The new Regulations on Foreign Investors Merging with or Acquiring Domestic Enterprises, which took effect in September, introduced a new national economic security (NES) test for cross-border M&A creating concern among foreign investors. But they needn't worry, at least in the near term.
The new NES test might impose additional self-discipline on foreign acquirers, as the acquisition of domestic market leaders with a commanding market share might not be politically feasible. But this might not have been achievable under the old regime anyway.
The new NES rules are therefore not a signal that China is shutting the door to cross-border M&A, but the more politicized a proposed transaction becomes, the more likely it is that the NES levers will be pulled to block or modify the deal. This risk has always existed, but the political levers are perhaps more evident and might become more robust under the new...