The State Council, or China's cabinet, said in a February statement that China will establish a ministerial panel to review foreign firms' attempts to buy, or merge with, domestic companies. The committee, led by the National Development and Reform Commission and the Ministry of Commerce, will review foreign companies' plans for merger and acquisition (M&A) with domestic companies whose business pertains to defense, agriculture, energy, resources, infrastructure, transportation, technology or equipment manufacturing. The new regulation came into effect in March. Nie Pingxiang, Research Associate with the Chinese Academy of International Trade and Economic Cooperation, believes that this is part of China's long-term plan to build a formal process to judge the merits of foreign takeovers, and shares her views on the reasons for the establishment of the security review and the prospects for foreign M&As in China. Excerpts follow:

The launch of the state-level foreign M&As review body is a result of changes in domestic economic situation. The cross-border M&As have been the major means of international direct investment. However, compared to the global scale, foreign direct investment (FDI) in China consists largely of greenfield investment (investment in an area where no previous facilities exist and usually offered as an alternative to another form of investment, such as M&As, joint ventures, and licensing agreements). Foreign M&As accounted for less than 2 percent of the total FDI in China from 2003 to 2010.

With the rising cost of production factors and intensifying constraint of resources and environment, the investment in traditional manufacturing sector becomes gradually saturated. As a result, the inflow of greenfield FDI into China decreases.

In the coming years, investment through M&As will take up an increasing share of the country's total foreign investment. While the reform and opening-up policy continues, the new review system, which is a result of the gradual changes in the utilization of foreign capital, will help perfect the safe, open and efficient economic system. It will also standardize and promote the sustained and healthy development of M&As by foreign firms in China, and provide favorable conditions for attracting foreign investment.

Encouragement

The new process shouldn't be viewed as efforts by China to tighten rules for overseas buyers. Current laws and regulations on M&As remain vague and broad, which has hindered the foreign M&As growth. As a result, inbound M&As currently account for about 3 percent of China's total FDI. The new rules could be part of efforts by China to define the review body and review projects, consolidate and streamline the review process, and make the M&As policy more predicable.

Some foreign media 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 system, as it is actually aimed at encouraging foreign M&As in China and improving related laws. The system will make national security reviews easier to implement and more transparent.

Globalization

Making good use of cross-border investment could greatly promote China's economic integration into the world. As economic globalization expedites industrial transfer and accelerates the flow of production factors, such as capital and technology, cross-border investment can make up for insufficient production factors, call for more participation in international competition, improve management systems and labor productivity, and quicken the process of industrial progress and institutional innovation, so as to improve a country's international competitiveness.

The positive effects of foreign M&As include introducing advanced technology and managerial expertise, promoting industrial upgrading and export of related products, spurring the development of supporting industries featuring integrated upstream and downstream operation, and fostering new areas for economic growth. Under the inadequate policies and regulations, however, foreign M&As are likely to create greater negative effects, such as monopoly in technology and market, and threat to national industrial and economic security.

National security reviews are a common feature of overseas M&As. Chinese corporations involved in M&As overseas are also investigated. The new rules draw references from similar rules in the United States, Canada, Australia and France. The new panel will play an active role in enforcing economic regulations for international M&As as well as guiding the foreign investment to where it's most needed in China.