China steps up efforts to open up its capital market

China's ongoing efforts to further open up its capital market, with the latest attempt to ease foreign strategic investment in listed firms, will help to improve the quality of A-share companies and inject more liquidity into the market, said experts.

The revised rules on foreign investors' strategic investment in public companies in China took effect on Dec 2. Under the revised version, which was jointly released by six government departments — including the Ministry of Commerce and China Securities Regulatory Commission in early November — foreign natural persons are allowed to make strategic investments in listed companies. Prior to this revision, only foreign legal persons or institutions were allowed to make such investments.

Capital requirements have also been relaxed. While potential foreign strategic investors were required to either possess a minimum $100 million worth of overseas actual assets or manage at least $500 million actual assets in overseas markets according to the former regulations, the threshold has now been lowered to $50 million and $300 million, respectively, as long as the foreign investor does not serve as a controlling stakeholder in the invested Chinese company.

Tender offers are acceptable for strategic investment under the revision. Private placements and share transfer agreements used to be the only two options for such investors. Meanwhile, foreign strategic investors are allowed to use shares of non-listed overseas companies as consideration shares for acquisition payment if they invest via private placements or tender offers.

A strategic investor is an individual or firm that invests in companies with the goal of gaining strategic advantages from the partnership rather than primarily focusing on financial returns.

China published the first foreign strategic investor management regulations in 2005. More than 600 A-share companies have attracted foreign strategic investment so far, as calculated by the MOC.

According to Tian Xuan, associate dean of the PBC School of Finance of Tsinghua University, foreign investors will thus have more flexibility and payment options under the latest changes. Their investment costs will effectively be lowered, he said.

The required lock-up period for acquired shares is now set at 12 months under the new rules, which used to be a minimum of three years.

This change has helped to lower investment risks for foreign investors, which will help them stabilize their investment in Chinese listed companies, said Tian.

Prior to the latest amendments, the proportion of shares of listed companies acquired by foreign investors through their first strategic investment was set at a minimum 10 percent. The bar has now been lowered to 5 percent.

Xue Yangyang, senior consultant at Everbright Law Firm's Shanghai Office, explained that the lowered requirement on shareholding can help foreign investors to adopt more diversified investment strategies. They can adjust their investment structure by taking into consideration the exit mechanism, capital flow and corporate governance, he said.

Foreign strategic investors can use other investment channels such as qualified foreign institutional investors and stock connect programs to make their investment more flexible, said Xue.

He Yongqian, an MOC spokesperson, said at a news briefing in early November that the new rules will help to direct more quality foreign capital to Chinese listed companies, advance the development of industries and facilitate the sound and stable development of the Chinese capital market.

As the new rules have also set a framework integrating market self-discipline, government supervision and social supervision, risks can be effectively avoided and alleviated when China steadily opens up its capital market, she added.

According to Tian of Tsinghua University, the new measures have addressed the major difficulties currently holding up foreign capital's entry into the Chinese market.

"Each measure can be considered a major breakthrough, which will significantly increase A-share market's appeal to foreign investors. More vibrancy can be expected in the A-share market," he added.

Pi Haizhou, an independent financial analyst, said that the target A-share company can leverage the resources of the foreign strategic investor to offer their products or services in more overseas markets. The idea of value investing will be more widely and deeply rooted in the Chinese market, he said.

"Given the fact that the lock-up period for such investors is 12 months to the minimum, they cannot make short-term speculation. Value investment will be their best choice against that backdrop. Chinese investors will keep an eye on the moves of these foreign investors. They will follow their choices and invest in the target A-share companies," said Pi.

shijing@chinadaily.com.cn