China is erecting walls to prevent money, technology and companies from leaving the country.<\/p>\n
This week, the State Council, China\u2019s cabinet, announced new rules requiring national security screening for Chinese companies seeking to invest overseas. The move follows regulations introduced<\/a> in April that allowed the authorities to intervene when foreign companies tried to relocate supply chains out of China.<\/p>\n Taken together, the measures amount to a new blueprint for the economic fortress China is building around its technology and supply chains amid rising tensions with Europe<\/a> and the United States<\/a>.<\/p>\n The rules are another sign that the economic principles of open markets and free trade, which have governed much of the world for decades and helped fuel China\u2019s extraordinary rise, are giving way to a more fragmented era.<\/p>\n From Washington to Brussels, the world\u2019s largest economies are choosing trade barriers over greater economic integration, driven in part by heightened concerns over China\u2019s global dominance in raw materials, manufactured goods and technology, and a surge in Chinese products around the world.<\/p>\n \u201cWe\u2019ve moved away from a world where laws made it easier to allow the flow of capital, people, technology and trade to go around,\u201d said Ben Kostrzewa, a partner and trade expert at Hogan Lovells in Hong Kong.<\/p>\n \u201cThe Chimerica economy envisioned 20 years ago turned out to be chimerical,\u201d he said, referring to the once-popular portmanteau of China and America.<\/p>\n Beijing has already offered a preview of what this new era could look like. It blocked Meta\u2019s $2 billion acquisition of Manus, an artificial intelligence company founded by Chinese engineers. It told Chinese refineries sanctioned by the United States not to comply. And it ordered a state-backed security equipment company not to cooperate with European Union investigators.<\/p>\n With each action, Beijing edges closer to a confrontation with the United States and Europe.<\/p>\n A Focus on National Security<\/p>\n Chinese policymakers have been building<\/a> a growing arsenal<\/a> of export controls, countermeasures and trade penalties in response to tariffs and other restrictions imposed by foreign governments.<\/p>\n The new State Council rules extend that effort to the overseas activities of Chinese companies and outline how Beijing could retaliate against foreign companies and individuals when Chinese investments are restricted.<\/p>\n The rules also give the authorities new powers to scrutinize Chinese companies seeking opportunities abroad, subjecting them to national security reviews that place investments into one of three categories: encouraged, restricted or prohibited.<\/p>\n Part of the motivation for this, lawyers say, is to keep money, talent and intellectual property in fields where China has a competitive edge from leaving the country.<\/p>\n Foreign businesses in China worry the measure could be interpreted broadly enough to include data from Chinese operations, which they must provide to international regulators as part of investigations or investment reviews.<\/p>\n China also clamped down on outbound investment a decade ago, targeting what it called \u201cirrational\u201d deals by corporate giants seeking trophy assets like the Waldorf Astoria. But those interventions were aimed at reducing financial risks<\/a> at home and largely involved banking regulators scrutinizing company balance sheets.<\/p>\n The new framework is different. Its focus is national security, and the effort is far more coordinated.<\/p>\n Green Light, Red Light<\/p>\n What is new in the rules unveiled this week is the effort to slow the overseas expansion of Chinese companies.<\/p>\n The measures restrict the movement of certain talent in sectors deemed sensitive, though Beijing has not defined which sectors qualify. They also give officials broader authority to review the movement of capital, including the power to force investors to sell shares or halt investments if national security concerns arise.<\/p>\n The rules also lay the legal groundwork for regulators to bar foreign entities from investing or operating in China, including expelling them from the country, in retaliation for actions taken by their governments against Chinese investments.<\/p>\n To some experts, the most striking effect of these rules is that they could constrain the ambitions of Chinese companies when they are under intense pressure to find new markets and the country\u2019s exports are reaching record levels.<\/p>\n \u201cChina has been encouraging companies to go overseas to set up production facilities, invest and bypass any constraints that may exist on manufacturing in China,\u201d said Lester Ross, a longtime China expert and senior counsel at Wilmer Hale.<\/p>\n Yet these new rules could complicate that, he added.<\/p>\n Chinese officials are calling the new rules a \u201cmilestone\u201d for outbound investment. But for many investors, the vague definition of what constitutes a national security concern has led to significant uncertainty.<\/p>\n D\u00e9j\u00e0 Vu?<\/p>\n The idea that companies or individuals need approval to invest overseas may seem unusual. But China has long restricted money flowing out of the country and currently limits individuals to moving $50,000 abroad each year. That tool has become increasingly important as economic growth has slowed.<\/p>\n