The absence of specific rules on national security investigation on foreign investment in China has been labeled as one of the imperfections of the Anti-Monopoly Law of PRC (“AML”). Article 31 of AML only makes a passing reference to the necessity of conducting national security review when foreign capitals engage in acquisitions or other forms of concentrations that implicate China’s national security. Critics point to the general provision as inoperable in curtailing the massive inflow of foreign acquisitions into strategically important industries in China. To the author’s knowledge, no such investigation has been performed in China, since AML became effective on August 1, 2008.

It may be changed soon. Media reports say that a so called “National Security Investigation Mechanism” (国家安全审查机制) is probably going to be unveiled at the end of this year. At that time, an inter-agency committee charged with the investigation will be established. According to the reports, the committee shall have members from a galaxy of government bodies that represent broad and varied state interest, i.e., National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Science and Technology, Ministry of Commerce, Commission of Science, Technology and Industry of National Defense, Ministry of Agriculture, State-owned Assets Supervision and Administration Commission of the State Council, China Banking Regulatory Commission, State Administration for Industry & Commerce, State Administration of Taxation and several trade associations in key sectors of economy. It is reported that the draft bill on the national security policy was submitted to the State Council in March. The prelude to the unveiling came when Premier Wen Jiabao made the work report to the 3rd Session of the 11th National People’s Congress on March 5, when he is quoted to say that “in encouraging foreign capitals to participate in the restructuring and M&A of domestic enterprises, China shall accelerate the establishment of national security investigation regime.

At the time of writing, the draft bill hasn’t been released for public comment. But the general public has already shown great concern over what triggers national security investigation. According to The Economic Observer, a Chinese weekly newspaper, the mechanism will adopt dual standards for determining the “eligibility” of a foreign M&A to national security investigation, i.e., industry-specific standard and transaction value standard. According to the report, China will maintain a list of strategically important and sensitive industries in which M&A by foreign firms are subject to the national security check. However, to trigger the investigation, a foreign M&A must also reach a certain level of transaction value. The issue that is widely debated now is whether a one-size-for-all value standard is suitable for all industries or each industry should have its own value standard.

According to The Economic Observer report, the national security investigation will be a proceeding separate from antitrust review performed by the Ministry of Commerce. Understandably, the antitrust review assesses the competitive effects of a concentration while the national security investigation is concerned with the national security implication of a foreign M&A in China. But the issue is to what extent they overlap in practice. As antitrust review goes, the Ministry of Commerce doesn’t operate in institutional vacuum. Under the newly published Measures on Review of Concentrations of Undertakings promulgated by the Ministry of Commerce, in the course of concentration review, the Ministry may seek opinions from relevant government authorities, trade associations, undertakings and consumers as necessary. As is the author’s understanding, National Development and Reform Commission, Ministry of Industry and Information Technology, State-owned Assets Supervision and Administration Commission of the State Council, State Administration for Industry & Commerce are the government bodies often consulted for comments and opinions on a particular concentration. They, and other private interested parties, may well invoke national security concerns in opposing the concentration. It remains to be seen where antitrust review ends and national security check begins.

The timing for the release of the national security policy initiative couldn’t be better. As a matter of fact, the preparatory work has been in progress for many years. According to The Economic Observer, the policy was finalized in 2009. But it was shelved due to the worldwide economic recession last year. Despite the downturn, China’s GDP still grew by 8.7% in 2009. The FDI in China is also projected to hit 90 billion USD in 2010, a level comparable to the high tide last seen in the pre-recession years. As foreign capital pours into the Chinese market, they should brace themselves for a new hurdle to overcome before they can tip into the Chinese market.