Southern Perspective Shenzhen

There is a tangible feeling of a shift in the view of the role of foreign investment into the Chinese economy, foreign investment is not welcomed with open arms anymore.

Foreign investment has deeply penetrated most sectors of the economy that are open, each of the top 5 enterprises are co-owned or controlled by foreign companies.

These strong nationalistic sentiments are thought to have put pressure on government officials at the time they were considering Coca-Cola’s proposed acquisition of Huiyuan Juice Company.

As the Chinese economy and large Chinese companies begin to be more self sufficient and look towards the domestic market for growth and development foreign companies will increasingly find themselves encountering barriers to market access, many US companies are feeling the squeeze already.

Foreign companies looking to invest in China will need to be aware of the specific particulars of the security review system that will most likely affect their attempted investments.

Under the new regulations, the National Economic Security Review (NES) requires approvals for certain categories of acquisitions; “important industries, elements that may affect national economic security and famous trademarks, time-honored brand companies”.

Acquisitions of companies that fall into any of these categories must first apply to MOFCOM for approval first, which you can bet will not come quickly or easily if at all.

The problem with the categories that China sets as those that require review is that they are not well defined.

This leads to high risk for any company that is considering an acquisition of a Chinese company as the guidelines are too broad and there is no explanation as to what companies fall into which categories.

This lack of clear edges in the definition will give rise to confusion in China as many other national governments give clear explanations as to what they deem sensitive areas.

In April 2008, the Organization for Economic Co-operation and Development released a paper discussing the “Protection of ‘Critical Infrastructure’ and the role of investment Policies Relating to National Security”.

This paper details the manner in which countries will view foreign investment in many specific categories including banking, land development, aviation and media.

Many other developed nations have clearly expressed how they define their critical infrastructure.

These types of clear cut explanations as to which areas are open and which are not are key to companies being able to understand the policies of the countries they are operating in and how those policies will affect their business.

Clear policies and consistent enforcement of logical decisions that follow the plan laid out in both the AML and the NES review are the best security to protect harmonious growth and development for the global economy.