China to Loosen Rules for Foreign Firms Buying Strategic Stakes

(Bloomberg) -- China plans to make it easier for foreign buyers to take strategic stakes in companies listed on domestic exchanges, a step that stands to address some of the complaints levied by the U.S. and other trading partners that its markets are too closed.

Among draft measures announced Monday by the Ministry of Commerce are a shortening of the lockup period for shares acquired by foreign strategic investors to one year from three and a lowering of the asset threshold for eligible buyers. They also include conditions that allow equity in foreign companies to be used as payment for those stakes.

The difficulties foreign buyers have faced in acquiring domestic companies has been a longstanding grievance for multinationals seeking access to Chinese markets, already the world's largest for everything from cars to mobile phones. They've been further highlighted by escalating trade friction as the U.S. and China slapped tariffs on billions of dollars of each others exports.

While denying American accusations of unfair practices that include state support for companies and forced technology transfers, China has also pledged to further open its markets to goods and investment. That's not stopped trade concerns from contributing to a slide in Chinese stocks that's made it the world's worst perform major market this year.

“It's a reasonable move,” said Zhang Yanhua, secretary general of the mergers and acquisitions committee of the Beijing Private Equity Association. “More foreign capital entering the mergers and acquisitions space will help industries, and the timing is relatively good with valuations at historic lows.”

The asset requirement for foreign buyers taking stakes without seeking control would be lowered under the new measures to $50 million in real assets or $300 million in assets under management, from an earlier $100 million in real assets or $500 million under management. Buyers seeking control would still need $100 million in real assets or $500 million under management.

Meanwhile, the inclusion of conditions for using shares in foreign companies as payment could be a “signal” that the practice, which was not strictly banned but rarely approved before, may be allowed going forward, according to Colin Shi, a Shanghai-based lawyer at Llinks Law Offices.

The new measures also make explicit practices already in effect as a result of other regulations. It notes that some purchase will be subject to national security reviews, an apparent recognition of rules in force since 2011, according to Shi.

In 2011, China set up a security review system for foreign acquisitions of key companies in strategic areas including agriculture, energy, infrastructure, transportation and technology. The rules also cover military and related companies, as well as enterprises near sensitive military facilities.

The measures, released for public feedback through Aug. 29, also reflect that fewer industries now require government approval for stake purchases as a result of the country's negative list first introduced in 2015.

“The draft rules will attract more foreign strategic investment into PRC listed companies in light of the simplified procedures and relaxation of lock up period,” John Xu, a Shanghai-based partner at Linklaters, said by e-mail using an abbreviation for the People's Republic of China.

To contact Bloomberg News staff for this story: Zhang Dingmin in Beijing at dzhang14@bloomberg.net;Miao Han in Beijing at mhan22@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Paul Panckhurst, John Liu

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With assistance from Editorial Board