International Trade 2023

Last Updated October 25, 2022

China

Law and Practice

Authors



JunHe LLP was founded in Beijing in 1989 and was one of the first private partnership law firms in China. It is one of the largest and most recognised Chinese law firms, and has a wide range of practices ranging from corporate, M&A, IP, antitrust, banking and capital markets to regulatory compliance, litigation, white-collar crime and trade. The trade team is much sought-after by clients for many trade, customs and trade controls matters. It has a strong and proven trade remedies practice, particularly in complex cases brought by the USA, the EU and China. In recent years, the team has established an outstanding practice in economic sanctions and export controls, helping multinational clients to do business with and in China, as well as leading Chinese companies coping with US laws and customs issues. It also advises multinational clients in Chinese customs matters and assists in customs audits and investigations.

The People’s Republic of China (“China”, or PRC) is a member of the World Trade Organization (WTO), China is also one of the signatories of the Agreement on Trade in Civil Aircraft, which entered into force on 1 January 1980. In addition, China has participated in the Committee on Government Procurement as one of the observers since 21 February 2002 and is currently in the process of acceding to the Agreement on Government Procurement.

China has free trade agreements (FTAs) currently in force with the following parties: Association of Southeast Asian Nations (ASEAN), Australia, Cambodia, Chile, Costa Rica, Georgia, Iceland, South Korea, the Maldives, Mauritius, New Zealand, Pakistan, Peru, Singapore and Switzerland. China also has Closer Economic and Partnership Arrangements with Hong Kong SAR and Macao SAR, and has an Economic Cooperation Framework Agreement with Taiwan.

In terms of regional and preferential trade agreements, China is one of the parties to the Asia-Pacific Trade Agreement. In addition to this, the world’s largest free trade agreement, the Regional Comprehensive Economic Partnership (RCEP) Agreement, entered into force on 1 January 2022 for China and nine other countries in the Asia-Pacific region.

China is a beneficiary under the Generalized System of Preferences scheme of Australia, New Zealand and Norway. Furthermore, China provides two preferential trade arrangements, as follows:

  • least developed countries having diplomatic relations with China are eligible for three phases of special and preferential tariff treatment; and
  • China provides duty-free treatment to certain agriculture products originating in Taiwan.

China has FTAs under negotiation with the following parties: the Gulf Cooperation Council, Israel, Moldova, Norway, Palestine, Panama and Sri Lanka. A regional agreement among China, Japan and South Korea is also under negotiation. China is also actively promoting the second phase of the FTA negotiations with Korea and an upgraded negotiation with Peru.

In addition, China is discussing FTAs with the following parties: Bangladesh, Canada, Colombia, Fiji, Mongolia, Nepal, Switzerland and Papua New Guinea.

In 2022, significant progress was made towards the RCEP’s entry into force. The RCEP Agreement entered into force on 1 January 2022 for Australia, Brunei Darussalam, Cambodia, China, Japan, Laos, New Zealand, Singapore, Thailand and Vietnam, and also took effect on 1 February 2022 for South Korea and on 18 March 2022 for Malaysia. The world’s largest free trade deal provides a boost to business and trade in the Asia-Pacific region.

The RCEP includes rules of origin and builds a cross-border logistics network, and also includes topics such as e-commerce, IP, competition policies and government procurement. An important note is that China has agreed, for the first time, to include government procurement clauses in a plurilateral agreement, even if the government procurement chapter is largely a matter of principle without a market access list. Even though the RCEP is still far from opening markets, it attempts to improve the transparency of procurement and procedures.

The negotiation on the bilateral EU-China Comprehensive Agreement on Investment (CAI) was officially finalised on 30 December 2020. However, in May 2021, members of the European Parliament voted overwhelmingly to “freeze” the legislative process of CAI, until China lifted sanctions imposed against several European individuals and entities. Neither side indicated any progress on CAI at the EU-China Summit 2022.

The Customs Law is the core legal basis governing customs matters, together with various regulations governing specific areas – eg, the Regulation on the Implementation of Customs Administrative Punishment.

