The Chinese authorities are relaxing the rules for international investors’ entry into the capital of listed companies.
In a trade war with Donald Trump, Xi Jinping made a gesture of openness to his international partners this summer. Through an amendment under consideration, Beijing is proposing to facilitate acquisitions of Chinese companies listed on the stock exchange by foreign companies. It’s a window of opportunity for European groups. “The link between the United States and China is affected for the moment, but that between Beijing and Europe, Germany, the United Kingdom and France especially, is intensifying”, notes Alain Gallois, CEO of Natixis’ investment bank in Asia-Pacific.
To take advantage of the Chinese market, foreign companies have so far mainly taken advantage of the double-digit growth rate, set up joint ventures or entered the capital of private companies. But these engines are seized up. “The partnerships forged with Chinese private groups have sometimes turned out to be quite complicated in the past. Access to listed Chinese companies, more significant in size and which communicate more transparently, would be a powerful lever ”, adds Alain Gallois.
Very high valuations
“Foreign groups can no longer rely on the Chinese market alone, also believes Richard Zhu, responsible for Alantra in China. If they want to grow and gain market share locally, this requires an acquisition policy ”. There is a pool of 2,101 listed private companies, valued at around $ 1 billion on average at the end of 2017.
Published on July 30, the Ministry of Commerce’s draft amendment plans to halve the total assets needed by foreign buyers who want to acquire a stake in a listed company. Above all, it favors payment in securities.
“Authorizing payment in shares is a strong signal from the Chinese authorities to foreign investors, because payment in cash was very restrictive for these buyers, given the very high valuations in China. It will make it possible to form real groups united by the exchange of securities ”, explains Jiannian Fan, associate lawyer of Gide in Shanghai. Where it takes 10 to 15 times the results to enter the capital of a private company, it takes 25 to 30 times for a listed company, says Richard Zhu.
A “beautiful shooting window”
For foreign groups, Beijing’s decision is timely. The Shanghai Stock Exchange posted the worst performance of the major world markets this year, to the point of now appearing to be undervalued. The composite index of the first Chinese place has collapsed by 19% since the beginning of 2018. “There is a great window of opportunity for making acquisitions in China, wants to believe Emmanuel Gros, co-founder of the investment bank B & A.
With this measure, Beijing hopes to regain its attractiveness, while the difficulties of setting up are pushing foreign companies to leave. “The Chinese market has become extremely competitive, and a number of European companies have started selling their non-core or underperforming subsidiaries in the country.”, notes Richard Zhu. The French Etam has thus sold certain activities to an investor in Hong Kong and the Portuguese pharmaceutical company Hovione, to a Chinese group.
“The government’s goal is also to open up Chinese groups that are still very local to the international market”, emphasizes Antoine de la Gatinais, associate lawyer at Gide. Finally, the authorities hope to bring some stability to an extremely volatile stock market. This is where the main obstacle lies, according to one auditor: « Being a minority shareholder in a listed Chinese company is not without risk. We can quickly find ourselves faced with governance difficulties or real influence on strategy. “