How will business conditions change for foreign companies in China now that newly strengthened regulations on mergers and acquisitions (M&A) are in effect? This question has been pestering PRC investors since this past August, when six central government entities – the Ministry of Commerce (MOFCOM), State Assets Supervision and Administration Commission (SAAC), State Administration on Taxation (SAT), State Administration of Industry and Commerce (SAIC), China Securities Regulatory Commission (CSRC) and State Administration of Foreign Exchange (SAFE) – jointly announced new M&A rules tightening the regulatory requirements for takeovers of domestic companies by foreign corporations, effective September 8.

Uncertainties surrounding the new rules loomed particularly large at Carlyle Group this fall. In fact, in October the group reduced its proposed stake in state-owned Xugong Group Construction Machinery to 50 percent (US$228 million) rather than the original 85 percent. “A reduced offer for Xugong would likely send a stern message to other foreign investment firms in China, indicating Beijing was reluctant to relinquish control of the country’s key assets,” reads a September report from Reuters.

The main concern for foreign investors is this: Under the new rules, certain types of acquisitions now require prior approval from MOFCOM (read on for details). Furthermore, the ministry is expected to increase scrutiny of China’s foreign investment. Some analysts view the move as evidence that Chinese authorities are clamping down on foreign investment to protect domestic companies against destabilizing takeovers by non-Chinese entities. Reuters attributed the strengthened regulations to a growing concern in the Chinese government that the country may be selling its assets to offshore companies at too low a price and weakening its stake in major industries.

“The thing to think about is that the government now has stronger influence,” says Amy Sommers, a partner at the Shanghai offices of Squire, Sanders & Dempsey. “On the one hand, they want to encourage foreign investment to continue growth and development in key sectors, yet on the other hand, they want to prevent losing control over sectors or seeing investment concentrated in certain hands.”

The regulations do not only affect foreign investment; given the vital role of M&As in recent years, the new rules may also impact China’s overall economic development. Of the US$60.6 billion-worth of foreign direct investment (FDI) flowing into the country in 2005, more than half (US$33 billion) was invested via M&A, reports The Economist. In the first seven months of this year alone, the value of China-based M&As totaled US$24 billion. Until foreign companies learn how to maneuver in the new regulatory regime, M&A activity may slow down in the near future, cutting FDI inflow significantly.

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