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China to review foreign acquisitions for national security

China’s new rules for reviewing certain mergers and acquisitions involving foreign firms will not affect the country’s openness or efforts to attract foreign investors, according to the National Development and Reform Commission (NDRC), China’s economic planning agency. NDRC said the new rules could increase the transparency and predictability of China’s reviews of foreign investment and promote more ordered mergers and acquisitions in China. Earlier, the State Council said the governmen …

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China’s new rules for reviewing certain mergers and acquisitions involving foreign firms will not affect the country’s openness or efforts to attract foreign investors, according to the National Development and Reform Commission (NDRC), China’s economic planning agency.

NDRC said the new rules could increase the transparency and predictability of China’s reviews of foreign investment and promote more ordered mergers and acquisitions in China.

Earlier, the State Council said the government plans to create a state body to review merger and acquisition deals that involve foreign firms to ensure they do not endanger China’s national security.

The new regulation, which will come into effect in March, is set to install a new red-tape barrier for doing business in China.

According to the new regulations posted on the government website on Feb. 12, certain industries, such as military, agriculture, resources, energy, key infrastructure, transport systems, key technology sectors and some equipment manufacturers, are listed under the security review.

The government may introduce more industries to the reviews of foreign mergers and acquisitions when those sectors pose a threat to national security, said Li Xiaogang, director of the foreign investment research center at the Shanghai Academy of Social Sciences. He made the comments after the State Council announced it would set up an investment review board.

If foreign mergers and acquisitions are determined to be a threat to national security, the board will require the Ministry of Commence and other departments to terminate the deal, according to the regulations.

Moreover, government departments, national trade associations, competitors, suppliers and other related parties are allowed to apply for the start of a review, according to the regulations.

Figures from the Ministry of Commerce show that the foreign direct investment hit a record high of 105.8 billion U.S. dollars in 2010, up by 17.4 percent over the previous year.

“It is only a start, and if those previously market-oriented sectors, such as retailing, are regarded as having a connection with economic security, they may also be (reviewed) by the board as well,” Li told the Global Times.

“When the regulations mature, they will become some sort of law to guide foreign economic management, similar to those in other developed countries now,” Li said, adding there will be more and more negotiations between the countries in the future.

According to Reuters, the body may be similar to Australia’s Foreign Investment Review Board, which has held sway over dozens of planned Chinese investments into the resource sector in Australia and can block deals it deems not to be in the national interest.

The Foreign Investment Review Board advises Australia’s treasurer, who has the final say.

In 2009, the state-owned China Non-Ferrous Metal Mining (Group) Co dropped a 400-million-U.S.-dollar bid for 50.6 percent of Lynas Corp, owner of the world’s richest deposit of rare-earth minerals, saying the conditions set by the Foreign Investment Review Board were too stiff, Reuters reported.

The Financial Times reported last month that the failure rate of Chinese overseas acquisitions stood at around 12 percent.

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China to review foreign acquisitions for national security

Government support and incentives

Numerous government agencies support investors. Through the Board of Investment, the government offers a range of tax incentives, support services and import duty exemptions or reductions to an extensive list of promoted activities.

Companies receiving investment promotion privileges from the Board of Investment are not subject to foreign equity restrictions in the manufacturing sector, and there are no local content requirements nor export requirements, as Thailand’s investment regime is in total compliance with WTO regulations.

The Board of Investment also coordinates the activity of the One-Stop Service Center for Visas and Work Permits, which enables foreign staff of BOI-promoted companies to obtain work permits and long-term visas within three hours or less.

The BOI also administers the One Start One Stop Investment Center, which opened in November 2009 to facilitate a full range of services and streamline investment procedures by bringing representatives from more than 20 government agencies under one roof.

In addition to the activities of the BOI, other government organizations, such as the Department of Export Promotion and international chambers of commerce, provide invaluable support and a host of other important services.


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