The Chinese authorities are relaxing the rules for international investors entering the capital of listed companies.Anne Drif
In a trade war with Donald Trump, Xi Jinping made a gesture of openness this summer that went unnoticed by his international partners. Through an amendment under consideration, Beijing is proposing to facilitate the buyouts of Chinese listed companies 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_near 1,500 buybacks were signed in 2015 according to the Ministry of Trade. 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 ”. A pool, he recalls, of 2,101 listed private companies, valued around $ 1 billion on average at the end of 2017.
The proposed amendment from the Ministry of Commerce aims to halve the amount of assets required to acquire stakes in these listed companies (that of takeovers is unchanged at $ 100 million) and 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 Loyrette Nouel in Shanghai. Where it is necessary to pay 10 to 15 times the results to enter the capital of a private company, it is indeed necessary to count 25 to 30 times, or more than double, for a listed company, specifies Richard Zhu.
What the draft amendment says
Published on July 30 and open for consultation until August 29, the text provides for reducing to $ 50 million, or to halve, the total assets necessary for foreign buyers who want to acquire a stake in a company. listed. The authorities reduced the blocking period for the securities of these buyers from 3 years to 1 year and removed the minimum threshold of 10% of the additional capital that these investors had to take after the initial investment. Finally, foreign groups will be able to pay for their acquisitions in securities from all sectors, restricted or not. In sectors that are not subject to specific authorizations, acquisition projects can be approved directly by local authorities of the Ministry of Commerce and more at the national level.
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. European companies, particularly French companies, are not offensive enough while there are more and more well-managed potential targets, created by Chinese entrepreneurs who have studied abroad at increasingly reasonable valuations ”.
The Chinese Stock Exchange is more open to foreign individuals The measure took effect on September 15: foreign individuals working in China are now allowed to buy and sell “type A” shares denominated in yuan. Until now, foreigners could buy “type B” shares, denominated in foreign currencies and specifically intended for international investors. But access to “type A” shares, which cover more companies, was mainly reserved for approved foreign institutional investors. The stock market regulator justified this new measure by the desire “to deepen the opening of the capital market, to diversify the sources of investment, to widen the channels of access to capital and to optimize the structure of the capital market. capital ”. The measure also benefits foreign employees of listed Chinese companies who work outside of China.
By this measure, Beijing hopes to regain its attractiveness. Growth is running out of steam and 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. French company Etam has sold certain activities to an investor from Hong Kong; Portuguese pharmaceutical company Hovione has sold assets to a Chinese group.
“A huge casino”
“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. By facilitating the entry of international investors, the authorities also hope thereby to bring some stability to an extremely volatile Chinese stock market, dominated by small savers.
This is where the most important brake lies, underlines one listener: “The Chinese Stock Exchange remains a huge casino that does not shine by its independence. Being a minority shareholder in a Chinese company is not without risk and one can quickly find oneself faced with difficulties of governance or real influence on strategy ”.
The difficult past of joint ventures with Chinese groups, like Danone and Wahaha, remains in everyone’s mind. Not to mention the control of foreign acquisitions, which even relaxed, is very tight.