The General Administration of Customs (GAC) and its local branches administer and enforce customs laws and regulations.

The punitive tariffs measure established by the Foreign Trade Law is mainly implemented by the Tariff Commission of the State Council in China.

Usually, punitive tariffs are applied without an investigation or review process in which the public can participate. China has imposed punitive tariffs on a total of three series of US-origin commodities since April 2018. Chinese domestic companies can apply for an exclusion for certain goods exported from the USA in accordance with the commercial market principle. 

The Regulations on the Implementation of Customs Administrative Penalties and the Regulations on the Implementation of the Import and Export Commodity Inspection Law were revised by the State Council in 2022.

The Tariff Law and the Frontier Health and Quarantine Law (the revised draft) will be deliberated by the 13th National People’s Congress Standing Committee in 2022 for the first time.

While China implements sanctions within the UN framework, the government has gradually established its own sanctions regime. So far, more than 80 individuals and organisations have been sanctioned by the Ministry of Foreign Affairs (MFA), mainly for interfering in China’s internal affairs, or imposing unilateral sanctions on relevant Chinese entities and individuals.

On 19 September 2020, MOFCOM issued the “Provisions on the Unreliable Entity List” (the “UEL Provisions”) laying out the mechanism to place foreign companies on the Unreliable Entity List (UEL), and may impose sanction measures on designated entities.

On 9 January 2021, MOFCOM promulgated the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures (the “Blocking Rules”), which are designed to block the application of certain foreign laws and measures that are determined to have the effect of unjustifiably prohibiting or restricting transactions between Chinese persons with third-country persons.

On 10 June 2021, the Anti-Foreign Sanctions Law of the People’s Republic of China was adopted by the Standing Committee of the National People’s Congress (NPC) and signed into law by the Chairman of the PRC.

Before the Anti-Foreign Sanctions Law was enacted, the Foreign Trade Law (2016, as amended) provided a general legal basis for imposing sanctions and the National Security Law (2015) provided legal authority for the State Council to take actions as necessary when there was a national security concern.

Now, the Anti-Foreign Sanctions Law has become the primary authority for the Chinese government to impose its own sanctions. In addition, the UEL Provisions authorise the imposition of certain sanction measures upon designated UEL entities, and the Blocking Rules are designed to block the application of certain foreign laws and measures that are determined to have the effect of unjustifiably prohibiting or restricting transactions between Chinese persons with third-country persons.

Economic sanctions under the UN regime are administered primarily by the MFA and enforced by multiple agencies such as the GAC, MOFCOM, the People’s Bank of China (the central bank), the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the Ministry of Transport and the Ministry of Public Security.

With the enactment of the UEL Provisions and the Blocking Rules, MOFCOM will lead a multi-agency working mechanism composed of relevant central agencies to administer the UEL measures, and the MFA or other relevant departments of the State Council will issue orders announcing the determination, suspension, modification or cancellation of the counter-sanction listing and countermeasure.

PRC persons and activities within PRC territory are subject to PRC jurisdiction for the purpose of sanctions. Foreign persons may also be subject to unilateral sanctions, as announced by the MFA, according to the Anti-Foreign Sanctions Law. The UEL will also impose sanction on foreign entities if their activities endanger national security, causing damage to the legitimate rights and interests of Chinese entities, etc.

China adopts the sanction lists under the UN regime. In addition, it is in the process of establishing its own unilateral sanction lists.

As to the UEL designation, the UEL Provisions provide that if a foreign entity conducts the following actions, it could be imposed with applicable sanctions:

  • endangering the national sovereignty, security or interests of China;
  • suspending normal transactions with an enterprise, other organisation, or individual of China, or applying discriminatory measures against an enterprise, other organisation, or individual of China, which violates normal market transaction principles and causes serious damage to the legitimate rights and interests of the enterprise, other organisation, or individual of China.

There has been no one designated to the UEL list so far.

For the MFA’s sanctions, they are announced by the MFA through its press conference. The public can search on the MFA’s official website for such announcements.

Except for adopting UN sanctions, China does not maintain its own comprehensive sanctions or embargoes against any countries/regions.

