China Tightens Rules on Foreign Investment and Technology Transfer

Kathmandu. China on Monday unveiled new rules to further tighten foreign investment, technology, data, and national security-related foreign transactions. 

This decision comes after Beijing ordered Meta to cancel the acquisition deal of artificial intelligence (AI) startup Manus a month ago.

The new rules, released by China's State Council, will come into effect from July 1. One of the most significant provisions of the rule makes government approval mandatory before sending restricted goods, technology, services, or related data from China abroad. 

These rules for the first time provide a clear legal basis for China to cancel even completed foreign investment and acquisition agreements. According to analysts, this will significantly increase regulatory risks for international investors, especially those investing in China's technology and artificial intelligence sectors. 

Chinese officials had previously stated that the Meta-Manus agreement violated Chinese laws related to foreign investment, although it was not disclosed which law was violated.  According to analysts, the decision sent a message that stakes in Chinese companies should not be transferred to foreign investors without government approval.

Beijing views artificial intelligence as a sensitive area directly linked to national security. Therefore, it has been trying to control the outflow of technology, intellectual property, and skilled manpower.

The new rule specifically prohibits the transfer of cross-border manpower in sensitive areas without government permission. This provision is believed to be aimed at Manus's strategy of moving its employees and operational activities to Singapore before the deal with Meta. Such practices are commonly referred to as 'Singapore-washing', where Chinese companies move their operations to countries like Singapore to attract foreign investment or circumvent regulatory restrictions.

Under the rules, investors will not be allowed to take out restricted goods, technology, services, or data by sending technical personnel abroad, having employees work in other countries, providing cross-border technical consulting, or arranging international training. It is analyzed that this could affect the plans of Chinese companies to expand operations abroad to enter foreign capital markets and avoid intense competition within the country.

Investment Can Be Blocked in the Name of National Security

The new rule gives the State Council the authority to conduct security reviews of foreign investments or asset transfers that could affect national security. If any investment is deemed risky, the government can order the investor to sell their shares, force them to stop the investment, or impose fines. 

Another important aspect of the rule is the provision of reciprocal restrictions. If any country imposes restrictions on Chinese investment, China can also prevent companies from that country from conducting Chinese business. For example, if the US government places a Chinese technology company on a sanctions list, China can retaliate by blocking an unrelated Chinese business or acquisition agreement of a US company.

However, the rule does not provide clear details on what types of investments or asset transfers can be blocked on the grounds of national security. This appears to give broad discretion to Chinese regulatory bodies in the future. These new rules come after two supply chain security orders issued in April.

Those orders also give Beijing the right to prevent employees of foreign companies that implement foreign sanctions against China from leaving the country.

The rules were implemented immediately without prior notice, without going through a process like a new law being discussed in the Chinese parliament. This has reportedly increased concern among the foreign business community operating in China.

According to analysts, the new rules signal that China is further tightening its control over assets related to artificial intelligence, technology, data, and national security.