National Security Reviews and Foreign Investment Screening in China: A Critical Guide for 2026

China's national security review system for foreign investments has become increasingly comprehensive and rigorous, creating significant implications for foreign investors and businesses. As we enter 2026, understanding these requirements is essential for any foreign entity considering investment in China or seeking to maintain existing operations.

Overview of China's National Security Review System

China's foreign investment security review framework is primarily governed by:

• Foreign Investment Law (2020): Established the basic framework for security reviews
• Measures for Security Review of Foreign Investment (2020): Provides detailed procedures and criteria
• Implementation Rules and Guidelines: Additional regulations issued by relevant ministries

The system is administered by a multi-agency working mechanism led by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM).

Scope and Criteria for Security Reviews

Foreign investments that may affect national security are subject to security review. This includes:

1. Types of Transactions Subject to Review

The following transactions may trigger security review:

• Foreign acquisitions of Chinese companies
• Foreign investments that obtain control or substantial influence over Chinese companies
• Foreign investments in sensitive sectors regardless of ownership level
• Foreign investments that may affect national security through other means

2. Sectors Subject to Enhanced Scrutiny

Investments in the following sectors face particular scrutiny:

• Critical Infrastructure: Telecommunications, energy, transportation, water conservancy, and financial infrastructure
• Key Technologies: Defense, aerospace, semiconductor, artificial intelligence, and biotechnology
• National Security Sectors: Defense industry, national security-related industries
• Important Agricultural Products: Strategic food security sectors
• Energy and Resources: Strategic energy and mineral resources
• Transportation and Communications: Strategic transportation routes and communication networks

3. Review Criteria

Reviews consider several factors:

• Impact on national defense security
• Impact on national security related to the national economy
• Impact on the basic social life order
• Impact on the research and development capabilities of key technologies related to national security
• Actual control by foreign investors over the invested enterprises
• Other factors affecting national security

Recent Developments and 2026 Outlook

The security review system has evolved significantly in recent years:

1. Enhanced Scrutiny Post-COVID

The pandemic has heightened focus on supply chain security and strategic industries:

• Increased attention to healthcare and biotechnology investments
• Enhanced scrutiny of supply chain dependencies
• Focus on critical infrastructure resilience

2. Technology and Data Security Focus

Recent developments emphasize:

• Data security and localization requirements
• Technology transfer and intellectual property protection
• Cybersecurity implications of foreign investments

3. Coordination with Other Regulatory Systems

The security review system increasingly coordinates with:

• Antitrust review processes
• Data localization and cross-border transfer regulations
• Export control and dual-use item regulations
• Anti-foreign sanctions law compliance

Impact on Foreign Investors

Foreign investors face several challenges under the current system:

1. Uncertainty and Timing

Security reviews create significant uncertainty:

• No fixed timeline for completion of reviews
• Potential for extended review periods
• Limited ability to predict review outcomes
• Prohibition on implementing transactions during review

2. Transaction Structuring Challenges

Investors must carefully structure transactions to:

• Minimize security review risks
• Ensure compliance with all applicable requirements
• Maintain transaction flexibility
• Address potential regulatory concerns proactively

3. Compliance and Monitoring Obligations

Post-investment compliance requirements include:

• Ongoing reporting obligations
• Compliance with conditions imposed during review
• Coordination with regulatory authorities
• Adaptation to changing regulatory requirements

Review Process and Procedures

The security review process typically follows these steps:

1. Initial Review (30 working days)

During the initial review:

• Authorities assess whether the transaction requires security review
• Preliminary determination of national security implications
• Potential for early termination of review

2. Substantive Review (60 working days)

If the initial review indicates potential security concerns:

• Full security review is initiated
• Multi-agency assessment of national security implications
• Consultation with relevant stakeholders
• Potential for requesting additional information from parties

3. Extended Review (if necessary)

Complex cases may require extended review periods:

• Review may be extended beyond the standard timeline
• Additional consultations and assessments
• Special procedures for complex transactions

Compliance Strategies for Foreign Investors

To navigate the security review system effectively, foreign investors should:

1. Conduct Pre-Transaction Assessment

Before proceeding with any investment:

• Assess the likelihood of security review requirements
• Evaluate potential national security implications
• Consider transaction structuring alternatives
• Prepare for potential review procedures

2. Engage with Authorities Early

Early engagement can help:

• Clarify regulatory expectations
• Address potential concerns proactively
• Streamline the review process
• Improve the likelihood of approval

3. Prepare Comprehensive Documentation

Thorough documentation should include:

• Detailed transaction descriptions
• Corporate structure and ownership information
• Technology and intellectual property details
• Market position and competitive analysis
• National security impact assessments

4. Implement Robust Compliance Programs

Post-investment compliance measures should include:

• Regular compliance monitoring
• Reporting and disclosure procedures
• Internal controls and governance structures
• Coordination with regulatory authorities

Industry-Specific Considerations

Different industries face varying levels of scrutiny:

Technology and Telecommunications

These sectors face the highest level of scrutiny:

• AI, semiconductors, and quantum computing technologies
• Telecommunications infrastructure and equipment
• Data processing and cloud services
• Cybersecurity and encryption technologies

Healthcare and Biotechnology

Post-pandemic focus has increased scrutiny:

• Pharmaceutical manufacturing and research
• Medical device and equipment
• Health data and genomics
• Biotechnology research and development

Energy and Infrastructure

Critical infrastructure investments face enhanced review:

• Power generation and distribution
• Natural gas and oil infrastructure
• Transportation networks and ports
• Water resources and environmental infrastructure

Practical Steps for Foreign Investors

Foreign investors should take the following immediate actions:

1. Assess Transaction Risk: Evaluate the likelihood of triggering security review
2. Engage Legal Counsel: Work with experienced national security and investment attorneys
3. Prepare Documentation: Develop comprehensive filing materials
4. Consider Timing: Account for potential review delays in transaction planning
5. Explore Alternatives: Consider structuring options to minimize review risks
6. Monitor Developments: Stay informed about regulatory changes and enforcement trends

Penalties and Consequences

Non-compliance with security review requirements can result in:

• Transaction prohibition or unwinding
• Financial penalties and sanctions
• Restrictions on future investments
• Forced divestiture requirements
• Reputational damage and market access limitations

International Coordination and Reciprocity

China's security review system increasingly considers:

• Reciprocity in foreign investment treatment
• International coordination with allied countries
• Responses to foreign investment restrictions on Chinese entities
• Alignment with international standards and practices

Looking Ahead: 2026 and Beyond

Several trends will shape the security review landscape:

• Increased focus on emerging technologies
• Enhanced coordination between regulatory agencies
• More detailed implementation guidelines
• Greater scrutiny of supply chain dependencies
• Integration with broader economic security policies

Conclusion

China's national security review system represents a critical consideration for foreign investors. The system's broad scope, uncertain timelines, and potential for significant consequences require careful planning and expert guidance.

Foreign investors who proactively address security review requirements and implement comprehensive compliance programs will be better positioned to successfully navigate China's investment landscape in 2026 and beyond. Given the complexity and potential impact of these requirements, engaging experienced legal counsel is essential for any foreign investment in China.