China Introduces New M&A Rules To Regulate Foreign Investment

September 11 - The Wall Street Journal - Chinese regulators introduced merger-and-acquisition rules that are targeting not just foreign investors but also Chinese companies incorporated overseas.

The regulators said the rules, which took effect Friday, aim to "promote and regulate foreign investment in China."

Merger-and-acquisition experts said the rules also might help to crack down on false inflows made through overseas companies set up by Chinese investors. Such inflows help fuel inflation and hinder Beijing's efforts to curb overly rapid investment growth that some economists fear could cause the economy to overheat, analysts said.

Chinese investors sometimes set up offshore vehicles to make their investments at home in order to enjoy tax and other benefits accorded to foreign companies in China.

Investment inflows from such companies account for about one-third of China's total foreign direct investment, estimates Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce. FDI in China totaled $72.4 billion last year, according to revised data from the Commerce Ministry, up from just above $60 billion in 2004.

"The [revised] rules can help to clear up false foreign direct investment" as well as prevent embezzlement of domestic assets, Mr. Mei said.

The new rules require that Chinese companies incorporated overseas get approval from the Commerce Ministry for any M&A activity in China, just like other foreign investors. Previously, M&A activities by these companies needed approval only from local governments.