Identifier
Created
Classification
Origin
08BEIJING3363
2008-08-29 10:34:00
CONFIDENTIAL
Embassy Beijing
Cable title:  

CHINA'S INVESTMENT SECURITY REVIEW SYSTEM

Tags:  CM ENIV ETRD INRA 
pdf how-to read a cable
VZCZCXRO1577
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3363/01 2421034
ZNY CCCCC ZZH
O 291034Z AUG 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9637
INFO RUEHOO/CHINA POSTS COLLECTIVE
C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 003363 

SIPDIS

STATE PASS USTR
EEB FOR OIA

E.O. 12958: DECL: 08/29/2018
TAGS: CM ENIV ETRD INRA
SUBJECT: CHINA'S INVESTMENT SECURITY REVIEW SYSTEM

Classified By: ECON MINISTER-COUNSELOR, ROBERT LUKE, REASON 1.5(B)

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 003363

SIPDIS

STATE PASS USTR
EEB FOR OIA

E.O. 12958: DECL: 08/29/2018
TAGS: CM ENIV ETRD INRA
SUBJECT: CHINA'S INVESTMENT SECURITY REVIEW SYSTEM

Classified By: ECON MINISTER-COUNSELOR, ROBERT LUKE, REASON 1.5(B)


1. (C) SUMMARY AND COMMENT: Recent publication of ministerial
organizational plans reaffirms China's intent to establish a
formal interagency national security review mechanism for
foreign investments in China, with the Ministry of Commerce
(MOFCOM) and the National Development and Reform Commission
(NDRC) as key players in the review process. China's new
Anti-Monopoly Law, which was recently implemented, calls for
establishment of a formal review mechanism, although 2006
revisions to the M&A regulations had already established
similar requirements, specifically to review the "national
economic security" implications of foreign transactions.
While national security considerations have apparently played
an informal role in a relatively small number of investments
to date, China has been moving deliberately for several years
to make its national security review of investments more
deliberate and formal. Specific details on how the more
formal interagency review would be conducted and which
agencies will perform what roles remain unclear. Also
unclear is how China defines "national security" and
"national economic security," the two key terms used in the
relevant sections of recently published ministerial
organizational plans and other regulations. END SUMMARY.

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Ministerial Organizational Plans -- San Ding Fang An
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2. (C) A recent Wall Street Journal article discussed the
issue of implementation of a national security review
mechanism for foreign investment in China. This was one of
the provisions of China's Anti-Monopoly Law that recently
took effect, and as such, we expect such a procedure will be
put in place in relatively short order. The WSJ article
referred to organizational plans published recently stating
that China will establish a "joint ministerial meeting" to
investigate concerns arising from foreign companies
investments in China. The organizational plans referred to
are ministerial blueprints for personnel and substantive
responsibilities known as the "San Ding Fang An" which have
been released for most Ministries including MOFCOM and NDRC.

Embassy has translated the relevant portions of these
blueprints at the end of this message. Identical language
regarding the national security review is contained in both
plans (below).


3. (C) The entire investment review process in China has been
in flux for several years, and it is likely to be some time
before any new procedures are fully functional and
sufficiently clear to avoid confusion among foreign
investors. It is also important to note that many of the
regulations that have been adopted recently appear to overlap
one another and the lines of authority between bureaucratic
players like MOFCOM and NDRC are far from clear. What we
know about the existing system and the evolution of the new
review procedures has been gleaned from a variety of meetings
with MOFCOM, NDRC and other sources over the past year or so.
As recently as the SED Investment Forum held in June in
Washington, it was clear that the national security review
process was still a work in progress, and that the
bureaucratic lines had yet to be clearly drawn.

-------------- --------------
Investment Catalogue Spells out the General Rules
-------------- --------------

4. (C) The Guidance Catalogue for Foreign Investment
Industries jointly promulgated by MOFCOM and NDRC and
approved by the State Council sets out the three categories
of investment by industry sector: those forbidden,
restricted and encouraged. Investment in sectors not listed
in one of these three categories is considered permitted.
With neither the status of law or regulation, the catalogue
is intended as indicative of how NDRC and other ministries
would likely act in reviewing individual investment proposals
under China's laws and regulations governing fixed asset
investment. Under Chinese law, all investments require some
sort of government approval. For foreign investments,
depending on the size of the project, some approvals may be
given at the local level, while others would require NDRC
and/or central ministry approval or from the State Council.


5. (C) One interesting question has always been whether the
investment catalogue applies equally to green field foreign
investment as well as cross-border M&A transactions. One
provision in the revised 2006 Interim Provision on the
Takeover of Domestic Enterprises by Foreign Investors state
this to be the case. But when this question was posed to an
official from the NDRC's Foreign Capital Utilization Division
during the State-NDRC dialogue in April, that official
replied, "for the time being, yes." He later explained that

BEIJING 00003363 002 OF 003


this may change with implementation of the new national
security review mechanism which was then under discussion.

