China turns more selective on growing pile of foreign investment

EARLY THIS WEEK, Shanghai Industrial abandoned plans to acquire a minority stake in Lianhua Supermarket, China's largest retail chain operator. The decision says a lot about the mainland's changing attitude towards foreign direct investment.

The bottom line: Negotiations will take longer, and the chances of success will be reduced.

Last July, the red-chip conglomerate said it would swap several medical businesses with its Shanghai-listed subsidiary in return for a 21.17 per cent stake in Lianhua. The move was to be the first step in a major restructuring.

Yet after 12 months, the company still had not received approval for its plans from mainland authorities. It had been lobbying to retain Lianhua's operational freedom as a domestic retailer even as it became majority foreign-owned, since overseas investors already held 33.28 per cent of the Hong Kong-listed firm.

Under the terms of its joining the World Trade Organisation, China opened its door to foreign retailers beginning in late 2004. Recently, however, various restrictions were imposed, including a ban on foreign firms selling tobacco, one of the most profitable items on store shelves. Public hearings are now required before any new hypermarket can be established. Were Lianhua to be classed as a foreign retailer, its room for expansion would have been significantly curtailed.

Two facts are worth noting here. First, Shanghai Industrial is in no real sense a foreign company, despite its overseas domicile; it is the investment arm of the Shanghai municipal government. Moreover, it already has effective ownership of the Lianhua stake, since it is held by Shanghai Industrial's mainland-listed subsidiary.