(China Daily)
Updated: 2007-06-25 11:20

Mandatory national security checks on foreign companies' acquisition of domestic players have been included to the draft anti-monopoly law submitted yesterday to the top legislature for a second reading.

"Foreign mergers and acquisitions (M&As) of domestic companies or foreign capital invested in domestic companies in other forms should be examined if the cases are related to national security," said the draft submitted to the 28th session of the Standing Committee of the National People's Congress (NPC).

There is already a national-security check framework in place for foreign M&As, but it has been included in draft legislation for the first time.

According to a regulation jointly issued by six government agencies late last year, foreign investors have to apply for approvals from the Ministry of Commerce when their purchases of domestic companies affect national economic security, are in key sectors or lead to the transfer of operating rights of famous domestic brands.

The legislative move reflects the government's efforts at clarifying the legal framework for foreign M&As, said Meng Jianbing, an expert with Seafront Law Office in Beijing, adding that lawmakers are learning from other countries such as the United States on how to protect national security.

The requirement was added to the long-awaited anti-monopoly law against the backdrop of a fast-rising number of foreign M&As as well as foreign companies acquiring major State-owned enterprises or companies with famous brands.

One case which has drawn widespread attention is US private equity firm Carlyle Group's attempted takeover of Xugong Construction Machinery, which did not pass regulatory hurdles following fears that China is selling strategic companies to foreign investors.

According to official statistics, foreign M&As accounted for 5 percent of all forms of foreign direct investment annually up to 2004 but increased dramatically to 11 percent in 2004 and nearly 20 percent in 2005.

Zhang Yansheng, director of the International Economic Research Institute affiliated to the National Development and Reform Commission, said it is crucial that foreign purchases of domestic firms go through security as well as anti-monopoly checks.

But "the situation needs to be spelt out in more detail. For example, what kind of merger cases are related to national security"?

The draft anti-monopoly law, which aims to provide for fair competition, was submitted for first review in June 2006.