So far China does not have other types of sanctions besides UN sanctions, the UEL, the Blocking Rules and the Anti-Foreign Sanctions Law.

While China does not have explicit “secondary sanctions” (as under US sanctions), the government may impose sanction measures against foreign persons in case of certain activities endangering China’s sovereignty or national security even when there is no China nexus.

Administrative and/or criminal liabilities could be imposed on PRC persons/entities who violate the regulations and foreign persons when the violation occurred in PRC territory. Foreign persons who are outside PRC territory, and who have committed a crime against the PRC or its citizens, could be subject to criminal liabilities in China. As to administrative liabilities, the PRC government has broad jurisdiction over PRC persons and activities conducted within the territory of the PRC.

Moreover, based on the UEL Provisions, for designated foreign entities, there is a menu of measures the government can choose from, such as restriction or prohibition on import or export activities, investments or a travel ban.

For violations under the Anti-Foreign Sanctions Law, where Chinese persons fail to implement the countermeasures taken against the sanctioned persons, the violators may be held criminally liable under the Criminal Law.

For the UN sanctions adopted by China, there is no such licence available in China, unless authorised by the UN.

As to the counter-sanctions imposed under the Anti-Foreign Sanctions Law, the law does not specify the licensing mechanism. Since the government has not published implementing rules, it remains unknown whether there will be any licence available. The law provides that the authorities may decide to suspend, modify or revoke the sanctions and measures when circumstances are warranted, which suggests that parties might submit applications seeking special licences.

Under the UEL Provisions and the Blocking Rules, Chinese persons can apply for exemptions to conduct activities otherwise prohibited; however, there has been no practice yet.

According to the Notice of the China Banking Regulatory Commission on Issuing the Guidelines on the Management of Country Risk by Banking Financial Institutions, when a banking financial institution is conducting its due diligence on transaction parties, it shall strictly comply with relevant UN resolutions and remain watchful over its business and transactions involving sensitive countries or regions. Furthermore, banks are also required to develop their “know your customer” (KYC) profiles for the administration of bank accounts to implement the relevant UN sanction resolutions.

With the release of the UEL Provisions, it is also important to note that entities cannot undertake certain transactions related to Chinese importation, exportation and investment with the designated foreign entities. So far, the government has not published compliance guidance in terms of the UEL Provisions, the Blocking Rules or the Anti-Foreign Sanctions Law.

There are certain reporting requirements in the banking and financial sector. According to the Notice of the People’s Bank of China on Implementing the Relevant Resolutions of the United Nations Security Council, upon receipt of the notice from the MFA on the implementation of relevant UN sanction resolutions, financial institutions and specific non-financial institutions shall immediately enter information about individuals and entities included in sanction lists into the relevant business systems and conduct a retrospective review. If any of the listed persons are identified, the financial institutions and specific non-financial institutions shall take corresponding actions immediately and report the relevant information to the People’s Bank of China and other relevant authorities.

As to the counter-sanctions under the Anti-Foreign Sanctions Law, Chinese persons are required to implement the countermeasures as announced (such as asset-freezing). The law does not specify the reporting procedures for such persons implementing the asset-freezing.

As to the Blocking Rules, Chinese persons have the obligation to report to MOFCOM when they encounter prohibitions or restrictions by such foreign laws and measures; however, detailed procedure is unspecified.

On 9 January 2021, MOFCOM promulgated the Blocking Rules. The Blocking Rules essentially adopt a two-pronged test:

  • whether foreign laws and measures have unjustified extra-territorial application; and
  • whether such foreign laws and measures unjustifiably prohibit or restrict transactions between Chinese persons with third-country persons. 

Although the Blocking Rules do not specify the foreign laws and measures the application of which is to be blocked, which is subject to the government’s absolute discretion, US sanctions programmes that have extra-territorial applications (eg, “secondary sanctions”) are likely to be blocked under the Blocking Rules.

