China Issues Rules on Foreign Investment via Share Swaps

As part of China’s continued drive to improve the country’s attractiveness as an investment destination, the Chinese government has officially issued regulations for foreign investors to utilize share swaps to finance merger and acquisition (M&A) deals with domestic Chinese businesses. With the introduction of share swapping regulations, China aims to regulate foreign investment, attract advanced technology and management experience from abroad and maintain fair competition and economic stability.

The Ministry of Commerce, the State-owned Assets Supervision and Administration Commission and four other government agencies published the new regulations, and their efforts will mark the first official confirmation that share swapping is acceptable in China. The new policies also clarify many details associated with M&A transactions that were not covered in the regulations that were drafted in 2004, making new transactions more systematic and secure for investors.

As China’s economy has been booming over the last decade, over-investment has left many markets saturated. The option of share swaps will gradually improve the general business environment by encouraging market consolidation. By consolidation through M&As with competitors, businesses are provided with an effective means to increase competitiveness. It will also create a means for businesses that are new in China to establish a more concrete presence by acquiring domestic companies that already have an established goodwill in the mainland.

The new regulations on M&A and share swapping will be effective on September 9th 2006. Upon its official launch, foreign businesses will have the flexibility to make payment for overseas-held stakes in Chinese companies via stock ownership exchanges, cash or a combination of both. However, it is also important to note that there will still be government provision on deals that involve a foreign company attaining a controlling stake in companies that are linked to vital industries, affect national economic security, or have well-known name brands.

Improved regulations for investors have been rewarding for China as M&As deals involving Chinese companies have increased 20% from mid-2005. It appears certain that the Chinese government will persist in its efforts to establish a better investment for investors. As foreign investors are allowed to take controlling interests in many instances, the new financial tools that are available will definitely provide foreign businesses with greater access to market opportunities in China.

Keep watching this space!
 

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