Firms ponder investment rules
Song QuanChina Daily  Updated: 2005-07-13 06:03

Chinese companies with plans to list their assets indirectly overseas have been left steaming after the foreign exchange watchdog issued two notices earlier this year.

All of the parties whose interests may be affected have joined in heated discussions and a desperate search for answers to questions raised by the two documents.

According to the two notices, published respectively in January and April, the State Administration of Foreign Exchange (SAFE) will be more active in checking out what many insiders call "roundtrip investments."

To enjoy tax breaks and other preferential treatment available only to foreign investors, many Chinese citizens have registered companies overseas, mostly in tax havens such as the British Virgin Islands and Cayman Islands, and then invested in China through the overseas-incorporated firms.

In recent years, offshore companies have played an important role in many listing schemes.

These overseas companies, which take over the assets of companies in China, become vehicles that may be listed on foreign bourses to raise funds.

According to the notices, "roundtrip investments," including mergers and acquisitions (M&A) that form a crucial part of listing schemes, will be subject to SAFE approval.

Officials and supporters of the move said it is aimed mainly at stopping investors from enjoying unfair tax breaks.

The decision is also meant to prevent managers of State-owned companies from transferring State firms' assets to overseas-incorporated companies they personally control.

In addition, the step will also be helpful in the fight against money laundering, corruption among officials and financial criminals' attempts to move assets out of China, supporters of the plan said.

Insiders say a research report by a Ministry of Commerce think tank prompted the government to tighten up its administration of "roundtrip investments."

The report by the Chinese Academy of International Trade and Economic Co-operation, published at the end of last year, highlighted inconsistencies in the use of offshore financial centres.

But opponents say rules announced in the two notices make it highly unlikely roundtrip investors will be granted approval. There are also complaints that some clauses in the notices are not practical.

This will discourage many foreign investors that prefer to invest in China through a tax haven company for flexibility and tax benefits, opponents say.

Lawyers have suggested foreigners intending to invest in China should pump funds directly into domestic companies.

Opponents say the impact of the two notices will be particularly large for Chinese companies with "detour" initial public offering plans.

As almost all the companies taking this route to overseas bourses use investment from international venture capital, opponents say the new rules threaten to block an important path for venture capitalists interested in Chinese companies.

Before the notices were promulgated, there had been no regulations targeting detour-listing schemes. Many Chinese IT companies have gone public in this way on the NASDAQ.

A key reason many Chinese companies opted to take the indirect route to list their assets overseas is they used to be able to more easily circumvent approval procedures than by using the orthodox route to listing their shares on international stock exchanges.

In addition, the founding shareholders of State-controlled companies are not allowed to sell their shares within a set period of time.

But the requirement does not apply to the indirect route. This meets the needs of venture capital, which always seeks a quick exit.

Venture capitalists would fund a company with potential to be accepted by the equity market, eying quick profits from the premium of the stocks.

With the promulgation of the two notices, this way of making money may no longer be possible.

In fact, companies using an indirect listing plan have halted their work because they are not sure whether M&A plans will be approved under the new requirements.

Most such companies are owned by private citizens. Lawyers suggest the best way for owners to avoid being affected by the new requirements is to give up their Chinese citizenship.

Sources close to the SAFE say the administration is working on a document that will answer questions concerned parties have raised.

There have been calls for companies that launched their overseas IPO programmes before the two circulars were issued to be exempted from the new requirements.

(China Daily 07/13/2005 page4)

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