In the week that WikiLeaks cables disclosed that Australia had revised its takeover rules to prevent China buying up its resources, it is hard to get too exercised over Beijing’s restrictions on foreign investment. Everyone is a protectionist, to a greater or lesser degree. Even so, there is something troubling about China’s new rules governing national security reviews, which come into effect on Monday.
China-watchers had been hoping for clear guidance on circumstances and thresholds that might trigger a review of a foreign investment proposal. In that context, the result of an eleven-month consultation – three pages of generalities – is disappointing. Sectors deemed sensitive to security include not just those related to the military, resources or energy, but those in “important” transport and infrastructure sectors, “important” agriculture, “key technology” areas, and “major equipment manufacturing.” Even the definition of “foreign” – including Hong Kong, Taiwan and Macau – gives rise to questions. Would an acquisition by a Hong Kong-listed Chinese investor need approval? What about a Chinese-owned vehicle registered in the Cayman Islands?
China often drafts principles first, then worries about details later; the Ministry of Commerce has already issued some supplementary guidance for these rules. And in practice, Beijing goes big on reciprocity: US bidders, for example, should not fancy their chances so soon after Huawei’s thwarted bid for 3 Leaf. But five years after Carlyle’s bid for a mainland machinery maker was blocked on grounds of “economic security”, foreign executives are practically none the wiser on their chances of security referral. All this uncertainty may simply scare bidders off. Ten years ago, China’s average inbound deal size was 71 per cent of the average outbound deal, according to Dealogic. So far this year, it is 28 per cent. China may be going out, but few are coming in.
