Chinese companies are set to become more competitive globally in the merger and acquisition market after the government’s decision to ease restrictions on outbound investments.
Starting from May 8, Chinese firms planning to invest less than $1 billion in an overseas company will no longer need to seek approval from authorities but only need register with the National Development and Reform Commission (NDRC), according to a statement by the NDRC.
Deals of above $1 billion will still need the approval of the NDRC, while those above $2 billion will require the approval of the State Council.
Currently, overseas resource-related investments above $300 million and deals in other sectors for more than $100 million need approval from the NDRC.
The uncertainty surrounding regulatory approval and the lengthy waiting time tends to put Chinese companies at a competitive disadvantage when it comes to overseas investments, according to bankers and local companies.
Companies can typically wait three or four months for regulatory approval for proposed overseas investments.
An example is Sichuan Hanlong Group’s attempted acquisition of Australia-listed mining company Sundance Resources in 2011.
Hanlong planned to buy 100% of Sundance for about A$1.4 billion in September 2011. However, it only received NDRC approval in August 2012 when the price of iron ore had dropped and Hanlong renegotiated with Sundance on terms. The deal was finally cancelled.
Chinese pork supplier WH Group’s $4.7 billion acquisition of Smithfield Foods in the US last year is an illustration of how Chinese companies take on additional risk due to the regulatory approval system.
The company, then called Shuanghui International, had to pay $275 million fees — so called reverse breakup fees — in advance to Smithfield due to the risk of not gaining approval.
“When we help a Chinese company acquire overseas assets, one of the most important things we care about is whether it can get approval easily,” said a Hong Kong-based M&A banker.
Target companies sometimes will consider the strict regulation as a risk that could delay the deal process, which makes them less willing to cooperate with Chinese companies, said the banker.
China’s easing of the rules for outbound investments comes at a time when local companies are rushing out to expand their businesses globally.
Chinese investors had invested $104.5 billion in 5,090 foreign companies from 156 overseas markets in 2013, and non-financial outbound foreign direct investment rose 16.8% last year to $90.2 billion, according to Ministry of Commerce data.
Domestic investors and analysts are hoping more reform measures will be announced by the authorities to reduce red-tape and further grease the wheels for overseas investments.
The major challenge is the difficulty in financing, said Ma Weihua, chairman of Wing Lung Bank and former president and CEO of China Merchants Bank, in the Boao economic forum last week.
“It’s unfeasible for Chinese companies to borrow for overseas investments because loans can not be counted as capital according to China’s rules in bank borrowing,” said Ma in a panel discussion about Chinese companies going global on April 9.
As such, local companies, especially privately owned companies that lack government financial support and access to overseas fundraising channels, can’t borrow domestically to fund their outbound investments.
Zhang Xin, CEO and co-founder of large private developer Soho China, spoke on the same panel about the limits overseas-listed property companies are faced with.
For example, they are only allowed to invest their capital raised outside China in domestic markets rather than overseas markets because their businesses are supposed to be in China. Zhang said this had hindered her company in overseas investments.
The NDRC’s new rules do not apply to investment projects in "sensitive countries, regions or sectors," said the NDRC. Sensitive countries and regions include those that have not established diplomatic relations with China, are under international sanctions, or are suffering wars and internal disorders.
Sensitive sectors refer to businesses in telecoms infrastructure, large-scale overseas land exploration, water conservancy projects, power networks and news media, the NDRC statement said.