Chinese persons have the obligation to report to MOFCOM when they encounter prohibitions or restrictions by such foreign laws and measures. MOFCOM may issue prohibition orders not to recognise, enforce or observe certain unjustified extra-territorial application of foreign legislation and other measures. Further, Chinese persons shall abide by the prohibition order. They can also apply for exemptions to comply with the foreign laws and measures. Until now, MOFCOM has not issued any prohibition orders. The Blocking Rules also give the suffering parties the rights to file civil lawsuits to seek compensation from the party that complies with such foreign laws and measures.

The most significant development over the past 12 months is the enforcement of the Anti-Foreign Sanctions Law. A few individuals and companies have been sanctioned by the MFA pursuant to the Anti-Foreign Sanctions Law, including Raytheon Technologies, Lockheed Martin Space Systems Company and officials from the United States and Europe.

With the release of the UEL Provisions, China is changing its position to establish its own list of sanctioned individuals and entities. However, the UEL itself has not been released yet. For the Anti-Foreign Sanctions Law, although a number of foreign persons has been sanctioned, the authority has not yet established a consolidated list of foreign persons subject to the counter-sanctions.

Also, the authorities have not yet issued specific procedures for both adding to and removing from the lists.

China has an export control regime that is distinct from sanctions. The main purpose of export control policies in China is the non-proliferation of weapons and protection of national security and interest. The Chinese government has developed a basic legal framework for export controls of its own since 2002.

On 17 October 2020, the Standing Committee of the National People’s Congress passed the new Export Control Law (ECL), which implements export controls over goods, technology and service and other technical data regarding dual-use items, military items and nuclear items. The law took effect on 1 December 2020 and is the first special law in the field of export control.

Before the release of ECL, the Foreign Trade Law provided a general legal basis for the current Chinese export control regime, which announced that the State may restrict or prohibit the import or export of goods or technologies for various purposes, such as national security, public interests, short supply and protection of natural resources, etc. The newly passed ECL, effective from 1 December 2020, is now the core legal authority for export control-related matters.

Article 5 of the ECL states that the Departments of the State Council and the Central Military Commission are the primary authorities for China’s export controls. MOFCOM under the State Council will be responsible for control of dual-use items and Central Military Commission for military items. The Customs Office would also be responsible for enforcement at the border.

PRC persons and activities within PRC territory are subject to PRC jurisdiction for the purpose of export control. It is noteworthy that the new ECL exerts certain long-arm jurisdiction when any organisation or individual outside the territory of the PRC endangers the national security and interests of the PRC or obstructs the fulfilment of non-proliferation or other international obligations.

China will establish its restricted persons lists to designate those who:

  • violate end-user or end-use restrictions;
  • possibly endanger national security and interests; or
  • use controlled items for terrorist purposes.

Such importers or end-users will be listed in the restricted persons list and are prohibited or restricted from transactions of controlled items, and the export of relevant controlled items to these persons may be suspended.

China does not use the Wassenaar List. China has its own control lists, such as the Catalogue of the Import and Export Licence for Dual-use Items and Technologies (the “Dual-use Catalogue”) which is annually updated. Dual-use equipment, materials, software and related technologies are covered.

In addition to the list-based controls, for any item, when the exporter knows or ought to know the items are to be used as or for weapons of mass destruction or for terrorism purpose, or may jeopardise national security, the export without a licence should be prohibited.

Also, MOFCOM released the new Commercial Encryption Import Licence and Export Control Catalogue (the “New Catalogue”) on 2 December 2020, which is to implement Article 28 of the Encryption Law that took effect on 1 January 2020. Items listed in the New Catalogue require licences during importation and exportation pursuant to Article 28 of the Encryption Law. The New Catalogue has been incorporated into the Dual-Use Export Control List.

Administrative Penalties

These include the non-acceptance of export licence applications, prohibition of the person in charge from engaging in relevant export business activities within five years, revocation of licences, confiscation of export licences and revocation of export business qualifications for related controlled items, warnings, orders to stop illegal activities, confiscation of illegal gains and hefty fines.

Criminal Penalties

Charges may include the crime of smuggling, the crime of illegal business operations, the crime of leaking state secrets, or the crime of endangering national security and interests.

Criminal penalties include a criminal record, fines, confiscation of property, criminal detention, imprisonment, etc.

