New procedures and joint review committee will help facilitate mergers and acquisitions by foreign firms

The news that China will review proposed mergers and acquisitions (M&As) by foreign firms has been a hot topic among foreign media recently. Some view the new security review system as a signal that China is changing its attitude toward foreign capital, while others worry that future deals might be prohibited by the Chinese government on the grounds of safeguarding national security.

However, these media have misread the new security review system, as it is actually aimed at encouraging foreign M&As in China.

The security review system can be regarded as an outcome of and a commitment to China's earlier policy. On April 6, 2010, China's State Council issued Several Opinions on Further Improving the Work of Foreign Capital Utilization, known as the No 9 Central Document, which set out guidelines on the future development of China's foreign investment policies.

In Article 12, for example, it encourages foreign capital to participate in the reorganization of corporations and M&As in the Chinese mainland with equity participation and mergers. It supports listed companies introducing strategic foreign investors, and establishes a standard process for foreign capital portfolio investment and M&As. It also proposes antitrust investigations according to the law and speeding up the creation of a safety review system for reviewing mergers and acquisitions involving foreign firms.

The State Council also emphasized the positive effects of foreign capital and M&As - optimizing resources, promoting technological advances and improving management systems.

It is clear that the review system is envisaged as encouraging the development of foreign capital.

China's National Development and Reform Commission and the Ministry of Commerce (MOFCOM) will lead the new joint review committee, which will examine applications for acquisitions of domestic enterprises that concern either national defense security or national economic security. The new system will scrutinize M&As pertaining to national defense, key agriculture, major energy and resources, major infrastructure and transport, key technology, and major equipment manufacturing.

The new system includes specific provisions for the review process, which can be triggered either upon voluntary request by the foreign investor involved or upon request by third parties. If MOFCOM decides that the potential deal does fall within parameters of the national security review process, MOFCOM will submit the matter to the joint review committee to commence the process.

With economic globalization, international M&As are becoming the major means of international investment. However, compared to the global scale, China's gross amount is relatively small. From 2004 to 2009, the total amount of foreign capital involved was around $490 billion. Foreign M&As account for less than 2 percent of the total foreign investment in China, lower than the global average level. Therefore, it is necessary to increase the scale of M&As to transform the development mode and promote industrial development.

National security reviews are a common feature of overseas M&As, Chinese corporations involved in M&As overseas are also investigated. Some companies successfully achieved not only their own development, but also assumed more social and environmental responsibilities through such deals. For example, Changsha Zoomlion Heavy Industry Science & Technology Development Corporation recently purchased CIFA in Italy, and the chairman of Zoomlion received the Italian President's Award in December 2010. The deal not only enhanced Zoomlion's own reputation, it also improved the image of Chinese companies in Italy.

However, some Chinese companies face obstacles when attempting to purchase a brand or company overseas, such as Chinese telecommunications manufacturer Huawei Technologies Co, which bought the US-based 3Leaf Systems last May, and was told recently by the Committee on Foreign Investment in the United States that it must sell 3Leaf or the committee would recommend President Barack Obama cancel the deal.

With more Chinese companies going overseas, the scale of mergers and acquisitions will quickly increase. While some Chinese firms have experienced boycotts owing to national security, encouraging responsible companies to make deals with full compliance will help defuse any worries and resistance.

Research shows that there is often resistance to economic globalization and international investment. However, in the long run, international investment and M&As are a good way for countries to create a win-win situation. Therefore, we should encourage and establish standard rules for international M&As in China and actively encourage Chinese companies to invest overseas.

The author is a researcher with the Chinese Academy of International Trade and Economic Cooperation.

(China Daily 02/23/2011 page8)