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China shows foreign investors carrot and big stick

Reuters News:  

China is showing foreign investors a carrot and a big stick. The commerce ministry on Monday released proposals to ease restrictions on some overseas investment in mainland stocks. That’s a welcome reprieve from trade tensions. But calls to vet buyers for security risks will give officials new clout just as investors have fresh reasons to be concerned.The proposed rule changes would make life easier for foreign investors looking at so-called “strategic investments” in mainland-listed companies. The lock-up period for such investments would shrink to 12 months from the current three years. Meanwhile, China will lower the minimum amount investors must own or manage to qualify.

The incremental opening is especially welcome as trade tensions mount. But the proposals also come with a big stick: China will monitor strategic foreign investments for security risks.

At first blush, that’s in keeping with a trend toward tougher vetting of investments from abroad across the rich world. The Committee on Foreign Investment in the United States has in recent months axed several attempted Chinese takeovers of American firms, including Ant Financial’s proposed $1.2 billion acquisition of MoneyGram International. Several European countries have also beefed up controls in response to increased Chinese interest.

It’s also true that the decisions of quasi-independent Western regulators have gained a political edge. Witness U.S. President Donald Trump’s decision to frame telecom equipment group ZTE’s near-death experience with U.S. sanctions enforcers as a trade bargaining chip.

In China, however, security vetting is even more likely to be deployed as a political weapon. Just consider Qualcomm’s recent decision to abandon its takeover of chipmaker NXP Semiconductors. Though eight other global regulators signed off on the deal, China’s State Administration for Market Regulation – created earlier this year to consolidate separate competition watchdogs – delayed the process until Qualcomm ended its bid. The suspicion is that Beijing used the antitrust body to retaliate against Trump’s aggressive trade policies, though officials deny this.

Chinese authorities have long found ways to keep foreign buyers out of certain companies and industries. Despite offering some investment carrots, the stick of security screening means that is unlikely to change that anytime soon.

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