Before engaging in any export of a dual-use item, an exporter must first obtain a Registration Certificate for Exporters of Dual-Use Items from MOFCOM.

For export, the exporter shall submit the application documents of export licence to the local provincial commercial authorities and obtain a Dual-Use Items and Technologies Export Licence from MOFCOM upon its approval.

Obtaining an export licence requires a three-step process.

  • Step 1: registration with MOFCOM for engaging in dual-use exports.
  • Step 2: approval – application must be filed with MOFCOM to obtain an approval letter for exporting related dual-use products.
  • Step 3: obtaining licensing – upon issuance of the approval letter, the applicant may proceed to apply for the export licence.

Customs would subsequently review the relevant licence to release the goods.

With the release of the ECL, MOFCOM released the Internal Compliance Guideline for Export Control of Dual-use Items on 28 April 2021, which includes nine elements in establishing an efficient compliance system. The nine elements are as follows:

  • a policy statement;
  • an independent compliance department;
  • risk assessment;
  • a screening policy;
  • emergency actions;
  • compliance training;
  • compliance audit;
  • record-keeping; and
  • a management manual.

Chinese export control mainly controls the end-use of controlled items and the end-user who receives the items. In connection with the exportation application, exporters are required to provide documentation establishing the intended end-use and end-user for the controlled items, and end-users are required to commit not to change the end-use or transfer the item to any third party without authorisation. Exporters and importers are further obliged to report to the government when it becomes aware of any potential change in the end-use or end-user.

The Catalogue of Technologies Prohibited or Restricted from Export of 2008 was updated in 2020, and the Dual-use Catalogue is updated on an annual basis, with the most recent update on 31 December 2021, which took effect from 1 January 2022.

The most important development regarding export controls is the passage of the new ECL on 17 October 2020, which is the first law in the field in China.

On 22 April 2022, MOFCOM released the Draft Export Control Regulation of Dual Use Items (the “Draft Regulation”) for public comments. The Draft Regulation is the first implementing regulation under the ECL. The deadline for public comments has already passed, while the Draft Regulation is not yet in effect.

The Draft Regulation overall is consistent with the ECL, which emphasises the end-use/end-user controls, “blacklists” regime, third-party liabilities, etc. Key points of the Draft Regulation are summarised below.

Controlled Items

The Draft Regulation adopts a provision that authorises the government to regulate the non-dual-use item (not currently included in the control lists) under the export control regime if the item is related to national security and interest. This provision provides an authorisation for the Chinese government to further regulate items (such as hi-tech items or emerging technology) other than items related to nuclear explosive activities or weapons of mass destruction under the current export control regime. 

Export Control Classification

The Draft Regulation stipulates that items included in the control list will be assigned a new control classification number. The Draft Regulation does not specify how the control classification number will be assigned; it is understood that it might be similar to the system of Export Control Classification Numbers under US export controls.

Country-Based Risk Level

MOFCOM and other authorities will conduct a risk assessment on the destination country/area that dual-use items are exported to and determine the different risk level accordingly. The export control restrictions will vary based on different risk levels of destinations.

Licence Regime

In accordance with the current dual-use export licence application, the Draft Regulation also provides different licences: general licences and shipment-specific licences. The application process varies based on the different licences.

The Draft Regulation provides no time limit for approval of a licence application if the item has a major impact on national security, the national interest of China or foreign policy.

Investigations by Foreign Governments

The Draft Regulation prohibits Chinese entities from co-operating or committing to co-operate with the on-site visits or reviews related to export controls conducted by foreign governments without MOFCOM’s prior approval. This may include the post-shipment verification, end-user check and on-site verification under foreign export control regimes.

Licence Exceptions

The newly-introduced licence exceptions stated in the Draft Regulation only include a limited number of scenarios:

  • return of dual-use items brought into China for maintenance, testing or inspection;
  • return of dual-use items brought into China for exhibitions held in China;
  • export of civil aircraft parts and components for maintenance; and
  • other circumstances provided by MOFCOM.

Different from licence exception applied automatically, the exporter who believes the licence exception applies should register with MOFCOM before exporting.

