VI-10 Question: According to some reports, in the next few years, China will further strengthen the censorship and supervision over foreign acquisition of sensitive and key enterprises related to national security. Why is that? Does that mean protectionism is rising in China and China will limit foreign investment in the country?
A: Cross-border acquisition is a common way of absorbing foreign investment. About 80 percent of all FDI in the world comes from cross-border acquisition. In the past, foreign investors were inclined to set up new companies. As a result, China is not familiar with acquisition, and doesn't have specific laws guiding and examining such conduct, so China uses a FDI examination system. As more cases of acquisitions of companies involving national security and sensitivity keep rising, the original examination system can no longer meet the needs of the market economy.
In recent years, many multinational companies have held monopoly status in China. They continue to expand their monopolies through advantages in technology, brand and scale. They mostly acquire companies in the following industries: energy production, basic material industry, mechanical manufacturing, food and consumer goods production, new technology services as well as commercial and financial sectors which are opened in accordance with China's commitment to the WTO. Statistics show that the market share of multinational companies in China is rising substantially and they take one third of the market share in light industry, chemical engineering, pharmaceutical, mechanical, and electrical industries. The problems arising from foreign acquisitions have not only disrupted the market order but also pose enormous hidden pitfalls for economic safety.
Every country handles cross-border acquisition carefully and from its own national interest. Developed countries like the United States are very cautious about acquisitions involving a foreign partner. The United States has a special institution called Committee on Foreign Investment in the United States £¨CFIUS£©to handle cross-border acquisitions. The China National Offshore Oil Corporation's attempt to acquire the U.S. company Unocal failed due to strong opposition from the CFIUS.
Currently, the Chinese Government follows the principles of "standardizing, managing, and developing," which means to standardize the management of acquisition conduct to attract more foreign investment and in the mean time, to prevent negative impact on the national security. In line with such principles, China issued Provisions for Foreign Investors to Merge Domestic Enterprises in September 2006, making a list of all national strategic and sensitive industries and establishing a examination system for special mergers and acquisitions. When necessary, the Provisions allow investigations over foreign acquisitions to prevent monopoly, ensure fair competition and to safeguard national security.
The promulgation of this law is not contradictory to the free and open market principle and does not mean rising protectionism. In the next few years, China will gradually establish proper asset value evaluation mechanism in line with the international practices to prevent the asset and right of domestic companies and their employees from being damaged during the process of foreign acquisition. Meanwhile, China will actively explore new ways to utilize foreign investment, strengthen research into acquisition, continue to improve relevant laws and regulations, establish and imporve industry safety and anti-monopoly early warning mechanisms, build up a more favorable investment environment for more ways of acquisition, and to promote cross-border acquisitions in China in an active and steady manner.