China's state assets watchdog has approved the sale of a 50 percent stake in Xugong, a leading Chinese construction machinery manufacturer, to Carlyle Group, a United States (US) private equity firm, the Economic Observer newspaper said here Sunday.

The State Assets Supervision and Administration Commission has approved Carlyle's revised bid for Xugong. The deal requires approval from the Ministry of Commerce (MoC) before it can come into effect, the report said. It quoted a source close to the deal.

The source said the new offer was very likely to be approved as it had been prepared with MoC guidance.

Carlyle originally offered 370 million US dollars for an 80 percent stake in Xugong. The deal was submitted to the MoC for approval in December last year. It was turned down amid rising concerns that foreign control of key Chinese firms could threaten the country's economic security.

The parties signed a new deal in mid-October in which Carlyle reduced its stake to 50 percent. They paid 1.8 billion yuan or approximately 225 million dollars.

The company chairmanship will be with Xugong but Carlyle will have equal representation on the board. The new deal has been approved by the congress of employees as well as the Xuzhou city government and the government of east China's Jiangsu Province where the company is located.

The Carlyle deal has sparked off a hot debate in China about the potential impact of foreign control of leading firms in the manufacturing sector.

The Carlyle controversy is drawing attention to other 'questionable' deals such as the proposed takeover of the Luoyang Bearing Corporation, a leading producer of bearings in China, by German-based Schaeffler Group.

The debate prompted the MoC and other authorities to promulgate new rules in August concerning the acquisition and takeover of Chinese enterprises by foreign investors. The new regulations, which took effect on September 8, state that such acquisitions and takeovers must be approved by central authorities in three specific cases.

They are: the foreign bidder has a market share of over 20 percent and annual sales in China of over 1.5 billion yuan (190 million dollars); the market share of one of the parties to the deal will reach 25 percent after the acquisition; the foreign bidder has acquired more than 10 Chinese enterprises in one year.

In its 11th five-year-plan the MoC said China would seek to improve the quality of foreign investment and put in place a system for monitoring the impact of such deals on domestic industries.

Zhao Jinping, a scholar with the Development Research Center under the State Council, said it was common international practice for governments to impose restrictions on mergers and acquisitions by foreign companies.

"As rules and regulations are fine-tuned the government will be able to handle such cases more easily and transparently," he said.

He Manqing, a MoC expert on multinational companies, predicted that mergers and acquisitions by foreign investors in China would increase sharply over the next few years now that rules had been set.

For some people, however, Carlyle's revised offer is still not good enough.

Xiang Wenbo, who vehemently opposes the move and sparked the debate by revealing the deal on his blog, said the 50-50 share structure would not guarantee China's control of the firm as is required by government rules.

Xiang is general manager of Sany Heavy Industries Co., a rival who also bid for Xugong. Xiang said Xugong had deliberately excluded Sany and all other rivals from the deal.
 
(Xinhua News Agency November 13, 2006)