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New regulations published on 31 December open up A-shares of Chinese companies to foreign investors, creating a new range of deal possibilities from among the roughly 1,400 A-share firms listed on the local stock exchanges. Effective from 31 January, the "Administrative Measures on Management of Strategic Investment of Foreign Investors in Listed Companies" (the "Measures") were jointly published by the Ministry of Commerce (Mofcom), China Securities Regulatory Commission (CSRC), State Administration of Foreign Exchange (SAFE), State Administration of Industry and Commerce (SAIC) and State Administration of Taxation (SAT).
The Measures are significant because they permit foreign investors to buy A-shares both in listed local companies which have completed shareholding reform (see PwC's M&A Houseview September 2005), and in newly-listed firms. Previously, only domestic investors and overseas institutional investors selected under the three-year-old Qualified Foreign Institutional Investor (QFII) scheme could buy shares on the Renminbi-denominated stock exchanges in Shanghai and Shenzhen up to a maximum of 10% in a single company, though foreigners could buy strategic stakes in listed local companies by purchasing non-tradeable shares.
The Measures, which provide administrative details for a notice jointly promulgated by the CSRC and Mofcom in late October, require foreign investors to meet several criteria. First, they or their parent companies must have tangible overseas assets of no less than US$100 million or at least US$500 million under management. Second, any A-shares bought by foreign investors are subject to a three-year lock-up period - an attempt by the government to avoid volatility in the A-share market. Third, although foreign investors may buy A-shares in instalments, their first acquisition in a listed company must be at least 10% of the listed company's total shares.
A-share listed companies selling at least 25% of their stock to foreign investors qualify as FIEs, benefiting from the preferential treatment that goes with FIE status. Those companies selling less than 25% to a foreign investor qualify for an FIE approval certificate but enjoy no such preferential treatment. However, these preferential treatments are undergoing revision in the ongoing tax reform process.
The government will be hoping that foreign acquisitions of reformed or new A-shares add momentum to its ongoing overhaul of the stock market. Beijing aims to convert the RMB2.1 trillion (US$259 billion) in non-tradeable A-shares currently tied up in listed companies (roughly two-thirds of the country's total market capitalisation) into tradeable A-shares - a sensitive process since many of these former non-tradeable shares are held by the state. Yet since the process began in earnest last August, more than 300 listed firms have completed (or have begun) the share restructuring, and newly-floated tradeable A-shares (also known as "G-shares") are expected to total some RMB200 billion (US$25 billion) by the end of this year.
The Measures will be welcomed by foreign companies seeking strategic investments in the A-shares of listed companies, since they offer an alternative route to QFIIs, which are of limited use to strategic investors wishing to take significant stakes. As of end-December, QFIIs had investment quotas totalling US$4 billion - a figure which will be raised to US$10 billion in 2006. (In late December, the CSRC and SAFE named Temasek Fullerton Alpha Ptd Ltd, American Investment Group, JF Asset Management Ltd and Japan's Dai-ichi Mutual Life Insurance Co as new QFIIs, taking the total to more than 30 QFIIs in all.) While QFIIs are best suited to investment managers, the Measures are designed to attract acquisitions by foreign companies looking to make longer-term strategic investments in A-share companies, by which the government hopes to promote better governance of listed companies.
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