Requirement for e-Commerce Platforms

The Draft Regulation requires customs brokers, freight forwarders, carriers, e-commerce platforms and financial service providers to cease their services where they discover violations of export controls and report such violations to MOFCOM. Failure to report the violations could constitute a violation of export controls. The Draft Regulation also provides mitigating factors for violations by customs brokers, freight forwarders, carriers, e-commerce platforms and financial service providers – eg, voluntary disclosure of violations or an internal compliance programme on export controls.

The Foreign Trade Law provides the legal authority for imposing AD/CVD duties and safeguard measures. Imposition of AD/CVD duties measures and safeguard measures (resulting in additional tariffs) is determined by MOFCOM and authorised by the Tariff Policy Committee under the State Council. MOFCOM has sole authority for the imposition of safeguard measures in the form of a quota. Customs is responsible for implementing the measures.

The MOFCOM Trade Remedy and Investigation Bureau (TRIB) is responsible for conducting dumping/subsidy and injury investigations, as well as the safeguard investigation.

Customs is responsible for implementing the measures and taking enforcement actions.

For AD/CVD investigations, MOFCOM may initiate interim reviews as requested by interested parties, including the petitioner, domestic industry, foreign exporters/producers and domestic importers. MOFCOM may also self-initiate interim reviews on its own discretion.

AD/CVD interim reviews and safeguard measure are conducted on a regular basis. Interested parties may request an interim review on AD/CVD measures within 30 days of the anniversary date of the enforcement of AD/CVD measures.

Interested parties, including the petitioner for investigation, domestic industry, foreign exporters and producers and domestic importers, may request an interim review or participate in an initiated interim review.

The relevant process for the investigation and imposition of duties and safeguards is as follows.

  • Petition received by MOFCOM.
  • Initiation: MOFCOM reviews the petition and decides whether to initiate an investigation within 60 days after the receipt of the petition (this may be extended under special circumstances). MOFCOM may also self-initiate investigation on its discretion.
  • Registration: interested parties may register with MOFCOM within 20 days after initiation of the investigation.
  • Investigation: MOFCOM may conduct the investigation and obtain information from interested parties by means of a questionnaire, sampling, hearing and on-site verification, etc.
  • Determinations and provisional measures: for AD/CVD investigations, MOFCOM will publish the preliminary determination within six months (up to nine months if extended) after the initiation. Within 12 months (up to 18 months if extended), MOFCOM will publish the final determination. There is no statutory time limit for safeguard investigation. MOFCOM may publish the final determination without a preliminary determination.

Findings with business proprietary information will be released to interested parties before the determinations. Both preliminary and final determinations will be published, which will disclose basic findings.

There is no jurisdictions on which the authorities cannot or will not impose AD/CVD duties or safeguards.

Reviews on AD/CVD measures are not mandatory. Interested parties may request for an interim review on AD/CVD measures within 30 days of the anniversary date of the enforcement of AD/CVD measures. MOFCOM may also self-initiate a review of AD/CVD duties.

For safeguard measures more than three years, MOFCOM shall conduct an interim review during the term of implement. There is no statutory time limit for the interim review.

Interim reviews on AD/CVD measures are as follows.

  • Request received by MOFCOM.
  • Initiation: MOFCOM may self-initiate the interim review or within 60 days after its receipt of the petition for review.
  • Investigation: MOFCOM may conduct the investigation and obtain information from interested parties by questionnaire, sampling and on-site verification, etc.
  • Decisions: MOFCOM will publish the final decision within 12 months after the initiation of review.

Safeguard measures are as follows: for safeguard measures with a term longer than three years, MOFCOM shall conduct an interim review; there are no provisions or regulations regarding the review process.

Interested parties may apply for an administrative reconsideration in accordance with the Administrative Reconsideration Law of the People’s Republic of China or bring a lawsuit to the court.

Administrative Reconsideration

An application for administrative reconsideration should be filed to the Tariff Policy Committee under the State Council within 60 days upon the notification of the measure. The Tariff Policy Committee will review the application and make a decision whether it will conduct a reconsideration or not, within five days after its receipt of application. If the Tariff Policy Committee decides to conduct a reconsideration, the decision will be made within 60 days (up to 90 days after extension) from the date of acceptance of the case.

