In common with many other countries around the world, the UK has recently strengthened its legislation on foreign direct investment. The UK National Security and Investment Act 2021 (NSI Act), which entered into force in January 2022, provides for greatly enhanced scrutiny in cases of acquisitions (of companies, assets and intellectual property, or IP) which may have an adverse impact upon UK national security. The NSI Act is being used effectively to block and control some investments and has attracted criticism from China, but it should continue to be implemented robustly.               

While not expressly aimed at any particular country or countries – the NSI Act is country-agnostic and also applies to acquisitions by UK entities – it is broadly accepted that concerns about uncontrolled investment from particular countries, not least China, were a key driver behind implementing the NSI Act. The Intelligence and Security Committee (ISC) of the UK Parliament published a report in June 2013 on foreign involvement in critical national infrastructure, which focused on Chinese supplier Huawei’s entry into the UK telecoms market. At that time, the ISC identified a “disconnect between the UK’s inward investment policy and its national security policy” and recommended that there needed to be an effective process to alert the government to potential foreign investment and that security should be factored in when considering foreign investment.

The ISC’s latest report – published on 13 July 2023 (see also the press release) – considers the current nature of the national security threat to the UK from China, including Chinese acquisition of IP, technology and data. It concluded that there is a significant threat to the UK from these activities, with this “[presenting] a serious commercial challenge, but also … the potential to pose an existential threat to liberal democratic systems”. In the ISC’s view: “The threat to future prosperity and independence [has been] discounted in favour of current investment. This was short-sighted, and allowed China to develop significant stakes in various UK industries and critical national infrastructure.” 

Does NSI Act take aim at China?

The NSI Act is referred to as a positive, albeit belated, development, but the ISC was not convinced that national security is actually being taken into account when decisions are made under it. The ISC reserved its judgement on the difference that the legislation will make in responding to the threat from China.

Just two days before the ISC’s report was published, the UK Cabinet Office released its 2022–23 annual report on the NSI Act. The report, the first to cover a full year of operation of the NSI Act, shows a focus on investments originating from China. In the period covered, 42% of ‘call-ins’ (transactions considered in detail) and eight of the 15 (53%) final orders (imposing measures where a risk to national security was identified) involved acquirers associated with China.

The data in the annual report further shows that only around 4% of the 806 filings accepted during the period related to Chinese investors. There is a timing difference, but this suggests there is a high likelihood of a China-backed investment facing at least a detailed review on the basis that it may give rise to a risk to national security.

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In a very unusual move, the Chinese embassy in the UK issued a statement on the day after publication of the annual report (and therefore the day before publication of the ISC’s China report) strongly criticising the UK Government’s approach. The spokesperson, responding to a self-directed ‘question’ about the annual report that referred to those call-in and final order statistics, commented: “[The] facts have fully demonstrated that the UK government has adopted discriminatory practices against investment by Chinese companies, and we firmly oppose it… Abusing the national security law to deliberately suppress foreign enterprises violates World Trade Organisation rules, and brings nothing but harm to others as well as oneself. We strongly urge the UK to stop its wanton suppression of Chinese companies and instead provide them with a fair, just and non-discriminatory business environment.”

The Chinese Government had previously criticised in similar terms a specific case reviewed under the NSI Act. Responding to an order that Nexperia BV (a subsidiary of partially state-owned Chinese company Wingtech Technologies) must sell the additional 86% stake it had acquired in UK semiconductor fabrication company Nexperia Newport, its spokesperson said in a press conference: “The UK has overstretched the concept of national security and abused state power to directly interfere in a Chinese company’s normal investment cooperation in Britain.”

What is behind China’s opposition?

The statistics in the NSI Act annual report do seem to indicate that the NSI Act is indeed operating to limit Chinese investment in the UK and that this investment could be disproportionately impacted. The Chinese Government’s reaction could therefore be taken at face value as a reasonable complaint about the NSI Act regime going too far, indicating that it is effective. 

On the other hand, China has an interest in continuing with acquisitions in the UK, so regardless of its actual view and the practical effectiveness of the NSI Act regime, it has an incentive to make these types of comments and therefore seek to avoid further strengthening of the rules. That is probably the more likely position.

The ISC’s China report does not consider the NSI Act annual report or the Chinese Government’s reaction to it. However, the alarming tone and conclusions of the ISC’s report strongly suggest that even if there is “discrimination” this is justified and should be continued. The overt acquisition of assets is just one element of the Chinese threat to the UK but an important one. The government now has the legal tools in the NSI Act to deal with this and it should take heed of the ISC’s ultimate concern – that China’s ambition is to make other countries ‘reliant’ on it – by using those powers.