MUFG Bank (China) Regulation Newsletter January 5 2021, Issue 44  
MUFG Bank(China), Ltd. A member of MUFG, a global financial group 1 
MUFG Bank (China) Regulation Newsletter January 5, 2021, Issue 44 
National Development and Reform Commission and Ministry of Commerce Issue Rules on the National Security Review of Foreign Investment 
 On December 19, 2020, the National Development and Reform Commission (NDRC) and the Ministry of 
Commerce (MOFCOM) issued “Rules on the National Security Review of Foreign Investment” (2020 Order No. 37, hereinafter the “NSR Rules”). The NSR Rules that detail the foreign investment security review system in China will take effect on January 18, 2021 as regulations relevant to the Foreign Investment Law. 
1. Background of the Policy 
The Foreign Investment Law and its regulations for implementation, which came into effect on January 1, 
2020, set forth three main measures to manage foreign investment: 1) the management system for pre-entry domestic treatment and negative lists, 2) the foreign investment data reporting system, and 3) the foreign investment security review system. In particular, the foreign investment security review system is an international management system for foreign investment, mainly focusing on balancing economic benefits and national security while also attracting foreign investment.  
At beginning, China’s foreign investment security reviews mainly targeted M&As by foreign investors. In 
free trade zones (FTZs), however, the country has expanded the scope of foreign investment security reviews to new projects, the establishment of new FIEs, and other types of investment (VIEs, shareholding by proxy, etc.). Please refer to Fig. 1 for more details on the history of the relevant regulations. 
[Fig. 1] History of Regulations Pertaining to Foreign Investment Security Reviews 
Year issued Order No. Name of law/regulation Outline 
2007 Presidential order No. 68 Anti-monopoly Law 
First explicit stipulation 
that the Chinese 
government would conduct NSRs on M&As by foreign investors 
2011 Guobanfa [2011] No. 6 
Notice on creation of an NSR system relating to M&As of a non-foreign enterprise by foreign investors 
Formal establishment of the NSR system for M&As by foreign investors 
 Foreign investors are required to check whether they are subject to a national security review (NSR) when 
establishing a new foreign-invested enterprise (FIE) or purchasing equity in a non-foreign enterprise.  
 The NSR will target foreign investment in defense, military and other key sectors that pertain to national 
security. 
 Foreign investors are required to complete the relevant consultations, applications and reviews for NSR 
before executing their investment. 
[Key Takeaways] 
China Business Solution Office 
RMB Internationalization Business Promotion Office 
MUFG Bank (China) Regulation Newsletter January 5 2021, Issue 44  
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2015 Guobanfa [2015] No. 24 
Rules on NSR for foreign investment in FTZs 
Expansion of the scope of foreign investment security reviews in FTZs to new projects, the establishment of new FIEs, and other types of investment* 
NDRC-MOFCOM Order No. 37 in 2020 
Rules on the National Security Review of Foreign Investment 
Formal establishment of the national-level NSR system for foreign investment 
* Other types of investment include the variable interest entity (VIE) model, shareholding by proxy, trust, reinvestment, offshore 
transactions, leasing, and the purchase of EBs (exchangeable bonds). 
2. Main Details of the NSR Rules 
1) A Foreign Investment Security Review Working Mechanism 
The government will establish a foreign investment security review working mechanism, led by NDRC and 
MOFCOM and being responsible for organizing, coordinating, and guiding foreign investment security review work. The Working Mechanism Office is established at the NDRC and can be contacted via the following methods*. 
Address: 1st fl., NDRC West Bldg. Sanlihe South 5-Xiang, Xicheng District, Beijing Phone: 010-68501622, 68502979 
*Source: NDRC Notice No. 4, 2019 
2) Types of Foreign Investment Transactions Subject to NSR 
[Fig. 2-1] Types of Foreign Investment Transactions Subject to NSR  Foreign investors establish a new domestic project or enterprise independently or jointly with other 
investors.  
 Foreign investors purchase equity or assets from a non-foreign enterprise via an M&A.  Foreign investors invest domestically through other types of methods. 
*Investments from Hong Kong, Macau, and Taiwan are to be executed based on the NSR Rules. 
*The method of applying foreign investment security reviews to securities is being formulated. 
3) Sectors of Foreign Investment Subject to NSR 
[Fig. 2-2] Sectors of Foreign Investment Subject to NSR 
Defense and military industries 
 Investment in the military industry, military-related industries and other areas 
relating to China’s national defense and security 
 Investment in the locations surrounding military installations and military facilities 
Investing in key 
sectors relating to national security and obtaining actual 
control of investment targets 
Scope of key sectors 1) Important agricultural products, 2) important energy and resources, 3) important equipment manufacturing, 4) important infrastructure, 5) important transportation services, 6) important cultural products and services, 7) important information technology and internet products and services, 8) important financial services, 9) core technologies, and 10) other important sectors 
Situations in which foreign investors obtain actual control  Foreign investors own more than 50% of the shares  Foreign investors own less than 50% of the shares but have sufficient voting rights 
to exert a material influence over the shareholder vote and resolutions of the board 
MUFG Bank (China) Regulation Newsletter January 5 2021, Issue 44  
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of directors and shareholders' meetings/general meetings 
 Foreign investors gain actual control of business decision-making, human 
resources, financial matters, technologies, etc. 
