China continues its efforts to open up its capital markets

In 2020, the Chinese government issued various rules and policies (such as relaxation of foreign shareholding restriction in securities companies) aimed at attracting private capital and foreign investment to China’s capital markets. We have seen increased interest by foreign investors in China’s capital market, particularly under the context of China’s resilience and quick recovery in the face of the global Covid-19 pandemic, together with the strength of Renminbi (RMB).

Against this backdrop, the Chinese government consulted the public on revisions to the Administrative Measures for Foreign Investors’ Strategic Investment in Listed Companies (Draft Administrative Measures) on 18 June 2020. The proposed revisions reflect the new Foreign Investment Law, which came into effect on 1 January 2020. They will relax investment thresholds, reduce lock up requirements and open new investment channels for foreign investors. Previous amendments released for public comment in 2018 were not brought in to force.

There are currently certain channels for foreign investors to participate in China’s capital markets. These mainly include investments structured through qualified foreign institutional investors (QFII), RMB qualified foreign institutional investors (RQFII), the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect arrangement, qualified strategic investors and investments through foreign investors’ local subsidiaries.

In this article, we focus on the implications of the proposed amendments for qualified strategic investors.

Highlights of the proposed amendments

Relaxation of investment thresholds

The proposed amendments relax the qualification and investment requirements adopting the same approach to that taken in the 2018 proposals: 

Financial resources of foreign investors

Currently, to be qualified as a strategic investor, a foreign investor or its parent company must have total overseas assets of not less than USD100 million or have at least USD500 million of overseas assets under its or its parent company’s management. Under the proposed amendments, where a foreign investor will not become a controlling shareholder of a listed company, the thresholds are reduced to having total assets of not less than USD50 million or at least USD300 million of assets under its or its actual controller’s management.

Shorter lockup periods 

The amendments propose shortening the existing post-purchase share trading restrictions applicable to foreign strategic investors from three years to 12 months.

Strategic investments in listed companies by foreign individuals 

Currently there are only limited legitimate channels for foreign individuals to purchase A shares in Chinese listed companies. The proposed amendments expressly permit foreign individuals to make strategic investments in listed companies, subject to certain qualifications including having (i) a clean criminal record for the last three years; and (ii) a compatible risk profile. 

The proposed amendments also go further than those put forward in 2018, and contain further relaxations on shareholding requirements for foreign strategic share acquisitions by:

• lifting the existing requirement that a foreign strategic share acquisition by way of a non-public offering must be for at least 10% of the shares of a listed company; and 

  
  

• lowering the shareholding requirement for a foreign strategic share acquisition by way of agreement from the current requirement of at least 10% to at least 5%.

Additional ways to investment

Tender offer

The proposed amendments specify that foreign strategic share acquisitions by way of tender offer will be regulated under the Draft Administrative Measures, with specific formalities set out. They also require that size of the shareholding acquired in such a transaction must be at least 5%.

Cross-border share swaps

Following the same approach as that taken in 2018, the proposed amendments contain new provisions on cross-border share swaps. Where certain requirements are met, foreign investors will be permitted to make strategic investments in listed companies using equity in overseas companies as consideration. In particular:

• the overseas company must be established in a jurisdiction with robust company laws. In the event of a foreign strategic share acquisition by way of agreement, the overseas company must be a listed company;

• the overseas company and its management must not have been subject to any material penalty by any regulatory authorities in the previous three years;

• the foreign investor must legally hold the overseas company's shares, which must be capable of being legally transferred; and

• relevant requirements under the outbound investment regulations must have been fulfilled and the required formalities completed, and the Securities Law, Company Law and other relevant regulations must be complied with.

Investment in the NEEQ listed companies

The proposed amendments provide that the Draft Administrative Measures can be used for reference in respect of foreign strategic share acquisitions relating to companies listed on the National Equities Exchange and Quotations.

Alignment with the new foreign investment regulatory regime

The proposed amendments update the Administrative Measure to remove the outdated provisions under the previous foreign investment regulatory regime. The amendments also make clear that foreign strategic investments will also be subject to the foreign investment negative list, the new Foreign Investment Law and the Foreign Investment Information Reporting Measures. The revisions also clarify that, where a strategic investment involves a State-owned enterprises or State-owned equity, taxation, company registration, foreign exchange, merger control review, nation security review, outbound investment and financial institution administration, the related formalities and administrative rules must be followed. 

Our observations

The proposed amendments lower the thresholds for foreign investment in listed companies in China, clarify the ways of strategic investment and are consistent with the new foreign investment regime. The changes, if implemented, will encourage more foreign investment to China through strategic investment channels. The timetable on when the amended measures will be finally promulgated is however still unclear.

It will be interesting to see whether the final version of the Draft Administrative Measures retains the same level of relaxation as is currently proposed and how the Administrative Measures will be implemented in practice under the new foreign investment regulatory regime, taking into account the interconnection with various government authorities. For instance, it is unclear how the cross-border share swap will operate in practice and what the involvement of the Ministry of Commerce will be.

KEY CONTACTS

Nanda Lau 刘依兰

Head of Shanghai office

Nanda.Lau@hsf.com

Gavin Guo 郭武汉

International Partner

Kewei (Shanghai)

Gavin.Guo@hsfkewei.com

Alizee Zheng 郑晓夏

Senior Associate

Alizee.Zheng@hsf.com

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