Beijing moves to limit foreign acquisitions

PUBLISHED : Saturday, 09 September, 2006, 12:00am
UPDATED : Saturday, 09 September, 2006, 12:00am

New rules will ban deals that are seen as affecting national economic security

Beijing has enacted new rules which for the first time ban any foreign acquisition and merger that might be seen as endangering national economic security.

The Provisions for Foreign Investors to Merge Domestic Enterprises was put into effect yesterday, after domestic debate on tightening supervision of foreign acquisitions.

An official from the Ministry of Commerce, which oversees foreign investment, said the new rules highlighted the significance of protecting national economic security. Under the rules, the Ministry of Commerce can - together with other related state agencies - ask anyone involved in an acquisition deal to cease or take up any necessary measures to prevent such a deal if it would affect national economic security, Xinhua quoted the official as saying yesterday.

The rules also include measures to prevent any foreign acquisitions that would cause the loss of tax revenue to the state, affect market order in stock exchanges and hurt the public interest, the official said.

It also includes investigations on anti-monopoly grounds.

Calls for the government to tighten controls of foreign acquisition of domestic enterprises have been mounting in recent months. The debates on national economic security have effectively stalled the Carlyle Group's US$375 million acquisition of a stake in Xugong Group Construction Machinery's Shenzhen-listed subsidiary, Xugong Science & Technology, for more than 10 months.

However, the new rules allow foreign investors to acquire and merge domestic enterprises through exchange of shares, which provides a fresh channel for foreign investors' acquisition of domestic firms, the official said.

To strengthen government supervision over such acquisitions of state-owned enterprises and listed companies, the new rules added two state agencies - the China Securities Regulatory Commission and the State-owned Assets Supervision and Administration Commission - as regulatory bodies.

The provision states that after merging domestic enterprises, only foreign investors that hold a 25 per cent-plus stake can enjoy the special treatment given to foreign enterprises.

The official said the clause was designed to prevent 'false foreign investors' - referring to domestic enterprises setting up subsidiaries overseas and investing in mainland while masquerading as foreign companies in order to explore the preferential policies offered to foreign investors such as tax breaks.

The new rules also stipulate that any foreign acquisition should meet the government's policy for industry development, land use and environmental protection.

Analysts said the regulations were intended to respond to growing domestic fears that foreign acquisition would lead to transfers of control of famous or time-honoured mainland brands. But foreign investors saw the rules as new hurdles for foreign investment.

Frank Lavin, US undersecretary of commerce for international trade, has said recently the calls to limit foreign investment were a 'worrisome trend'.