M&A May Face Review

China is said to start security review of foreign mergers and acquisitions (M&A) of domestic companies.

According to the news on February 14, China will build a security review system for the foreign investors’ M&A of domestic companies. This report was under heavy scrutiny of the public, especially the foreign investors. The experts point out that this policy is close to the international convention and don’t imply the change of China’s basic policy of attracting foreign investment.

They believe that this measure only aims to make the policy of reviewing foreign M&A cases more regular and transparent and therefore the rejection will be more reasonable. For these M&A which don’t harm the national security, the new policy will accelerate the process of giving approval. However, which enterprises and industries are related with the state security is what people attach most importance to. The relevant stipulations and rules are awaited.

“When dealing with acquisitions made by foreigners, each country will take national economic security for granted. So will China, which has been doing this for years without an open standard,” says Huo Jianguo, head of the International Trade and Finance Cooperative Institute of Ministry of Commerce.

He points out that enhancing the security review of foreign M&A in important fields is to be in line with the international standard, making China’s related system more reasonable and transparent. It also works to reduce the randomness of operations. “The detailed implementation standard needs to be made clear.”

Nobody can deny the contribution of foreign investment to China’s economic development in these 30 years. However, with the acceleration of globalization and the fast economic development of China, it is necessary for this most populated country to improve the quality and safety of foreign investment, especially when dealing with the excessive fluidity and increasing inflation stress.

“Founding the joint conference for reviewing foreign M&A is what we learn from the USA,” says an expert in the Development Research Center of the State Council. “They rejected China National Offshore Oil Corp’s offer to acquire Unocal Corporation with the concern of the US energy safety, didn’t they?”

According to the notice of the State Council, China will found the joint conference for reviewing foreign investors’ M&A of Chinese companies. The review will be carried out for the foreigner’ offer to acquire the military industrial enterprise, enterprises located in or surrounding key military facilities and the other enterprises related with national defense. The M&A of important agricultural products, energy and resources, basic facilities, transportation facilities, technologies, equipment manufacturers also need to be reviewed in order to prevent the foreign investors gaining the control of these fields.

Reduce the Randomness of Implementation

The experts point out that China is still studying the relevant rule and tries to follow the international regulation. With the improvement of China’s economic power, it is necessary to improve make the policy more transparent so more reasons can be given when rejecting the offer. This could reduce the randomness of implementing the policy.

According to the stipulation, the review system aims to prevent the damage to national defense, national economic safety, necessities for people’s daily life and key technologies and resources.

“This means that the foreign M&A will face careful reviews if they are related with the national safety,” says Huo Jianguo.

An insider from a state-owned investment company says: “While we make acquisitions in some countries, we will be reviewed too. These happen more frequently in the developed countries, where they set up joint conferences to work on the reviews.”

Ma Wenfeng, analyst from Aig Consultancy Company, says that China welcomes most of foreigners’ offers to acquire domestic companies. Though these offers are said to go through reviews, no one knows what are reviewed. Actually, China, as a country with a big population and strong economic power, need to build its own security review system, which is very complete in the developed countries.

He points out that the huge population in China puts the supply of grains and the other agricultural problems under heavy scrutiny. In truth, the foreign investors have taken the dominant place in the soybean oil industry, which causes the threat to people’s lives. The rampant M&A of foreigners in the soybean industry led to the soybean crisis in 2005. In 2007 and 2008, China has to face the problem of purchasing grains.

“If the key agricultural products are under control of foreigners, the stability and safety of China will be greatly damaged. If the key resource and energy are threatened by foreign investors, the whole country’s economic operation will be affected.”

In addition, founding the joint conference for security review can help to make clear the functions of relevant government departments.

An anonymous official from the National Development and Reform Commission (NDRC) says that both NDRC and Ministry of Commerce have the right to approve the offer of foreigners’ M&A of Chinese companies or the reverse process. Previously, the Ministry of Commerce declined Coca Cola’s offer to acquire Huiyuan and NDRC denied Tengzhong’s plan to acquire Hummer. When the joint conference is founded, the industry access and M&A process will have a unified standard.

As the notice says, the joint conference will be under leadership of the State Council. Both NDRC and Ministry of Commerce will play an important role in it. When dealing with the foreign M&A of Chinese companies in a certain industry or field, they will work with the relevant departments to conduct the security review.

It is important to know that the security review system was approved on February 3 and took effective thirty days after that day.

Worries of the Foreign Investors

Though the officials claim that the new policy gets close to the international standard and don’t imply the changes to China’s policy of foreign investment, the foreign investors and some experts are concerned of the lack of details this could make the government hold more cautious attitudes towards foreign M&A in some fields and the process of examination and approval will be more complicated.

A director of a US-based investment banks says that the new policy only makes out general requirements without any detailed rules. How will the implementation go depends on NDRC and Ministry of Commerce.

“In truth, Chinese government is always very flexible when carrying out policies. The implementation force depends on cases and sometimes an exception could be made. The new rule can work as a new basis despite its lack of details,” says the banker.

“Many foreign investors’ offers to acquire Chinese companies were rejected without given names. Though China has already got “Anti-monopoly Law”, many acquirers still look for reasons to affect the outcome. The foundation of joint conference gives the government departments enough reasons to intervene in the acquisitions if they are related with national safety,” says an expert.

He also mentions that foreign investors have already grasped the throat of the industries of mine and grain processing in China, which is not good for economic safety.

An insider from BP believes that the issuance of security review of foreign M&A is out of the question, but the implementation is very important and should be done carefully.

He says: “The implementation should be made clear with detailed method, otherwise it is not good for the country, consumers and relevant industries.”