BEIJING / WASHINGTON - Business leaders and experts in the United States are firing back against China's new rules for national-security reviews of foreign mergers and acquisitions, saying the plan is too broad and will lead to more friction and trade protectionism.

"This broad and subjective economic impact assessment is inconsistent with international best practices and allows greater risk of decisions based on economic protectionism, not actual security risks," said John Frisbie, president of the US-China Business Council.

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Last Saturday, the State Council, or China's Cabinet, said that it was establishing a ministerial panel to screen attempts by foreign firms that want to acquire at least a majority stake in a Chinese company. The new rules target key companies in defense, agriculture, energy, resources, infrastructure, transportation, technology or equipment manufacturing.

It is the first time that China has established a formal process for reviewing national security issues around international deals since 2008, when new antitrust legislation went into effect. The new review process will take effect next month.

The National Development and Reform Commission (NDRC) said the new regulations will increase the transparency of China's reviews of foreign investment and are in line with the World Trade Organization rules. The NDRC and the Ministry of Commerce will lead the new review committee.

"We are pleased that China has revised the basis for M&A review from 'national economic security' in earlier regulations to 'national security' in the new regulations, but are disappointed that the review process will still assess a proposed deal based on its impact on China's economy," Frisbie said in a statement to China Daily.

Derek Scissors with the Heritage Foundation said the review process is not helpful and the difficulties in Sino-American relations will remain unchanged.

"This (the review process) is essentially the same as the current system, where foreign acquisitions have been modified or rejected on insubstantial grounds," said Scissors, adding that trade frictions will likely increase because of the new review process.

Philip Levy with the American Enterprise Institute said the rules should be clear. He said the panel needs to be careful defining the scope of national security interest, otherwise "this can become a significant deterrent to foreign investment, as well as a source of conflict".

"If the rules are not clear and the process is arbitrary, the review panel will face many challenges," he said. "Excessively broad definitions can be economically damaging for China or any other country that might adopt them."

China's announcement come as the number of foreign takeovers grew by 57.9 percent in 2009. Thirty Chinese firms were acquired in deals with a disclosed value of $2.39 billion, according to ChinaVenture Group, a Beijing-based investment consulting firm.

Many developed countries, including the US, have long set up similar committees to review foreign investments that potentially pose a national security threat.

The Committee of Foreign Investment in the United States (CFIUS), a multi-agency panel chaired by the Treasury Department, reviews foreign M&As on a case by case basis. Unlike other countries, it has no prohibited sectors or industries.

The Wall Street Journal recently reported that CFIUS would likely recommend that President Barack Obama nix the acquisition of US tech company 3Leaf Systems by Chinese telecom equipment maker Huawei Technologies Co.

In recent years, CFIUS has blocked other planned M&As from Chinese investors in telecommunications, mining and manufacturing, incurring the anger of Chinese officials and business leaders.

"If a foreign country tries to adopt any trade protectionism means to block China's deals, a Chinese committee can do the same thing to their companies," said He Jingtong, a professor at the Institute of Economics of Nankai University in Tianjin.

China has also vetoed foreign deals of Chinese firms.

In 2009, China vetoed a $2.4 billion bid by Coca-Cola to buy Huiyuan Juice Group Ltd. It also rejected Carlyle's $375 million bid for the construction equipment maker Xuzhou Construction Machinery Group Inc in 2008.

Zhang Yansheng, director of the Institute for International Economics Research under the NDRC, said the new rules are part of China's progress in establishing a modern economic regulatory system. He said China will not use the panel as a weapon to block foreign investments.

One Chinese expert said the new review process could create some frictions. Song Guoyou, an economics professor at the Center for American Studies at Shanghai-based Fudan University, said that although the review committee is an important tool for China to protect its security interests, it will cause more disputes with the US.

Other Chinese experts said they are worried that China's new vetting process could actually work against Chinese companies attempting to expand overseas.

Yang Guisheng, partner with Dacheng Law Offices, the largest law firm in Asia, said the new rules could affect deals in developing countries or continents, such as resource-rich South America and Africa. More than half of China's overseas investments goes to the mining industries in both continents.

The US is one of the largest foreign investors in China. Between January and October of last year, the US invested $3.14 billion in China, a 10.75 percent growth over the same period in 2009, according to the Ministry of Commerce.

China has also been investing a great deal into the US, but 94 percent of its investments go to low-yield US government bonds.

Hu Haiyan contributed to this story.

China Daily