-------------- --------------
Previous Regulations Excluded NDRC from the Decision Process
-------------- --------------

6. (C) Revisions to the M&A regulations for foreign
enterprises announced jointly by MOFCOM, SASAC, CSRD, the
State Administration of Taxation, SAIC, and SAFE in 2006
formalize an "economic security" review procedure, which
ministry sources tell us made explicit what has always been
in place informally. Under the revised 2006 revisions,
several factors were singled out as requiring a review
initiated by MOFCOM and conducted conjunction with other
ministries. These included transactions which could lead to
foreign control of a domestic enterprise in an important
industry or which have an impact on national economic
security or lead to the takeover of a domestic enterprise
which holds a famous trademark or brand. Foreign companies
initiating such transactions are required to apply for review
by MOFCOM as the lead ministry in obtaining approval by
foreign firms involved for M&A transactions involving Chinese
companies. Sources at NDRC told us MOFCOM passes specific
transactions to the relevant ministries for review. In some
cases, MOFCOM itself would conduct the review (for example,
retail and distribution investments),while financial
transactions would go to the People's Bank and the relevant
financial regulators, and industrial projects would go to
NDRC and the relevant line ministry. This description of the
process predated the transfer of industrial policy functions
from NDRC to MIIT, so it is unclear whether NDRC would now
play the same role in reviewing M&As in specific industrial
sectors.


7. (C) One interesting aspect of the 2006 M&A revisions, was
that it failed to specifically give NDRC a role in the review
process. At the June Investment Forum, NDRC Vice Chairman
Zhang Xiaoqiang clarified NDRC's role in the process by
noting that any M&A that could potentially lead to an
additional investment in the acquired company or a change or
expansion of business activities would be considered to
require NDRC approval under China's investment law. Since it
is unlikely that any foreign M&A would not fall in this
category, all significant foreign M&As would continue to
require a review by NDRC. Specific language to this effect
has in fact been added to both Ministry's San Din Fang An
plans (see below).

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Economic Security and the Carlyle and Blackstone Cases
-------------- --------------

8. (C) To date, we have yet to hear anyone define what is
meant by "economic security," although there has been plenty
of debate over the term even in public fora. One recent M&A
conference attended by Econ M/C featured a speaker from a
prominent MOFCOM-affiliated institute who expressed concern
about the impact of economic security reviews on investment
flows and called for a broad definition of economic security
to include ensuring the stability of international investment
flows. MOFCOM speakers at the same event, including Treaties
and Law Director General Shang Ming, shed no light on how
they interpreted the term. According to Wang Zhile, director
of MOFCOM's Research Center on Transnational Corporations
(CAITEC),there have been only a handful of reviews conducted
of foreign M&A transactions. One he cited was Carlyle's
attempted purchase of Chinese heavy equipment maker Xugong.
According to Wang, in this case, the original analysis of the
effect of the transaction on Chinese industry was conducted
by the industry association itself and was heavily influenced
by the views of potential competitors of Xugong. MOFCOM then
asked its own anti-dumping specialists to conduct an injury
analysis on the proposed transaction and they concluded the
domestic industry would not be hurt by the acquisition.
However, despite repeated revisions of the terms of the
acquisition ending with a proposal for less than a
controlling stake, Carlyle's bid was never approved by the
State Council. It was held up over various concerns,
including at NDRC which had expressed reservations about
provisions for technology transfer. Ultimately the deal
collapsed when Xugong itself apparently lost interest in
being acquired. Although sources have told Embassy that NDRC
eventually agreed to approve the deal, no such decision was
actually announced. A second case cited as having undergone
a review is Blackstone's acquisition of a less than
controlling stake in SOE chemical maker China National
Bluestar. We have no information regarding this review,
except to note that Bluestar had itself earlier been the
subject of a possible CFIUS review for its proposed
acquisition of a high temperature boiler maker Harper
Furnace, a proposal that was later dropped.

BEIJING 00003363 003 OF 003



-------------- --------------
National Security Review under the Anti-Monopoly Law
-------------- --------------

9. (C) The final piece of the puzzle and the one that is the
least understood at this point is how the national security
review mandated in the Anti-Monopoly Law will actually be
carried out. Questions remain, about why this provision was
inserted in the AML in the first place. It was not in the
final draft submitted by the State Council to the NPC, and
appears to have added during the second reading in the NPC in
August 2007. The general consensus seems to be that the AML
provided a convenient platform to bless such a requirement
through legislation rather than regulation. However, doing
so has led to fears that this provision could be used to
promote protectionist policies in the AML review. As MOFCOM
has responsibilities for conducting other reviews under the
AML, it would also makes sense for MOFCOM to serve as the
point of contact for foreign companies to submit information
required for the national security review. This appears to
be the proposed procedure outlined in the San Ding Fang An
plans.


10. (C) Another interesting question is how the two concepts
of national economic security and national security relate to
one another. The language in the San-ding Fang An sheds
little light on this issue, noting only that MOFCOM will
accept and reply to the foreign company's application for M&A
approval. Aspects relating to national security will be
reviewed by an inter-ministerial committee. Aspects relating
to additional fixed asset investment will be regulated under
the China's fixed asset investment law. Major cases
involving national security will require the convoking of an
inter-ministerial investigation.

-------------- --------------
Translation of the NDRC and MOFCOM "San Ding Fang An"
-------------- --------------

11. (U) Embassy informal translation of the relevant
provisions that appear in both the NDRC and MOFCOM
organizational plans (San Ding Fang An):

"NDRC, MOFCOM and related ministries will establish and
inter-ministerial joint conference mechanism for security
reviews of foreign acquisitions and mergers with domestic
enterprises. MOFCOM is the responsible ministry for handling
this process, and will respond to applications that foreign
investors file in order to acquire and merge domestic
businesses. For acquisition and merger applications subject
to security review, the inter-ministerial joint conference
will conduct a review; for applications involving incremental
investments of fixed capital, the state rules for the
administration of fixed capital investments will apply; if
major matters of security concern are involved, an
inter-ministerial joint conference will assemble to address
relevant issues."

RANDT