Mandatory national security checks on foreign companies' acquisition of
domestic players have been included to the draft anti-monopoly law submitted
yesterday to the top legislature for a second reading.
"Foreign mergers and acquisitions (M&As) of domestic companies or foreign
capital invested in domestic companies in other forms should be examined if the
cases are related to national security," said the draft submitted to the 28th
session of the Standing Committee of the National People's Congress (NPC).
There is already a national-security check framework in place for foreign
M&As, but it has been included in draft legislation for the first time.
According to a regulation jointly issued by six government agencies late last
year, foreign investors have to apply for approvals from the Ministry of
Commerce when their purchases of domestic companies affect national economic
security, are in key sectors or lead to the transfer of operating rights of
famous domestic brands.
The legislative move reflects the government's efforts at clarifying the
legal framework for foreign M&As, said Meng Jianbing, an expert with
Seafront Law Office in Beijing, adding that lawmakers are learning from other
countries such as the United States on how to protect national security.
The requirement was added to the long-awaited anti-monopoly law against the
backdrop of a fast-rising number of foreign M&As as well as foreign
companies acquiring major State-owned enterprises or companies with famous
One case which has drawn widespread attention is US private equity firm
Carlyle Group's attempted takeover of Xugong Construction Machinery, which did
not pass regulatory hurdles following fears that China is selling strategic
companies to foreign investors.
According to official statistics, foreign M&As accounted for 5 percent of
all forms of foreign direct investment annually up to 2004 but increased
dramatically to 11 percent in 2004 and nearly 20 percent in 2005.
Zhang Yansheng, director of the International Economic Research Institute
affiliated to the National Development and Reform Commission, said it is crucial
that foreign purchases of domestic firms go through security as well as
But "the situation needs to be spelt out in more detail. For example, what
kind of merger cases are related to national security"?
The draft anti-monopoly law, which aims to provide for fair competition, was
submitted for first review in June 2006.