In lieu of cash payments share swaps will be allowed when foreign companies merge with, or acquire, domestic enterprises, according to a regulation published in China yesterday.

An existing provisional rule does not expressly forbid such activity but "it is the first official confirmation that share swapping is acceptable as cash payment," said Wang Zhile, director of the Research Center on Transnational Corporations affiliated to the Ministry of Commerce.

The regulation which takes effect on September 8 details procedures on share swaps and spells out how foreign companies can pay in the form of stock, cash or a combination of both when merging with, or buying out, a local enterprise.

Wang said the regulation, which is in line with internationally-accepted practices, creates more room for the growth of domestic companies since share swapping is not common at present. It would also encourage Mergers and Acquisitions (M&A) activity by multinationals, he added.

The regulation was jointly published by the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission and four other government agencies.

In 2003, the government published a provisional regulation on foreign investors' M&As, but the new, detailed regulation is believed to have taken into consideration factors at home and what is internationally acceptable. "It clarifies many points on foreign investors' mergers in China," Wang said.

Lu Jinyong, an investment researcher at the University of International Business and Trade, added that the new regulation would help China better channel foreign investment flows. In the past overseas investment in the country largely focused on building new facilities, he said, but the pace of M&As had picked up in recent years. They were a major form of investment globally and accounted for over 80 percent of the total.

The issue of monopolistic practices is also addressed in the regulation which specifies that mergers require approval from government agencies. For example companies must get approval for a potential merger when the foreign party has a sales volume of 1.5 billion yuan (US$188 million) or more in the Chinese market.

However, experts called for more details. "The same sales volume might have a different bearing in different sectors," Wang said. "How can one size fit all?"

The regulation comes against the backdrop of heated debate on whether takeovers by foreign investors would hurt the domestic industry and threaten economic security.

The issue has come under the spotlight following US-based Carlyle Group's agreement to pay US$375 million to purchase a subsidiary of the Xugong Group a construction machinery giant in China. The Chinese firm controls more than 50 percent of the country's crane and road-paving equipment market.

The deal has not yet been approved by the government reportedly because of fears that it might jeopardize the domestic machinery industry.

(China Daily August 10, 2006)