*If the foreign investors are not sure if their investment sectors are subject to NSR, the investors may consult with the Working 
Mechanism Office about the specific projects. 
4) Application for NSR 
[Fig. 2-3] Application for NSR Foreign investors or the relevant non-foreign parties are required to voluntarily submit applications of the investments that fall within the scope of the review to the Working Mechanism Office before executing investments. 
Application materials 
1) Application form*, 2) investment plan, 3) explanation of an impact on national security which the foreign investment may have, and 4) other materials set forth by the Working Mechanism Office. 
*The application form is required to include the names, addresses, and the scope of business 
responsibilities of the foreign investors, as well as the basic information of the investment and other 
matters set forth by the Working Mechanism Office.  
5) NSR Process 
[Fig. 2-4] NSR Process 
Outline of the NSR Process 
Stage Review Period Result/decision of the review Remarks 
Stage 1: Preliminary review 
15 working days 
○ No NSR required  The applicant is not 
allowed to execute any foreign investment during the review period.  
 The office shall notify the 
applicant of the decision of the review in writing. 
 If the impact on national 
security can be eliminated by imposing additional 
conditions, the applicant may accept such 
conditions in writing. 
△ NSR required → Referred to Stage 2  
Stage 2: General review 30 working days 
○ Pass the NSR 
Impact or possible impact on national security identified → Referred to Stage 3 
Stage 3: Special review 
60 working days May extend under special circumstances 
○ Pass the NSR 
△ Impact on national security confirmed 
The investment is approved subject to additional 
conditions 
× The investment is prohibited 
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6) Revisions to or Withdrawal of the Foreign Investors’ Investment Plan 
[Fig. 2-5] Revisions to or Withdrawal of the Foreign Investors’ Investment Plan 
During review period 
Investment plan revisions 
The Working Mechanism Office shall recalculate the review period from the date of receiving the revised investment plan. 
Withdrawal of investment The Working Mechanism Office terminates the NSR. 
After passing 
review 
Investment plan revisions 
If the applicant revises the investment plan after it has passed the NSR, it must resubmit the plan to the Working Mechanism Office if the proposed investment has or potentially has an impact on national security. 
7) Execution upon Receiving the NSR Result 
[Fig. 2-6] Execution upon Receiving the NSR Result 
NSR decision Investment execution 
Investment approved Foreign investors are permitted to execute the investment. 
Investment approved conditionally 
Foreign investors are permitted to execute the investment subject to additional conditions. 
Investment prohibited 
 Foreign investors are not allowed to execute the investment.  If foreign investors have already executed the investment, they are required to 
dispose of the equity or assets and/or take other necessary measures by the deadline to return to the state before execution and eliminate any impact on national security. 
8) Disciplinary Actions for Regulatory Violation 
[Fig. 2-7] Disciplinary Actions for Regulatory Violation 
Types of regulatory violation Disciplinary actions to be taken 
Investment executed with no application made in compliance with the regulations 
 The regulators shall order foreign investors to make an 
application by the deadline.  
 If foreign investors refuse to make an application, the 
regulators shall order them to dispose of the equity or assets and/or take other necessary measures by the deadline to return to the state before execution of the investment and eliminate any impact on national security. 
The regulators shall record the foreign investors as having poor credit on the state-run financial credit database and take disciplinary actions based on the relevant regulations. False materials provided or relevant information concealed 
 The regulators shall retract the relevant decision.   If foreign investors have already executed the investment, 
the regulators shall order them to dispose of the equity or assets and/or take other necessary measures by the deadline to return to the state before execution of the investment and eliminate any impact on national security. 
Investment not executed in compliance with the additional conditions 
 The regulators shall issue an improvement order.   If foreign investors refuse to follow the improvement 
order, the regulators shall order them to dispose of the equity or assets and/or take other necessary measures by the deadline to return to the state before execution of the 
MUFG Bank (China) Regulation Newsletter January 5 2021, Issue 44  
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investment and eliminate any impact on national security. 
3. Impact on Enterprises 
The foreign investment security review system is an international management system for foreign 
investment and one of the major Chinese measures to manage global foreign investment. In the days to come, foreign investors will be required to check in advance whether their investment activity or investment sector is subject to an NSR when executing an investment in China (e.g. establishing a new FIE or purchasing equity in a non-foreign enterprise in the region). If you are not sure whether you are subject to an NSR, you can consult with the Working Mechanism Office. If you have determined that you are subject to an NSR, you must pass the NSR as required by the NSR Rules prior to starting activities for investment in China based on the regulations. 
We will continue to follow up on related information and provide further updates as they come.  
MUFG Bank (China) Regulation Newsletter January 5 2021, Issue 44  
MUFG Bank(China), Ltd. A member of MUFG, a global financial group 6 
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