In the News: 'Reverse CFIUS' Will Not Apply Retroactively; PBOC Drafts Rules on Data Security; and China Encourages Private Investment in Projects

Shanghai,China-March 25th 2023: facade of People’s Bank of China (PBC). The central bank of China. Credit: Robert/Adobe Stock

Outbound Investment Regulations Will Not be Retrospective

The Biden Administration’s long-anticipated executive order referred to as “Reverse CFIUS,” which will create the first national security screening of U.S. investments into China, will not apply retroactively, according to a report by The Deal. The order will not undo transactions agreed upon before it is issued, but it could undo American investments in Chinese companies and startups that close after the White House unveils the new regulation, which could happen later this summer or in the fall. President Biden is expected to invoke the International Emergency Economic Powers Act (IEEPA) as the supporting legal authority to issue the executive order.

The Treasury is likely to take the lead on “Reverse CFIUS” because of its experience with CFIUS, the acronym for the Committee on Foreign Investment in the U.S., and for the role it plays with sanctions and in the development of an outbound investment review scheme. The main target of the order will be investments in innovations with military applications, including technology transfer, intellectual property and management expertise. The “Reverse CFIUS” order would allow the government to block transactions and collect data on investments into China that could raise national security issues. The White House directive is set to be released as Congress considers legislation to establish an outbound investment regimen. Once regulations are in place for the outbound screening, joint ventures, private equity, venture capital and other transactions that are not yet completed could be undone. The rationale behind the new regulations is to safeguard America’s leadership on cutting-edge technologies such as semiconductors, artificial intelligence and quantum computing.

According to Jonathan Gafni, senior counsel and head of U.S. foreign investment at Linklaters, it’s going to be easiest to sell “Reverse CFIUS” as not being invasive if it’s forward-looking rather than backward-looking. After the executive order comes out, there needs to be a framework set up for reviewing future transactions. Gafni also said that “reverse CFIUS” could expand in the future to retrospectively screen investments. David Plotinsky, a partner at Morgan, Lewis & Bockius, warned that companies could still find themselves in a complicated situation if they have contractual obligations to make multi-phase investments. Investment phases that occur after regulations get issued will be swept up by the new law.

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PBOC Issues Draft Rules on Data Security

China’s central bank, the People’s Bank of China (PBOC) issued draft rules on data security management for the bank’s own operations, according to a Reuters report. These draft rules, the Measures for the Administration of Data Security in the Business Areas of the People’s Bank of China (Draft for Comments) (中国人民银行业务领域数据安全管理办法 (征求意见稿), have been issued as Beijing further tightens its grip on data usage and security in an environment of rising geopolitical tensions and data privacy concerns. The draft aims to improve the implementation of China’s Data Security Law, referring specifically to data governance related to the business scope of the PBOC. Such businesses include cross-border RMB business, interbank trading, payment and clearing business, digital RMB business, credit rating and anti-money laundering.

The central bank will establish a system of accountability for data security and also punitive measures for violations in order to monitor all data processing activities. Under the rules, the central bank’s data collected within the country, if required by law, will be stored domestically. Data processors are banned from sectioning or reducing the size of the data to avoid official security checks when the data is exported. The draft also proposes the implementation of a rating and categorization system where all data will be marked and rated centrally in accordance with a set of standards issued by the PBOC. It aims to ensure targeted and differentiated data security management as well as the imposing of a set of technical measures.

Relatively sensitive data could see its sensitivity downgraded after a process that strips the data of information on certain individuals and organizations. With a set of laws including the Data Security Law, China requires key data sets to be stored within the country. Cross-border data movements should apply for a security review under certain circumstances. The draft stipulated that compliance should not follow a “one-size-fits-all” approach. Data-governing measures could be relaxed by applying for internal reviews, or if the use of data has a clearly-defined purpose.

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China Reveals Steps to Increase Private Investment

China’s National Development and Reform Commission (NDRC), unveiled measures (关于进一步抓好抓实促进民间投资工作努力调动民间投资积极性的通知) that seek to promote, encourage and push private investment in some infrastructure sectors and said it will strengthen financing support for private projects, according to Reuters. The central government released guidelines (中共中央 国务院关于促进民营经济发展壮大的意见) last week as authorities pledged to make the private sector “bigger, better and stronger” under a weak post-pandemic economic recovery. Over the past several weeks, investors have been looking forward to more stimulus measures to prop up an economy that is rapidly losing momentum. However, some initial steps were insufficient and have underwhelmed markets.

The NDRC said that it wants to attract more private capital to contribute to the construction of major infrastructure projects nationally. A list of sectors ranging from transport, water, clean energy, new infrastructure to advanced manufacturing and modern agriculture will be available to private investors. China said it will create a “traffic light” system to label clearly the areas in which private investors are able to invest. The NDRC said it recognizes the significance of improving private investment and it will strive to keep the proportion of private fixed-asset investment at a “reasonable level.” Private fixed-asset investment shrank by 0.2% in the first six months of this year compared to a year earlier, in contrast to an 8.1% rise in investment by state entities, highlighting weak private sector confidence.

The NDRC also pledged to strengthen financial support for private-invested projects. A special fund from the central government budget will be set up to give annual support to 20 cities with high private investment growth. The NDRC will also sort out the list of private investment projects to be sent to banks and guide them to increase their loan support for private investment, said Luo Guosan, head of the NDRC’s Department of Investment. The NDRC, along with the China Development Bank (CDB), the Agricultural Development Bank of China (ADBC), ICBC, ABC, BOC, CCB and CITIC Bank, had announced plans to establish a pilot investment and lending cooperation mechanism to help promote and expand private investment.

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