The Ministry of Commerce has published draft rules that would allow foreign firms to invest in China via share swaps but would tighten acquisition criteria to protect China's economic security, the official China Securities Journal reported on August 08.
For the first time, the new rules would require a Chinese company that has been approached by a foreign buyer to appoint a domestically registered financial adviser to carry out due diligence in an effort to protect Chinese assets, the paper said.
A foreign investment that alters the control of a Chinese industry leader, a famous brand or a company with more than 2,000 employees would need Ministry of Commerce approval, it added.
The ministry, which is seeking public comment on the rules, would be empowered to demand changes to the terms of the deal if it deemed that China's economic security was threatened.
The draft rules follow a backlash against foreign acquisitions of Chinese firms. A number of high-profile deals has stalled or failed, including US buyout firm Carlyle's bid for Xugong, a leading heavy machinery equipment maker.
The commerce ministry recently convened a meeting with five other government authorities, the first of its kind in China, to discuss Carlyle's bid, the paper said.
The report did not spell out the terms under which a foreign buyer could buy into a Chinese firm for shares instead of cash.
The ministry has also proposed new rules covering special purpose vehicles (SPV) established to take over Chinese companies and list them overseas - a common way for start-ups and venture capital firms to realise their investments.
The SPV must inform the ministry, within 30 days of listing, how it intends to repatriate to China the money raised, the report said. It did not say how the ministry could enforce the proposed rule.