After a quarter-century of welcoming and even courting foreign investors, Beijing officials are starting to show considerably more caution. Chinese lawmakers are set to pass legislation this week that would limit foreign acquisitions in China on national security grounds.
Authorities in Washington recently said they would review foreign attempts to purchase U.S. companies working in sensitive military or technology sectors, including Chinese companies.
The Chinese national security provision is somewhat incongruously tucked into an anti-monopoly bill the National People’s Congress is expected to pass this week, after 13 years of debate and numerous drafts. Western companies have welcomed many of the law’s provisions, including limits on monopolistic behavior by state-owned enterprises, but the final draft has an unexpected last-minute addition: It states that acquisitions by foreign companies “should go through national security checks.”
The addition reflects what many executives and lawyers describe as greater Chinese skepticism toward foreign investment, even as the Chinese government establishes a $200 billion overseas investment fund and encourages Chinese companies to buy foreign businesses with valuable technology or brands.
“There is certainly a desire by the Chinese government to ensure the crown jewels are not pillaged away by foreign invaders,” said Connie Carnabuci, a partner in the Hong Kong office of Freshfields Bruckhaus Deringer, a multinational law firm.
National security concerns have been raised lately as a reason to delay deals in industries that would not be seen as security risks elsewhere. For example, the Carlyle Group, the American private equity firm, has been trying for nearly three years to buy a construction equipment manufacturer, but government approval is still pending. Even a French purchase of a Chinese cookware company was delayed earlier this year for a national security review; the Commerce Ministry eventually gave its approval.
“Where China used to require foreign capital, and while China used to require foreign managers, now they’re comfortably pat with capital and the managerial class has gotten better, so what do they need foreign investors for?” said John T. Kuzmik, a partner at Baker Botts, a Houston-based energy law firm.
Many experts say that China has long made national security a key consideration in its review of purchases by foreign companies. In this view, the new legislation simply formalizes that practice.
“This just provides a legal footing for objections,” said John Zhang, a partner at Greenberg Traurig. “In the old days, they probably wouldn’t tell you why they were objecting to a foreign investment.”
The language in the new legislation is evocative of U.S. politicians’ complaints two years ago when the state-owned China National Offshore Oil Corp. tried to buy the American oil company Unocal, only to retreat in the face of strong opposition from Congress.