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December 19, 2006 4:10 pm

Rule changes puzzle OECD

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Beijing should reconsider or clarify its “new screening requirement” for mergers and acquisitions, according to an analysis by the Organisation for Economic Co-operation and Development.

The Paris-based global institution argued in a recent policy paper that China’s cross-border M&A laws and regulations were vague and non-transparent, generating much confusion among the foreign investor community.

The OECD recommendation is mainly directed at rules introduced in August by the Commerce Ministry and in November by the National Development and Reform Commission that outline investment procedures for sectors involving “national economic security” and famous or traditional local brands.

This week, the State-owned Assets Supervision and Administration Commission, the watchdog for government-controlled companies, reiterated that military, power, oil, coal, telecommunications, aviation and shipping industries would remain under “absolute” state control.

The central government’s latest rules and strong statements on inward investment suggest that five years after China joined the World Trade Organisation there is growing wariness of selling prized assets to foreigners hastily and on the cheap.

The OECD said the complex new rules introduced last month, put forth by the powerful National Development and Reform Commission, may in fact cause greater confusion as they are applied.

China wants to keep key industries and state-owned enterprises in its own hands, but the OECD argues that the latest rules go too far in trying to supervise sensitive acquisitions.

“Foreign investors seeking to merge with or acquire domestic Chinese enterprises ... may not have enough information to be able to apply these [rule] terms to an actual transaction,” its report said.

“Pending the publication of detailed implementing regulations, if any, the new screening process may have a serious unintended
discouraging effect on investments.”

In the past six months, OECD representatives have held meetings with Chinese counterparts, especially the Ministry of Commerce.

The OECD has called on China to bring local and central government approval processes in line, and to get more feedback from foreign investors before promulgating new rules.

China’s large state-owned enterprises, particularly those in the north-east, are often eager to attract investment. But Beijing’s leaders disagree over the preferred extent of foreign involvement, especially when it comes to money-making companies it wants to go global.

Last year, 169 state enterprises under central government control increased their combined profits by 28 per cent to Rmb628bn ($80bn), according to Sasac.

Ken Davies, an OECD economist, said there were conservative elements within China’s government that believed the purpose of foreign investors should be to aid state sector reform rather than generate profits.

There was sometimes genuine surprise among top officials when foreign investors attempted to take over quality firms rather than loss-making ones, he added.

Beijing’s latest M&A rules also have additional provisions for the use of special purpose entities registered abroad by Chinese firms.

This is mainly aimed at preventing “round-tripping”, where domestic companies disguise themselves as foreign to benefit from inward investment incentives.

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