How M&A Works in China

For M&A, the basic policy is as follows:

Foreigners are permitted to purchase small Chinese companies that the central government is not interested in managing.

Foreigners are permitted to purchase large, state-owned enterprises that suffer from financial difficulty, provided the foreign investor agrees to restructure the purchased company.

Foreigners are permitted to purchase non-majority interests in strong, successful Chinese companies, but only if there is some added benefit, such as transfer of technology, advanced management or access to foreign markets.

Foreigners are not permitted to purchase a majority interest in a large and financially successful Chinese company. Even smaller companies are off the table if they are financially sound and work in a core technology field or have created a strong or historically important brand.

China is remarkably receptive to direct foreign investment that creates new business activity in China. The policy towards the purchase of existing businesses and assets is the opposite. Such purchases are strongly disfavored, since they are seen as providing no net benefit to China. Under this policy regime, venture capital and troubled company buy-out businesses have plenty of room to operate. Strategic alliances in core industries also work well.

On the other hand, traditional private equity that focuses on the outright purchase of strong and successful companies simply does not work under this system. Central government regulators will consistently step in and exercise their veto powers to prevent the foreign acquisition of a majority interest in any existing, strong Chinese company. This is not likely to change anytime soon.

Read more in this article from China International Business