The Chinese government is considering a law that will allow share-swapping between foreign and Chinese companies undertaking mergers and acquisitions.

The draft regulation on consolidations between foreign and domestic companies demonstrated the government's attempt to strengthen supervision of mergers and acquisitions, reported the China Securities Journal.

The Ministry of Commerce first drafted a regulation in 2004 and revised it this year, aiming to give detailed guidance and make better use of foreign investment.

The fourth chapter confirms stock ownership exchanges and cash are allowable as payment for overseas-held stakes in domestic companies.

Li Dacheng, a lawyer with the DLA Piper Law Office, said it was the first time the country had clarified the regulation concerning foreign investors and permitted share swapping.

Other experts regarded the regulation as bringing China into line with the international market. Previously, the Chinese market gave priority to cash payments, so the regulation would guide foreign investors, said Liu Xiaodan, manager of the United Securities Corporation mergers and financing department.

Sun Xiaohua, an expert with the Ministry of Commerce, said the 2004draft was a good framework, but failed to mention foreign mergers and acquisitions in sectors that could jeopardize China's industrial and economic integrity.

The first draft required the Ministry of Commerce approval for bids by foreign investors to control companies that dominated sectors of Chinese industry, owned famous brands or employed more than 2,000 people, or when the move could affect China's economic security.

Regulators had been pressured after controversy involving the US-based Carlyle Group's agreement to pay US$375 million to purchase a subsidiary of the Xugong Group, China's construction and machinery giant.

Under the agreement signed by the two parties last October, Xugong Group was to sell 85 percent of its shareholding in Xugong Group Construction Machinery Co. to Carlyle. The Chinese firm, with annual revenues of 17 billion yuan (US$2.1 billion), controls more than 50 percent of China's crane and road paving equipment market.

Sources close to the deal said the ministry had stalled the takeover for fear that it might jeopardize China's machinery industry.

Foreign acquisitions of leading companies were "a new problem China has to face, while advancing economic reform and opening up", said Song Heping, deputy director of the ministry's Industrial Damage Investigation Department, last month.

The ministry was trying to balance protection of indigenous industries with the investment enthusiasm of foreign companies, Song said.

(Xinhua News Agency August 9, 2006)