China's Foreign Investment Security Review: Scope, Procedure and What It Means for Foreign Investors

The following is general information on Chinese law, not legal advice for any specific matter. Rules and thresholds change from time to time, and the treatment of any transaction depends on its structure and the parties; consult qualified PRC counsel before acting.

The regime: the 2021 security-review measures

China's foreign-investment security review is a separate gate that sits on top of the ordinary foreign-investment and market-access rules. Its governing instrument is the Measures for the Security Review of Foreign Investment (外商投资安全审查办法), issued jointly by the National Development and Reform Commission and the Ministry of Commerce as Order No. 37, published on 19 December 2020 and effective 18 January 2021, made under the Foreign Investment Law. The review is about national security, not about ordinary competition or market access, and its reach is defined by a list of sectors and activities. A foreign investor that assumes its deal is cleared because it is small, or because the target is not a household name, has misread the regime: the trigger is the sector and the nature of the investment, not the headline value.

What is covered: the sectors and activities

The measures reach foreign investment in a defined set of areas. They include investment relating to military industry, military-support and other defence-related sectors; important agricultural products; important energy and resources; important infrastructure; important transport services; important cultural industries; important information technology and internet products and services; important financial services; and key technologies. Within those areas, the measures apply to establishing a foreign-invested enterprise, to acquiring equity or assets, and to other ways of participating in control. The list is deliberately framed in broad terms such as "important" and "key", and the definitive scope is applied by the working office on a case-by-case basis — so the prudent question at the outset of any deal in a sensitive area is whether to make a voluntary filing and obtain certainty.

The procedure: a sequence of strict clocks

The procedure runs on fixed periods that parties must build into the deal timetable. After the working office receives complete materials, it decides within 15 working days whether to initiate a security review. If it initiates, a general review is conducted and is to be completed within 30 working days of the decision to initiate — and during this period the investor may not proceed with the investment. If the general review does not clear the transaction, it moves to a special review, to be completed within 60 working days, extendable in special circumstances with written notice to the parties; time taken to supply supplementary materials is excluded from these periods. The practical meaning is that a sensitive transaction can be frozen for months, and the investor's obligation is to hold the deal until clearance — so the filing has to happen early, not after signing.

What happens without a filing: the enforcement powers

The measures are backed by real enforcement. Where an investment that should have been filed proceeds without filing, or where a party acts in a way that circumvents the review, the working office may order the investor to dispose of the shares or assets and take steps to restore the status quo, among other measures, and the authorities may take further action in accordance with the law. For a cross-border transaction, that is a catastrophic remedy — it can mean unwinding a closed deal — so the security-review question has to be answered before closing, in writing, rather than assumed away. The same discipline applies to a transaction structured through an offshore holding company: the review looks through to the substance of the investment, not the formal route.

How a foreign investor should approach it

• Screen the sector first. Determine whether the target or activity falls within the covered areas, and treat any "important" or "key" descriptor as a reason to look closer.
• File early, and voluntarily where in doubt. A voluntary filing that clears is cheap certainty compared with the risk of an unwinding order.
• Build the clocks into the deal. The 15-working-day initiation decision and the 30- and 60-working-day review periods are the minimum timeline, not a formality.
• Do not close while review is pending. The investor may not proceed during review, so signing and closing must be sequenced around clearance.
• Look through structures. An offshore holding or a minority interest does not automatically take the deal out of scope.

The scope, thresholds and procedure are applied by the authorities on the latest official basis and on the facts of each transaction; the summary above is general information current as of the date of writing. For the merger-control dimension that often runs in parallel, see our guide to China antitrust and SAMR investigations.