China to set up investment review board to screen FDI
February 14, 2011

Even as investment bankers forecast a stellar year for mergers and acquisitions in Asia following a leap in the value of both inbound and outbound transactions in 2010, China is all set to rain on their parade. According to the new regulations posted on a government website (www.gov.cn) Saturday, industries including military, agriculture, resources, energy, key infrastructure, transport systems, key technology sectors and some equipment manufacturers are listed under a new re-tape security review for foreign firms interested in doing business in China. The new rules which are yet being drafted are expected to be effective from March this year.

The new regulations are expected to eventually be governed by an Investment board, as is found in many other developing countries. Members of the new board will be drawn from the National Development and Reform Commission, Ministry of Commerce and other agencies. The statement also called on “related departments” to “enhance the sense of responsibility to guard state and commercial secrets. The investment board will be guided by the government and will have final authority over who can invest in what, how much and for how long. The board will have the power to discriminate against companies and governments in order to protect China’s national security ie domestic companies. The Financial Times reported last month that the failure rate of Chinese overseas acquisitions stood at around 12 percent.

The process will include two parts as “general review” and “special review.” For those deals failed to pass the “general review,” a “special review” will be started that may last up to 60 days. If Beijing finds a deal that could potentially threaten national security, it can terminate the deal.

China has in the past cancelled several contracts that it deemed undesirable citing conditions laid down by other investment boards or governments were too stiff. In 2007, it blocked ArcelorMittal from gaining a majority stake in China Oriental Group and in 2009 it forced Russia’s Evraz Group to abandon an option to take control of Delong Holdings Ltd, a Chinese steelmaker listed in Singapore, in a US$1.5 billion deal. Other deals called off by Beijing include a US$2.4 billion bid by Coca-Cola for Chinese firm Huiyuan Juice in 2009 and Carlyle’s US$375 million bid for construction equipment maker Xugong in 2008. In 2009, the State-owned China Non-Ferrous Metal Mining (Group) Co also dropped a US$400 million bid for 50.6 percent of Lynas Corp, owner of the world’s richest deposit of rare-earth minerals, saying the conditions set by the Foreign Investment Review Board were too stiff.

Seeking to protect the domestic economy and businesses from foreign conglomerates, Beijing may introduce more industries to the reviews of foreign mergers and acquisitions (M&A) when those sectors pose a threat to national security, Li Xiaogang, director of the foreign investment research center at the Shanghai Academy of Social Sciences told the Global Times. He made the comments after the cabinet or the State Council announced it would set up an investment review board. Look through this page for details on this topic.

“It is only a start, and if those previously market-oriented sectors such as retailing are regarded as having a connection with economic security, they may also be (reviewed) by the board as well,” Li Sunday told the Global Times.

Outbound M&A soared 166 percent to a record US$126.1billion in the region excluding Japan and Australia, according to Citigroup, with total deal flows including inbound and intra-regional transactions jumping 48.8 percent to a record US$470.5billion. Figures from the Chinese Ministry of Commerce show that China’s FDI hit a record high of US$105.75 billion in 2010, up by 17.4 percent over the previous year.

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