Winston Ma, a former managing director and head of the China Investment Corporation’s North America office who currently serves as an adjunct professor at New York University School of Law, told fDi that the new rules define national security broadly and cover the digital economy sector “in a similar fashion” to the Committee on Foreign Investment in the United States (CFIUS).

Mr Ma expects that in contrast to previous national security reviews, which typically related to large transactions in military, energy and infrastructure sectors, the new NSR could potentially reach smaller, early stage investments into tech ventures.

“Chinese tech companies have proven their mettle by catching up to global rivals in smartphone and 4G technology. Now in the age of 5G, China’s innovation ecosystem is one of the most interesting innovation hubs in the world, just like Silicon Valley,” he added. 

It follows that China would protect its digital innovation “at a time [when] tech supremacy is the new geopolitics”, says Mr Ma.

While details on foreign portfolio investment are still being worked out, sectors subject to FDI review will comprise: defence, agriculture, energy, manufacturing, infrastructure, transport, cultural products, IT services, internet products, technology and financial services.

Chinese acquisitions of foreign companies have come under increased scrutiny throughout 2020, notably in technology, where attempts to buy US semiconductor and internet companies were blocked by the US. In recent years, CFIUS has also called for completed transactions to be unwound, including the dating app Grindr and social media platform TikTok.

Mr Ma says that, as with the types of rules in other jurisdictions that have blocked acquisition attempts by Chinese capital under the broadly defined “national security” concept, “the NSR notice leaves great discretion in the hands of Chinese government agencies.”

The security review builds on the Foreign Investment Law, which came into effect on January 1, and seeks to improve China’s business environment and open up to foreign investors.

Greenfield investment tracker fDi Markets indicates that the total number of projects announced by foreign companies in China has been in decline relative to outbound projects announced by Chinese companies abroad.

BRI begins to stall

The economic effects of the pandemic outside of China, however, have caused investment by Chinese companies into the Belt and Road Initiative (BRI) to falter. A report published by Moody’s Investors Services on November 23 found that Chinese investment in BRI countries fell to $23.5bn in the first half of 2020, compared with $104.7bn in 2019.

“Worsening credit stress amid the pandemic will put the brakes on fresh BRI investment flows, which are unlikely to return to 2014–2019 levels before 2023, even as China’s policy objectives continue to support BRI activity,” Rahul Ghosh, a Moody’s senior vice president, said in a statement.

By contrast, China remains the only large economy to grow this year. It has led the way for other developing countries, such as Vietnam and Guinea, in the wake of the pandemic, with International Monetary Fund predictions that its 1.8% rate of real gross domestic product growth in 2020 will increase to 8.2% by 2022. 

China is also currently in talks with the EU to clinch a major trade deal, despite EU concerns over the country’s “forced labour”.