Lawsuit

An interested party may bring a lawsuit to the court, against the Tariff Policy Committee’s decision not to conduct a reconsideration or a reconsideration decision, within 15 days from the date of receipt of the rejection decision or the date of expiry of the reconsideration period, respectively.

Due to the negative impact on international trade caused by the COVID-19 pandemic and the Russia-Ukraine conflict, China seems not to have resorted to AD/CVD measures to restrict imports. In 2022, MOFCOM initiated only one new AD investigation and no CVD investigations. The outlook for international trade is still uncertain, it remains to be seen whether the downward trend in the use of trade remedies will continue.

MOFCOM is in the process of amending three anti-dumping rules in the future:

  • the Rules on Sunset Review of Anti-Dumping Investigations.
  • the Rules on New Shipper Review of Anti-Dumping Investigations; and
  • the Rules on Price Commitment of Anti-Dumping Investigations.

The comment period ended on 20 October 2020.

The investment security mechanism in China is mainly established by National Security Law and Foreign Investment Law. Details of the mechanism are provided in the 2011 Provisions of MOFCOM on Implementing the Security Review System for M&A of Domestic Enterprises by Foreign Investors, the 2015 Measures for the Pilot Programme of National Security Review on Foreign Investments in Pilot Free Trade Zones, and 2021 Measures for the Security Review on Foreign Investments (“2021 Measures”).

Under the 2021 Measures, the review is initiated upon (i) the transacting parties’ own filling, (ii) a request by the Working Mechanism Office to file a mandatory application, or (iii) proposals by relevant stakeholders.

  • Once the review process starts, the Working Mechanism Office – headed by National Development and Reform Commission (NDRC) and MOFCOM – will, within 15 working days, make a preliminary determination as to whether a security review is necessary. If a review is deemed necessary, the Working Mechanism Office will start the general review process, which runs for a maximum of 30 working days.
  • If the Working Mechanism Office determines that the transaction may affect national security, a special review process will be initiated which would run for a maximum of 60 working days and can be extended.
  • A final decision will be made as to whether to allow the transaction to proceed, to require adjustments to the transaction, or to prohibit the transaction, depending on the circumstances.

Generally, parties are not allowed to proceed with the transaction during the whole review process.

The 2021 Measures established the Working Mechanism Office to administer the investment security mechanism. The Working Mechanism Office is established within the NDRC and headed by both the NDRC and MOFCOM. It receives applications from transacting parties, handles each stage of the review process, and issues official decisions as to whether to allow, allow with conditions, or prohibit a transaction.

The 2021 Measures defines and broadens the transactions subject to review. The types of foreign investments that might be subject to security review include:

  • greenfield investments where foreign investors, either solely or jointly with other investors, invest in new projects or enterprises in China;
  • M&A transactions; and
  • foreign investments by other means, whether direct or indirect (catch-all provision).

By inserting the catch-all provision, the 2021 Measures gives the Working Mechanism Office wide discretion in determining whether to subject a particular type of transaction to the review process.

As to the criteria used to determine whether a particular investment could have national security implications, investments that meet either one of the following conditions are subject to security reviews:

  • investment in the arms industry, an ancillary to the arms industry, or any other field related to national defence or security, and investment in an area surrounding a military installation or an arms industry facility (no actual control is required); or
  • investment in important agricultural products, important energy and resources, critical equipment manufacturing, important infrastructure, important transportation services, important cultural products and services, important information technology and internet products and services, important financial services, key technology, or any other important field related to national security, resulting in the foreign investor’s acquisition of actual control of the enterprise invested in.

If the transacting parties are unsure as to whether a transaction is subject to security reviews, they could consult with the Working Mechanism Office before deciding whether to file an application.

As a result of applying the criteria mentioned in the previous section, if a particular investment is determined to fall within the scope of investments subject to security reviews, the transacting parties shall submit an application for security review to the Working Mechanism Office.

