Since the US began to scrutinize foreign direct investment more closely after 9/11, many other nations took notice and followed with their own Merger and Acquisition (M&A) regulations and economic security reviews.

While there are legitimate security concerns (both physically and economically) that nations must protect themselves from, this type of regulation is ripe for abuse.

Nations will become increasingly hostile in dealing with many types of foreign direct investment and proposed M&A activity.

Government regulators around the world are lowering thresholds for intervention, increasing the aggressiveness with which they investigate these cases and increasing penalties for violations.

This will lead to increased government involvement with their leading companies and has the potential to lead to serious conflict as world powers compete for growth and development.

M&A is quickly becoming the preferred method of international investment for companies looking for a quick and low risk method of entering a market.

This practice can be mutually beneficial, as the acquired or merged company receives an infusion of financing and potentially some expertise or advanced technology from the acquiring company.

The acquisition or merger of some companies can trigger an emotional response from citizens.

Examples include the California based oil company Unocal attempted acquisition by a Chinese State Owned Enterprise and the disapproved acquisition of the Huiyuan Juice Company by Coca-Cola as well as the withdrawn acquisition of Rio Tinto, an Australian mining company, by Chinalco.

While none of these deals appeared to be in direct conflict with anti-monopoly laws of the respective nations, they were all controversial.

What does China’s National Economic Security mean for big business worldwide?

China’s National Security Review

The Chinese government will “accelerate the establishment of the National Security Review Mechanism of foreign investment” stated Chinese Premier Wen Jiabao in March of 2010.

China’s National Economic Security (NES) review was initially proscribed by Article 31 of the Anti-monopoly law (AML).

Critics state that the security-review system will simply place additional burdens on foreign companies investing in China.

Supporters point out that these types of reviews have become standard practice internationally and that China is simply following the international norm.

Peter Wang, of the law firm Jones Day in Shanghai summed up the situation, “The definition of national security is bound to be somewhat broader than what people think of as national security in the U.S. – it’s going to be economic security and economic development and stability,”. The national security review system is “not unexpected, and it’s not necessarily unreasonable, but it’s certainly not making things any easier.”

The best example of Chinese NES Review is the failed attempted acquisition of Xuzhou Machinery by the Carlyle Group.

The Chinese government did not approve this acquisition and cited national security concerns.

Speculation as to what the security review will specifically entail is rife.

From the indications so far, it is likely to be a combination of current observed international practice that will require time, practice and revision before becoming the efficient tool that it aspires to be.

There is a tangible feeling of a shift in the view of the role of foreign investment into the Chinese economy.

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.

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 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.

What problems will this cause for international companies looking to increase access to the Chinese domestic market?

Is China slowly closing its doors to FDI and sealing off the path to the largest domestic market on the planet?

Remember the good ol’ days when you could smoke in the hospital? Well, they are gone. Maybe not as progressive as New York, but a considerable one.  Smoking in China is considered a second sport.

South China’s Shenzhen City plans to fully prohibit the premises of all medical institutions in the city in 2011.

All medical institutions above city and district levels, including military hospitals, will ban smoking from June next year, while community health centers, clinics and private hospitals will impose the ban from December 2010, Yang Guoan, vice director of the city’s health education research institute, said at the meeting.

Anyone caught smoking at these institutions will be fined starting Jan. 1, 2011.

Policies for smoking controls inside the Special Economic Zone are still being studied and the levels of fines to be imposed have yet to be determined.

In addition, all doctors will be expected to record patients’ smoking histories when they visit hospitals for the first time, after the ban is imposed.

I am sure it won’t be missed.

Six months ago Shenzhen removed their once mayor, Xu Zongheng, for “serious disciplinary violations”(China Daily)

Corruption is not uncommon in the ranks of officials but day by day work is being done. A new policy has come about recently:

“Officials whose spouse and children have all emigrated to foreign countries should not take top positions in the Party and government,” said a regulation issued by the Communist Party of China (CPC) Shenzhen committee and the Shenzhen government on Wednesday.

The reasoning behind all this is not to discourage people from moving out of China, but to discourage absconding to those places to in order make off with the big government pay checks.

The Ministry of Commerce has estimated, “About 4,000 corrupt officials fled the country with at least $50 billion between 1978 and 2003.”

How effective will this new policy be? It is hard to say now, but steps are being taken even if they are small ones.