UPDATE 1-China to vet inward M&A deals for national security

Sat Feb 12, 2011 7:25am EST

Feb 12 (Reuters) - * Foreign M&A deals in China subject to additional checks

* New rules come into effect in March

* Beijing may block deals that it deems to harm security

(Add details, background)

BEIJING, Feb 12 (Reuters) - China will launch a state-level investment review body to check that merger and acquisition deals struck by foreign firms in one of the world's fastest-growing economies do not endanger "national security", China's State Council, the cabinet, said on Saturday.

The new regulation, which will come into effect in March, is set to install a new red-tape barrier for doing business in China, the world's second largest economy where double-digit growth has attracted more than $105 billion in foreign direct investment last year.

Foreign investments in military, agriculture, energy and resources, key infrastructure, transport systems, key technology sectors and "important equipment manufacturers" may be subject to reviews, according to a statement published on the central government Internet portal, www.gov.cn.

The review will be conducted by a "foreign investment security review board" under the cabinet. Members of the board will come from the National Development and Reform Commission, the Ministry of Commerce and other agencies on ad hoc basis.

The new body could enable China to turn the tables on some countries that have previously blocked its investments on national security grounds.

China suffered the biggest knock to its deal-making confidence in 2005, when state-controlled oil firm CNOOC Ltd withdrew an $18.5 billion bid for U.S. oil firm Unocal after the Senate moved to block it on national interest grounds.

But Beijing, which introduced an anti-trust law in 2008, has also blocked deals that do not conform with its national plans in the past.

China rejected Coca-Cola's $2.4 billion bid for China's top juice maker Huiyuan , in 2009 and buyout giant Carlyle's $375 million bid for Xugong, China's biggest construction equipment maker, in 2008.

The government wants to consolidate many heavy industries such as steel into the hands of a few big players, and it has blocked several foreign attempts to buy into its huge steel sector, by far the world's biggest.

In 2007, it blocked ArcelorMittal from gaining a majority stake in China Oriental Group and in 2009 it forced Russia's Evraz Group to abandon an option to take control of Delong Holdings Ltd , a Chinese steelmaker listed in Singapore, in a $1.5 billion deal.

INVESTOR-UNFRIENDLY?

China attracted $105.7 billion in foreign direct investments in 2010, 17.4 percent more than in 2009, but some foreign businesses have complained that the Chinese government is becoming more unfriendly towards investors.

According to the new regulation, Chinese government agencies, trade associations, competitors, suppliers and other related parties are allowed to apply for the start of a review of a foreign-related M&A deal.

The process will include two parts as "general review" and "special review". For those deals failed to pass the "general review", a "special review" will be started that may last up to 60 days.

If Beijing finds a deal that could potentially threaten national security, it can terminate the deal.

"Related departments and units must enhance the sense of responsibility to guard state and commercial secrets... to effectively safeguard national security," the cabinet said in the notice.

The body could be similar to Australia's Foreign Investment Review Board (FIRB), which has held sway over dozens of planned Chinese investments into resources sector in Australia, and which can block deals it deems not to be in the national interest.

The FIRB advises Australia's treasurer, who has the final say. In 2009, the state-owned China Non-Ferrous Metal Mining (Group) Co dropped a $400 million bid for 50.6 percent of Lynas Corp , owner of the world's richest deposit of rare earth minerals, saying the conditions set by the FIRB were too stiff.

Earlier in the same year, Treasurer Wayne Swan forced Chinese metals group Minmetals to withdraw a $1.7 billion bid for OZ Minerals until it revised the deal to exclude a mine situated in a restricted weapons testing area. (Reporting by Zhou Xin and Tom Miles, editing by Miral Fahmy)