China's New Foreign Investment Rules: A Step Towards Greater Openness and Market Access

[Michael's Chinese Law Series-Compliance & Dispute Resolution]

Earlier today (1 Nov. 2024), in a significant move towards further opening up its economy to foreign investors, China has revised and issued the "Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors" (《外国投资者对上市公司战略投资管理办法》) which to be enforced on 2 Dec..2024.

This update, jointly released by six key Chinese government departments including the Ministry of Commerce (MOFCOM) and the China Securities Regulatory Commission (CSRC), marks a substantial relaxation of requirements for foreign investors looking to engage in strategic investments in listed companies.

I. Highlights of the revised measures

The revised measures are designed to align with China's broader economic reform agenda, which emphasizes the importance of attracting long-term, value-oriented investment while ensuring market stability and security. Here are the key highlights of the new rules:

1. Inclusion of Foreign Natural Persons

One of the most notable changes is the inclusion of foreign natural persons as eligible strategic investors. Previously, only foreign legal entities or organizations were permitted to make such investments. This revision brings the country's regulations in line with the "Foreign Investment Law of the People's Republic of China" and expands the pool of potential investors, allowing individual foreign investors to participate in the strategic investment of listed companies.

2. Lowered Asset Requirements

To facilitate and encourage more long-term capital inflows into listed companies, the revised measures have appropriately reduced the asset requirements for non-controlling foreign investors. If a foreign investor does not become a controlling shareholder after making a strategic investment, the minimum requirement for their actual assets is now set at $50 million or managed assets totaling $300 million. For those who do become controlling shareholders, the threshold remains at $100 million in actual assets or $500 million in managed assets.

3. Introduction of Tender Offers as a Strategic Investment Method

The previous rules only allowed strategic investments through private placements and agreement transfers. The updated measures now include tender offers as an additional method for foreign investors to engage in strategic investments. This change provides greater flexibility for foreign investors and aligns with the actual conditions of the securities market.

4. Allowing Cross-Border Share Swaps with Non-Listed Companies

Another significant update is the permission for strategic investments through directed issuance and tender offers to be settled with shares of non-listed foreign companies. This addresses a previously unregulated area in cross-border share swaps and facilitates both inbound and outbound mergers and acquisitions. It also reflects a more nuanced approach to managing the risks associated with such transactions.

5. Reduced Shareholding Lock-up Periods

The revised measures have appropriately relaxed the shareholding lock-up periods for strategic investments. For investments made through directed issuance, there is no longer a mandatory shareholding ratio requirement. For investments through agreement transfers and tender offers, the required shareholding ratio has been reduced from 10% to 5%. Additionally, the lock-up period for foreign investors' shares has been adjusted from a minimum of three years to one year, unless otherwise stipulated by specific laws and regulations.

These revisions reflect China's commitment to creating a more open and transparent investment environment that is attractive to foreign investors. By lowering barriers to entry and providing greater flexibility in investment methods, the new rules aim to boost foreign investment flows into China's listed companies, thereby supporting the country's economic growth and development.

II. Implications for Foreign Investors

The revised "Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors" represent a significant opportunity for foreign investors seeking to enter China's vibrant securities market. Here are some key implications for potential investors:

1. Expanded Investment Opportunities

With the inclusion of foreign natural persons and the relaxation of asset requirements, a wider range of foreign investors now have access to strategic investment opportunities in listed Chinese companies. This expansion opens up new avenues for diversification and participation in China's growing economy.

2. Greater Flexibility in Investment Strategies

The introduction of tender offers as a valid method for strategic investment provides foreign investors with greater flexibility in structuring their investments. This allows investors to choose the most suitable approach based on their specific objectives and market conditions.

3. Potential for Long-Term Gains

By encouraging long-term and value-oriented investments, the revised measures signal China's commitment to fostering sustainable economic growth. Foreign investors who align their strategies with these principles may benefit from the long-term appreciation of their investments in Chinese listed companies.

4. Enhanced Regulatory Clarity

The updated rules provide clearer guidance on the regulatory framework governing strategic investments in listed companies. This clarity can help foreign investors navigate the complexities of the Chinese market and ensure compliance with relevant laws and regulations.

5. Opportunities for Sectoral Diversification

The revised measures apply to all sectors, except those specifically restricted under China's negative list for foreign investment. This provides foreign investors with opportunities to diversify their investments across different industries and gain exposure to a wide range of Chinese companies.

6. Potential Challenges and Considerations

While the revised measures offer significant benefits, foreign investors should also be aware of potential challenges and considerations. These may include differences in corporate governance practices, cultural differences, and the need to adapt to China's unique business environment.

7. Importance of Due Diligence and Compliance

As with any investment, due diligence is crucial for foreign investors considering strategic investments in Chinese listed companies. Investors should conduct thorough research to understand the target company's financial health, management team, market position, and competitive landscape. Additionally, ensuring compliance with all relevant laws and regulations is essential to avoid any legal or regulatory issues.

8. Engaging with Local Advisors and Partners

Given the complexities of the Chinese market, engaging with local advisors and partners can be invaluable for foreign investors. These experts can provide valuable insights into market trends, regulatory requirements, and best practices for navigating the investment process.

9. Monitoring Market Developments and Policy Changes

The Chinese securities market is subject to ongoing developments and policy changes. Foreign investors should stay informed about these developments and adjust their strategies accordingly. This may involve monitoring news releases, attending industry conferences, and participating in relevant forums.

10. Building Strong Relationships with Chinese Companies

Establishing strong relationships with Chinese companies can be beneficial for foreign investors. These relationships can provide access to valuable business networks, insights into market dynamics, and opportunities for collaboration and partnership.

III. Comments

The revised "Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors" represent a major step forward in China's efforts to attract foreign investment and promote economic growth. By lowering barriers to entry, providing greater flexibility in investment methods, and emphasizing long-term value creation, the new rules create a more welcoming environment for foreign investors.

For foreign investors, this presents a unique opportunity to participate in China's vibrant securities market and contribute to the country's continued economic development. However, it is important to approach these opportunities with a clear understanding of the market dynamics, regulatory requirements, and potential challenges.

By conducting thorough due diligence, engaging with local advisors and partners, and building strong relationships with Chinese companies, foreign investors can navigate the complexities of the Chinese market and realize their investment goals.

As China continues to evolve and grow, the revised measures will undoubtedly play a crucial role in shaping the future of foreign investment in the country. Foreign investors who seize these opportunities and adapt to the changing landscape will be well-positioned to achieve long-term success in China's dynamic economy.

(Michael Chen, JunHe LLP Shanghai)