There are no items and/or parties that are exempt from review if the transaction is subject to security review.

If the Working Mechanism Office decides to prohibit the transaction, the investment cannot be made. If the investment has already been made, the foreign investor will be ordered to dispose of the acquired equities or assets within a specified time period and take other necessary measures to restore the situation to that which existed before the investment was made and to eliminate any national security impact.

If the transacting parties fail to file an application for review even after the request by the Office or fail to execute the transaction in accordance with the conditions imposed by the Office, the Office can require the parties to take corrective actions. If the parties refuse to do so, they will be ordered to dispose of the investment and take other necessary measures to restore the situation to that which existed before the investment was made and to eliminate any national security impact.

Finally, failure to file an application after request by the Office or submitting false information during the review process can result in a negative credit record being entered against the parties in the relevant credit information system and joint sanctions might also be imposed on the parties according to relevant laws and regulations.

The investment security reviews or filings do not require any fees.

On 29 March 2022, the Administration Regulation on Foreign Investment in Telecommunications was amended for the third time after its second amendment published in 2016. The new amendment allows foreign shareholders to maintain more than 50% of the shares in telecommunications companies according to other applicable laws and regulations. As telecommunication sectors are likely to be considered important infrastructure, such investments may trigger the investment security review by the Working Mechanism Office.

Currently, there are very limited public cases with regard to transactions that were subject to the security review process and the relevant decisions made by the Working Mechanism Office. It remains to be seen whether the Office might publish guidance or guiding cases that could narrow down the scope of investment subject to security reviews and bring clarity to the application of the investment security mechanism in China.

There are several subsidies and incentive programmes for domestic production, such as promotion of domestic market grants, assistance for research and development expenses, the state key technology renovation project fund, preferential tax policies for township enterprises, etc.

There are no standards or technical requirements employed that aim at reducing imports and/or encouraging domestic production.

China maintains different certifications and accreditation requirements to control the standards of imports, such as:

  • Certificate of Origin;
  • Quarantine Inspection Permit (QIP);
  • Meat Quarantine Import Permit (MQIP);
  • Automatic Registration Form (ARF) on Poultry; and
  • Biotech Product Labelling Policy.

With regard to competition policy and anti-monopoly action, China published several compliance guidelines in 2020 for business operators, the automotive industry and intellectual property management respectively, which apply to both imported and domestic products.

For grain obtained from local farmers, China has adopted a minimum purchase price policy when the market drops below that minimum price.

In 2021, the National Development and Reform Commission strengthened price monitors on iron ore, steel, copper and aluminium to address abnormal fluctuations in prices.

The Guiding Opinions Promoting the Adjustment of State-owned Capital and the Reorganization of State-owned Enterprises issued by The State-owned Assets Supervision and Administration Commission of the State Council provides that it is necessary to promote the concentration of state-owned capital in major industries and key fields to encourage domestic production and enhance the controlling power of the state-owned economy.

Government procurement in China is primarily under the regulation of the Government Procurement Law (GPL), the Tender Law and local government procurement measures. The GPL requires government procurements to buy domestic goods, projects and services, with certain exemptions. 

There are no geographical protections measures employed that aim at reducing imports or encouraging domestic production.

All significant issues and developments have already been addressed.

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Shanghai
PR China

+86 21 2208 6373

+86 21 5298 5492

tangwy@junhe.com www.junhe.com
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Law and Practice

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JunHe LLP was founded in Beijing in 1989 and was one of the first private partnership law firms in China. It is one of the largest and most recognised Chinese law firms, and has a wide range of practices ranging from corporate, M&A, IP, antitrust, banking and capital markets to regulatory compliance, litigation, white-collar crime and trade. The trade team is much sought-after by clients for many trade, customs and trade controls matters. It has a strong and proven trade remedies practice, particularly in complex cases brought by the USA, the EU and China. In recent years, the team has established an outstanding practice in economic sanctions and export controls, helping multinational clients to do business with and in China, as well as leading Chinese companies coping with US laws and customs issues. It also advises multinational clients in Chinese customs matters and assists in customs audits and investigations.

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