According to an official of the National Development and Reform Commission (NDRC), China’s inward merger and acquisition (M&A) security review system complies with WTO’s security exceptions principle. While China will not change its policy of opening up to the outside world and utilising foreign capital, it will strengthen investment cooperation with other countries and build a more liberal multinational investment system and legal environment.

On 12 February, the General Office of the State Council issued the Circular on Establishing a Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, requiring foreign investors seeking M&A of domestic enterprises to undergo security review if the target enterprises are engaged in important agricultural products, important energy and resources.

After this circular was released, the resident liaison organs of countries with significant investments in China responded promptly. The China-EU Chamber of Commerce, China-US Chamber of Commerce and Japan External Trade Organization lost no time in collecting the views and opinions of their member enterprises and are going to draft a response plan.

Four days after the issue of the circular, NDRC reiterated that actively utilizing foreign capital is a major part of China’s national policy on opening up to the outside world. Establishment of the inward M&A security review system is aimed at improving the foreign capital utilization policy and regulatory system, enhancing transparency and predictability, and promoting the orderly development of inward M&As, while no changes will be made to the policy of opening up to the outside world and foreign capital utilization.

China has been rated as the most attractive investment destination in the world for a number of years consecutively. According to figures released by the Ministry of Commerce, in the year 2010 the amount of foreign capital actually utilised in the country hit the US$100 billion mark for the first time, reaching a historic high level.

It is understood that the focus of China’s inward M&A security review system is on protecting national security. Hence, the circular has set out the scope of security review which covers inward M&A of domestic enterprises engaged in the following industries involving national security: military and military-related industries, important agricultural products, important energy and resources, important infrastructural facilities, important transportation services, key technologies, and major equipment manufacturing.