New draft law streamlines procedures for overseas companies

The security clearance measures outlined in the draft foreign investment law will boost China's corporate governance efforts and create a level-playing field for overseas companies in the country, experts say.

Under the draft law, foreign investors will have to gain security clearance from the government for investments that are considered potentially harmful to China's national security.

Zhao Xudong, a professor of commercial law at the Beijing-based China University of Political Science and Law, says the draft law is a major step for China as it helps the nation follow international norms, cater to national security review requirements and chart detailed plans for the supervision of foreign investors.

The draft stipulates that foreign investors can apply for the review proactively, especially if they feel that their investment may threaten China's national security. A joint ministerial mechanism will then take a decision on whether a review is necessary or not.

Any foreign investment application that is considered a threat or found detrimental to China's national security will be rejected by the joint ministerial mechanism set up by the State Council.

Foreign investors whose application have been rejected will not be allowed to appeal the decision.

"The new rule can effectively mitigate and eliminate foreign investment activities which may adversely affect national security, the interests of domestic investors and environment," says Zhao.

The draft law lists investments in sectors such as defense, energy, grain, infrastructure, core manufacturing and information technologies as potential sectors for reviews.

Most of the concerns about foreign investments are those associated with mergers, acquisitions and takeovers of established domestic companies, rather than new ones, sources say. Countries like Germany, Australia, the United States and Canada have all implemented similar review systems in their government and legislative sectors.

The US government, acting on the recommendations of the Committee on Foreign Investment, ordered Ralls Corp, a Chinese company, to divest its interest in Oregon wind farms in September 2012, citing national security concerns.

Wang Zhile, a senior researcher on foreign investment at the Chinese Academy of International Trade and Economic Cooperation, a think tank under the Ministry of Commerce, says: "Foreign investment that has already been made in heavily polluting industries or business that may affect the development of China's high-tech industries will also not get permission. Under the new rules, multinationals will be keen to strengthen cooperation with their Chinese partners in promoting regional development, technological innovation, outsourcing services and product safety."

Overseas information technology companies have already encountered strong headwinds in the government procurement sector after the government expressed serious concerns about imported IT products.

An array of overseas tech multinationals, including IBM Corp, Microsoft Corp and Apple Inc, were either ousted from government-funded deals or criticized for major security loopholes.

The Ministry of Industry and Information Technology, along with a number of government agencies, has been setting an increasingly higher bar for the information security market since last year.

Miao Wei, the minister for industry and information technology, says at a recent meeting that information security is the foundation of national security.

Charlie Dai, principal consulting analyst from Forrester Research Inc, says China will have a firm grip on IT products used in various government procurement projects in the coming years.

"It is clear that China is determined to protect its information safety. Overseas players will have to conform to government regulations if they want to win government contracts," he says.

China has also included emerging tech sectors like cloud computing in its security watch list.

Zuo Xiaodong, vice-president of the China Information Security Research Institute, says that the country will start rating the trustworthiness of cloud-computing companies which provide services to the government.

"Only companies that get full security clearance will be allowed to join government-funded projects," says Zuo, who is a leading expert involved in drafting the policy.

To assist these moves, China will apply nationwide what it has called a "negative list" model, meaning that foreign companies can invest in any area that is not specifically banned or restricted without having to gain prior approval from authorities.

Sun Jiwen, spokesman for the Ministry of Commerce, says the law will mean that most foreign investment entering China will no longer need approval from local authorities. In addition, foreign investors will also enjoy equal treatment with local investors in sectors that are not on the negative list.

"The law also fights against monopolies and other forms of unfair competition in the domestic market, and protects the interests of investors as well as labor rights."

The ministry did not say when the law would be adopted and put into effect but indicated that it would combine and update three existing pieces of legislation covering foreign investment, including a joint-venture law.

James Zimmerman, chairman of the American Chamber of Commerce in China, says AmCham China supports the streamlining of laws and regulations that affect foreign-invested companies and the way they operate in China.

"We also support a revision of the law that will ease the approval procedures for the establishment and operation of foreign-invested enterprises in China, as well as provide for greater market access and the reduction of trade barriers that affect US companies," says Zimmerman.

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