China tightens overseas investment rules after blocking Meta-Manus deal

Highlights:

• China outlines legal basis for unwinding completed foreign investment deals
• Rules designed to prevent 'Singapore-washing', overseas talent transfer in sensitive sectors
• Rules can punish foreign firms if their home country restricts Chinese investment

China issued sweeping new rules on Monday tightening control of overseas deals that involve Chinese investors, technology, data and national security, a month after Beijing ordered Meta to unwind its acquisition of AI startup Manus.

The rules, published by the State Council, or cabinet, will take effect from 1 July. One of the most significant articles requires authorisation for exports of restricted Chinese goods, technologies, services or related data.

The regulations provide for the first time a comprehensive and formalised legal basis for China to force the unwinding of completed overseas transactions, heightening compliance risks for global investors in sensitive sectors such as Chinese tech and AI.

Chinese authorities previously said the Meta-Manus deal violated unspecified outbound investment laws, which analysts said discouraged stake transfers by homegrown companies to foreign investors without Beijing's approval.

Beijing views AI as a sensitive sector critical to national security and has made efforts to control outbound flows of technology, IP and talent.

The new rules specifically ban cross-border talent transfers in sensitive sectors without approval, targeting the kinds of moves Manus made when it shifted employees and operations to Singapore before the Meta acquisition, a practice commonly known as "Singapore-washing".

They could affect Chinese firms wishing to move capital and operations abroad to attract investment in more liquid overseas capital markets and to escape intense domestic competition.

Investors "shall not transfer goods, technologies, services and related data that are prohibited from export... by means of sending technical personnel across borders, organising personnel to work in other countries (regions), providing technical guidance across borders, or arranging cross-border training."

They also give the State Council, China's cabinet, authority to conduct security reviews of overseas investments or asset transfers that may affect national security, order investors to dispose of shares or cease investment, and impose fines for non-compliance.

The regulations also give Beijing the power to ban foreign entities from trading with China if their home countries restrict Chinese investment. For example, if the US government puts a Chinese tech firm on a sanctions list, Beijing can retaliate by blocking a US firm's unrelated acquisition of a Chinese-linked entity.

The rules did not specify which types of deals or asset transfers would be banned due to national security considerations.

Supply chain rules

The new regulations follow two new supply chain security decrees published by the State Council in April, which grant Beijing the power to impose exit bans on employees of foreign companies involved in enforcing foreign sanctions against China.

Unlike new legislation debated by China's parliament, those measures were introduced without warning and took immediate effect, sparking concern among the foreign business community in China.

Analysts say that China is building up its export control legal toolkit to counter Western sanctions, bolster its dominant position in global supply chains and domestic self-reliance in critical goods and sensitive sectors such as technology.