MOC clamps down on shady foreign investments

Recent interim provisions issued by the Ministry of Commerce on foreign equity investments would strengthen regulations to bring foreign investments in line with Chinese policies, experts told the Global Times Thursday.

The MOC published the interim provisions, which concern capital contributions made with equities by enterprises with foreign investment, on its website Wednesday, stipulating that if equity interests come from a foreign-invested company, then the company must be legally set up in China and comply with foreign investment industry policies. The provisions were effective from Monday.

Some foreign investors would register a shell company with no real businesses in China, and then use its equity interests to create investments in Chinese companies that the government had restricted or forbidden, Luo Yuding, associate dean of the business school at the Shanghai University of Finance and Economics, told the Global Times Thursday.

China maintains a tight control on foreign investments by issuing the Foreign Investment Industry Catalog, last revised in December 2011, which lists industries and sectors where foreign investments are encouraged, restricted or prohibited.

According to the catalog, foreign investors are restricted from buying high-end office buildings and hotels in China, but Luo said that they could buy up the real estate developers instead, thus circumventing the regulations.

The interim provisions have banned eight types of equity interests from being used as capital contributions when setting up a new foreign-invested enterprise and increasing a foreign equity's share in a company in China.

The new provisions will have little impact on dollar-denominated private equity funds in China, as they invest directly with cash, not equity interests, Wang Yansong, a managing director at China First Capital, told the Global Times.

Foreign investors are more concerned about exit strategies for their investments in China now that IPO markets and mergers and acquisitions activities have both cooled off, Wang said.