大成研究 | 郭玉兰：New Rules Boost Foreign Strategic Investment in China

The revisions stem from directives outlined in the 20th National Congress report, which emphasizes a high-level opening-up of the economy, promoting a domestic-international "dual circulation" development pattern, and enhancing the functionality of capital markets to increase direct financing. The Third Plenary Session of the 20th Central Committee held in July this year called for a systematic expansion of foreign investment across various markets, including capital and services, to improve the ease of foreign equity and venture investments in China.

In recent years, China’s ongoing economic growth and deepening reforms have increased the demand for attracting high-quality foreign investments, particularly as the scale of the securities market expands. With significant adjustments to laws governing foreign investment, securities, and companies, there is a pressing need to update the relevant regulations. The revised Measures aim to direct more quality foreign capital into listed companies, enhancing foreign capital utilization while supporting industrial upgrades and the stable development of capital markets. The regulatory framework is becoming more robust to effectively manage risks. Throughout the revision process, public feedback was solicited, and suggestions from various stakeholders were carefully considered, leading to the publication of the updated Measures, which received general support.

1. Inclusion of Foreign Individuals:The revised Measures now allow foreign individuals, in addition to corporations, to engage in strategic investments in Chinese listed companies, aligning with the Foreign Investment Law.

2. Relaxation of Asset Requirements:The asset thresholds for foreign investors have been adjusted. Previously, the requirement was at least USD 100 million in total tangible assets or USD 500 million in managed tangible assets. The new Measures reduce this to USD 50 million in total tangible assets or USD 300 million in managed tangible assets for non-controlling shareholders, while maintaining the previous threshold for those seeking to become controlling shareholders.

3. Introduction of Tender Offers:The revised Measures now permit foreign investors to make strategic investments via tender offers, in addition to the previously allowed methods of private placements and negotiated transfers.

4. Permission of Cross-Border Share Exchanges:The revised Measures allow for the use of shares from non-listed foreign companies as payment in strategic investments made through private placements or tender offers, facilitating cross-border transactions and attracting foreign investors to utilize various investment methods.

5. Reduction of Shareholding Ratio and Lock-Up Periods:Previously, foreign investors were required to initially hold at least 10% of the shares, with a three-year lock-up period. The new Measures eliminate the shareholding requirement for private placements and reduce the minimum for negotiated transfers and tender offers from 10% to 5%. Additionally, the lock-up period is shortened from three years to a minimum of 12 months, while still ensuring the long-term investment nature of strategic investments. If other regulations impose longer lock-up periods, those must be adhered to.

The revised Measures enhance regulatory oversight and risk management by establishing a collaborative framework involving market self-regulation, government oversight, and social supervision. Key provisions include:

Foreign investors are now able to engage in strategic investments with greater ease and flexibility. 

In the last year or two, the China Securities Regulatory Commission has implemented various strategies to support capital market growth, including reducing stamp duties and restricting short selling. However, the A-share market remains largely off-limits to foreign investors due to the non-convertibility of the Yuan under the capital account. Currently, only qualified foreign institutional investors can access mainland shares through the QFII scheme, while overseas participants can trade via Stock Connect programs, which operate under a quota system.

Since the initial introduction of the Measures in 2005, foreign strategic investments have made a positive impact on the development of China’s capital markets, with over 600 strategic investments recorded. The revised Measures aim to enhance the appeal of China’s markets by streamlining regulations and lowering barriers for foreign investors. This is expected to attract more foreign capital, potentially encouraging local investors to increase their A-share holdings.

Overall, the revised Measures represent a significant step toward creating a more inviting environment for foreign investment in China’s capital markets, while also emphasizing the importance of regulatory compliance and risk management. By fostering a balanced approach to foreign strategic investments, China seeks to attract high-quality foreign capital, support its economic growth, and ensure the stability of its financial markets. The effectiveness of these Measures remains to be seen.