New rules add clarity
Six government departments jointly published a much-anticipated set of rules on foreign investors' takeover of Chinese enterprises earlier this week.
The rules' promulgation seems to be prompted by the controversy surrounding a United States equity firm's bid to acquire construction machinery maker Xugong. But the rules provided answers to a wide array of issues that emerged in the area during the past few years. These issues include investigations into foreign companies' monopolies in the Chinese market and the use of share swaps when foreign firms merge with, or acquire, domestic companies, which is now explicitly permitted by the rules.
Some of the rules appear to be designed to ward off deals that could hurt domestic industry or threaten national economic security.
The case of Xugong may be a real factor that helped accelerate the promulgation of the rules, although there is still no official judgment about the legitimacy of accusations by Sanyi, the domestic suitor for Xugong, that a successful takeover by the American firm will jeopardize national interests.
However, the rules should not be taken as a change of attitude in the country's foreign investment policy. As an integral part of the global economy, China simply cannot afford to turn hostile to foreign investors.
China's policy-makers are sensible and visionary enough to understand that domestic and international ownership transactions among enterprises of different types of investors could benefit all related parties. Economic security will ultimately rely on a thriving economy, to which the international M&As could contribute.
On the other hand, concerns about such deals' implications for the country's strategic interests are also reasonable.
Many focused attention on the clauses about economic security after the rules were published. However, the stipulations that bear more immediate practical means are those about share swaps and M&As that would eventually lead to overseas listing of domestic assets. Previous rules about such schemes were fragmented and ambiguous in some cases conflicting with each other creating many difficulties for both international private equity investors and domestic companies aiming to use their funds.
In addition to approving the use of share swaps, a key financial engineering tool in such transactions, the new rules' chapter on such deals presents something clear and well thought-out that related businesses can follow with much increased predictability.