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China passes constitutional National Security Law
Practical Law UK Legal Update 2-617-6054 (Approx. 4 pages)
China passes constitutional National Security Law
| Published on 22 Jul 2015 • China |
The NPC Standing Committee has passed a new National Security Law. The new law is effective from 1 July 2015.
National Security Law requires state to safeguard key economic interests
The new law requires the state to safeguard key economic interests including industries that are vital to the national economy, key industrial sectors, key infrastructure projects and key construction projects (Article 19).
The law identifies the following industrial sectors:
- Finance.
- Resources and energy.
- Food safety.
- Culture.
- Technology.
- Cybersecurity.
- Ecological and environmental protection.
- Nuclear technology.
- Exploration and utilisation of outer space, international seabed areas and polar regions.
Apart from the industrial sector, a connection to terrorism, extremism or religious affairs are also specified as factors that can bring a matter within the ambit of the new law.
New constitutional legislation on the national security regime passed
The National People's Congress (NPC) Standing Committee (全国人民代表大会常务委员会（全国人大常委会)) promulgated the National Security Law of the People’s Republic of China 2015 (2015 National Security Law) on 1 July 2015. The law overhauls the national security review (NSR) process in China (PRC) (中国(中华人民共和国)).
The new law defines national security for the first time as comprising a status under which the following are relatively free from danger, international and domestic threats and the ability to maintain security on a continuous basis:
- The State's political regime, sovereignty, unity and territorial integrity.
- The welfare of the people.
- Sustainable economic and social development.
- Other significant national interests.
(Article 2)
NSR mechanisms will apply for foreign investment, technology, network IT and construction projects
The new law requires the state to establish an NSR mechanism for matters that affect or may affect national security, including:
- Foreign investment.
- Network IT products and services.
- Construction projects.
(Article 59)
The government also reserves the right to specify matters or key technologies for which NSR mechanisms must be established, and to establish mechanisms for any other “major activities that have national security implications”.
NSR of foreign investments
The first national legislation on NSR was the Notice of the General Office of the State Council on Launching the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors 2011 (2011 notice). The 2011 notice requires M&A transactions in which foreign investors acquire the equity or assets of domestic Chinese enterprises in sensitive or key industries to undergo NSR. For more information on NSR scrutiny in M&A transactions, see Practice note, China aspects of global M&A: Foreign investment restrictions and National Security Review (NSR) and Article, China's new M&A review rules: a comparison with the US.
In May 2015, China adopted a more extensive and sophisticated NSR regime for all foreign investment activities in China’s free trade zones (FTZs). Inside the FTZs, all foreign investments in the FTZs that have national security implications must undergo NSR, whether they are structured as:
- The establishment of new enterprises (also called greenfield investment).
- Mergers or acquisitions of existing enterprises.
- Other investments, such as contractual arrangements (for example a variable interest entity (VIE) structure), share entrustment, trust, reinvestment, overseas transaction, lease or subscription of convertible bonds.
(Notice of the General Office of the State Council on Printing and Distributing the Trial Measures for the National Security Review of Foreign Investment in Pilot Free Trade Zones 2015.)
For more information on the NSR regime implemented in the FTZs, see Practice note, China (Shanghai) Pilot Free Trade Zone: overview: National security review.
On 19 January 2015, the Ministry of Commerce (MOFCOM) (中华人民共和国商务部) released a Draft Foreign Investment Law (draft law) for public comment. Under the draft law, as in the FTZs, all foreign investment activities which damage or may damage China's national security would have to undergo NSR (see Legal update, Draft Foreign Investment Law open for comment until February 17).