China on Saturday (Dec. 19) released its “Foreign Investment Security Review Measures,” which will review foreign investment cases in the area of national security. Just a day earlier, U.S. President Donald Trump signed the “Foreign Corporate Accountability Act”. It is believed that these two latest regulatory review orders are seen as a point of reference for each other, and that the two sides are once again trading blows.
China’s Ministry of Commerce and the National Development and Reform Commission on Saturday issued the “Security Review Measures for Foreign Investment”, which will conduct security reviews for investments in military industry, military support and other areas related to national defense and security, as well as investments in military facilities and areas surrounding military facilities. In addition, foreign investment cases in important agricultural products, infrastructure, energy and resources, transportation services, financial services, information technology, critical technology and other important areas related to national security and obtaining effective control of the investing enterprise must be subject to security review. The security review measures will come into force 30 days after the date of publication.
Just one day before China announced the “Foreign Investment Security Review Measures,” President Trump signed the Foreign Company Accountability Act, legislation that will prevent some Chinese companies from listing on U.S. exchanges unless they comply with U.S. auditing standards. The bill would prohibit foreign companies from listing their securities on any U.S. exchange if they fail to pass an audit by the Public Company Accounting Oversight Board (PCAOB) for three consecutive years, according to the Foreign Company Accountability Act.
The Foreign Company Accountability Act is seen as a clear target for U.S.-listed Chinese companies such as Alibaba Group, Jindo, and PetroChina. The bill would make U.S.-listed Chinese companies threatened with delisting if U.S. regulators are not allowed to review their financial audit materials. Chinese Communist authorities have long prevented overseas regulators from reviewing local accounting firms, citing national security concerns.
“The “Foreign Company Accountability Act,” which received full support from both chambers of Congress, was signed into law by President Trump on Friday, followed by China’s “Foreign Investment Security Review Measures” the next day, in what is seen as a swift counter-attack to the U.S. “Foreign Company Accountability Act.
In response to China’s “foreign investment security review measures” on Saturday, China’s official media, China News Service, said in a report on Saturday that the measures released a triple signal at a time when external risks are clearly increasing. One: China’s opening up to the outside world will pay more attention to risk prevention and control in the future; and two: China’s opening up will move to a higher level and will not stagnate, let alone regress. The article said that according to the new provisions, security review in accordance with the necessary and reasonable principles, set review procedures and time limits, hierarchical, progressive review, and will be implemented in the process of precise review of foreign investment that affects or may affect national security, to avoid the generalization of security review; third: China will pay more attention to the use of internationally accepted systems and rules to safeguard rights.
CNA also mentioned the U.S. Foreign Investment Risk Review Modernization Act, the European Union’s FDI Framework Regulation, Australia’s Foreign Investment Reform Act, and the U.K.’s International Investment Reform Act. and the “International Security and Investment Act” being developed in the UK. The report said that China’s introduction of foreign investment security review approach is in line with this trend.
However, while Australia’s Foreign Investment Reform Act applies to all foreign investors, China is expected to come under extra scrutiny, in part because Chinese tech company huawei was excluded from Australia’s 5G network in 2018 due to national security concerns.
Liu Yizhan, an associate professor at China’s Zhejiang Institute of Finance, and Zhang Haiyan, a professor at the Institute, said in a paper published last October that at least 82 percent of Chinese mergers and acquisitions in the EU in 2018 with deals worth more than 1 million euros were FDI (foreign direct investment) under the EU’s FDI Framework Regulation. At least 82% of Chinese M&A projects in the EU in 2018 were in at least one of the three categories of FDI (foreign direct investment) as defined in the EU’s FDI Framework Regulation: sensitive industries under review, SOE background, and state-led outbound projects. It is clear that Chinese companies will face more stringent and extensive scrutiny of their investments in the EU, the article says.
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