The news that China will review proposed mergers and acquisitions (M&As) by foreign firms has been a hot topic among foreign media recently. Some view the new security review system as a signal that China is changing its attitude toward foreign capital, while others worry that future deals might be prohibited by the Chinese government on the grounds of safeguarding national security.

However, these media have misread the new security review system, as it is actually aimed at encouraging foreign M&As in China.

The security review system can be regarded as an outcome of and a commitment to China's earlier policy. On April 6, 2010, China's State Council issued Several Opinions on Further Improving the Work of Foreign Capital Utilization, known as the No 9 Central Document, which set out guidelines on the future development of China's foreign investment policies.

In Article 12, for example, it encourages foreign capital to participate in the reorganization of corporations and M&As in the Chinese mainland with equity participation and mergers. It supports listed companies introducing strategic foreign investors, and establishes a standard process for foreign capital portfolio investment and M&As. It also proposes antitrust investigations according to the law and speeding up the creation of a safety review system for reviewing mergers and acquisitions involving foreign firms.

The State Council also emphasized the positive effects of foreign capital and M&As - optimizing resources, promoting technological advances and improving management systems.

It is clear that the review system is envisaged as encouraging the development of foreign capital.

China's National Development and Reform Commission and the Ministry of Commerce (MOFCOM) will lead the new joint review committee, which will examine applications for acquisitions of domestic enterprises that concern either national defense security or national economic security. The new system will scrutinize M&As pertaining to national defense, key agriculture, major energy and resources, major infrastructure and transport, key technology, and major equipment manufacturing.