Foreign investment monitor #9

Today, foreign investors looking to invest in China should look out for two separate regimes that regulate foreign investments: the FI regime and the NSR regime. As their names suggest, the FI regime applies to all foreign investment activities, while the latter only focuses on those that potentially give rise to national security concerns.

As China seeks to further open up and liberalize its domestic market amid a complex geopolitical landscape, the two regimes are heading into seemingly contradictory directions: while foreign investments in most sectors are welcome under the FI regime, the NSR regime does have teeth when national security is at the stake.

The FI regime continues to be further relaxed

China’s commitment to opening its market to foreign investors remains strong. The FI regime dates back to the 1980s when China first opened its door to foreign investments. The regime has gradually been relaxed in the past decades. Most notably, the regime fully adopted the “negative lists” approach in 2016, essentially abolishing the requirement for prior approval on foreign investments in sectors not listed as restricted or prohibited.

Under the current Foreign Investment Law, any foreign investments in sectors outside of the “negative lists” are now treated equally to domestic investments, without any prior and suspensory scrutinization. Since 2016, China has been shortening its national “negative list” year by year, with the most recent update in 2024 eliminating the remaining restrictions in the manufacturing industry. This approach reflects China's ongoing efforts to liberalize its market and position itself as a more open environment for foreign investment.

The growing influence of the NSR regime

The relaxation of the FI regime is mirrored by a growing focus, expansion and strengthening of the NSR regime, which has become more stringent in recent years. While Chinese authorities continue to be cautious in intervening on national security grounds, the NSR regime’s growing influence cannot be ignored. Its impact on deal timelines and certainty makes it a critical factor for investors to watch closely.

The NSR regime, established in 2011 and expanded in 2020 with the introduction of Measures on Security Review of Foreign Investment (NSR Measures), has been increasingly applied to foreign transactions that might affect China’s national security. An NSR Working Mechanism was established, with the National Development and Reform Commission (NDRC) being the lead authority coordinating the inter-ministerial review mechanism.

The expanded NSR regime now covers more types of transactions and sectors, including both direct and indirect foreign investments as well as greenfield investments. We’ve seen an uptick of transactions being filed to NDRC or NDRC calling in transactions for NSR review, often triggered by third-party complaints and sometimes leading to companies abandoning a transaction. A notable example of this occurred in 2019 when Jardine Matheson-backed Yonghui Superstores abandoned its proposed acquisition of a controlling stake in Zhongbai Holdings, a Chinese state-owned supermarket operator, reportedly due to concerns raised by the NDRC during the NSR process.

With both the FI and NSR regimes evolving, investors must stay alert. The general expectation is that the NSR reviews will play a more prominent role in China’s foreign investment regulatory framework, given the relaxed FI regime and the shift of the Chinese merger control regime towards focusing on genuine competition issues. Nevertheless, even though western countries have intensified their examination of Chinese investments, the Chinese authority has managed to apply significant caution when scrutinizing foreign investments in sectors involving national security.

Navigating the uncertainty of NSR reviews 

While the NSR regime is designed to protect national security, its implementation can be opaque and unpredictable, posing significant challenges for foreign investors. The broad scope of the NSR Measures—ranging from the types of transactions to the sectors involved—combined with the limited availability of publicly disclosed precedents, means that many aspects of the review process remain uncertain. This includes key factors such as the scope of notifiable transactions, review timelines, substantive concerns, and the standards of review and outcomes.

The NDRC exercises considerable discretion throughout the process, and its views can shift in response to evolving national security priorities, public policies or geopolitical dynamics. As cautious as the NDRC may be in applying the NSR regime, the unpredictability of the process—combined with the NDRC's evolving stance—makes managing NSR-related risks complex. Investors must recognize that what is deemed “critical” or “sensitive” can change over time, making early and ongoing legal guidance crucial to navigating this uncertain terrain.

Proactive—and tailored—risk management

Given the unpredictability of the NSR process, foreign investors should take a proactive approach to assess potential risks early in the deal-making process. Here are some key steps to consider:

Under the NSR Measures, a mandatory and suspensory filing to NDRC is triggered in two key situations: (i) investments in military or military-related industries, or investments located near military facilities; or (ii) acquisition of control over a Chinese target active in a “key” or “critical” sector, including critical agriculture, critical energy and resources, significant equipment manufacturing, critical infrastructure, critical transportation services, critical cultural products and services, critical IT-related or internet products and services, critical financial services, key technologies and other critical sectors. A foreign investor will be deemed to have acquired control if, post-transaction, it holds 50 percent or more of the shares, has sufficient voting rights to materially influence resolution of shareholders’ meetings and the board or directors, or can exercise material influence over key decisions of the target.

The NSR Measures do not provide clear guidance on what constitutes “critical,” giving NDRC considerable discretion in setting filing thresholds. Of course, NDRC’s perspective on what is critical may evolve based on factors such as, but not limited to, shifting industrial policies, social concerns and geopolitical dynamics.

As a result, foreign investors must adopt a holistic approach when assessing whether a filing obligation is triggered. This involves considering all aspects of the target’s business in China (including its controlled subsidiaries), such as its business relationship with military-related sectors or entities, proximity to military bases, relationships with public entities, and the broader geopolitical context. NDRC has shown particular interests in sectors such as artificial intelligence, automation, infrastructure and the automobile industry. While not explicit in the NSR regime itself, tightened regulation on data protection in China has led to regulators’ increased interest in transactions involving target businesses having access to substantial amount of personal data or important data. Additionally, the reactions of third-party stakeholders are an important consideration in assessing potential risks.

Given the uncertainty and broad discretion involved, this is ultimately a risk-based assessment that cannot be guided by a simple checklist or fixed rules. To effectively manage the risks from the outset, foreign investors should seek legal advice to conduct a comprehensive evaluation early in the deal-making process.  

Strategize your interaction with the regulator

Another key to navigating the NSR regime is understanding how to interact effectively with NDRC. While the agency is cautious in applying the NSR regime, its process is not always transparent, and timelines can vary widely. Foreign investors can request a pre-notification consultation with NDRC to clarify whether their transaction will require a formal NSR filing. This can help address some of the uncertainty about filing thresholds and regulatory expectations.

However, keep in mind that the consultation process itself is subject to NDRC’s discretion and can take anywhere from one to three months or even longer depending on the complexity of the situation. In addition, NDRC is generally unlikely to provide views on any substantive issues during the consultation. Given the uncertainties related to the consultation process itself, it is crucial for foreign investors to carefully strategize their interaction with the regulator, including whether to apply for a pre-consultation.

Prepare for unpredictability: managing NSR Reviews

Once a filing is made or a consultation is initiated with NDRC, transaction parties must be ready for the uncertainty surrounding timelines and outcomes.

Review timeline: NDRC operates within statutory review periods, but these can be extended if the authority requests additional information, as the review clock will be stopped while NDRC awaits the parties’ response. The review process consists of three phases: a preliminary review of 15 business days, a general review of 30 business days, and a special review of 60 business days. However, the overall timeline is often unpredictable due to delays in receiving responses and the interdepartmental consultations that will occur.

Possible outcomes: The outcome of an NSR review can range from unconditional clearance to prohibition. In some cases, NDRC may clear a transaction subject to conditions, which could include changes to the structure of the deal or to the target’s operations. These conditions can impact the transaction value and may affect the overall deal strategy.

Failure to notify consequences: While there is no monetary penalty for not notifying a transaction under the NSR regime, the authorities can call in a transaction, which is not time-barred. In some cases, they may require the transaction to be unwound or impose specific remedies if substantive concerns arise.