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Middle Market Money Your Guide to Understanding Regulatory Developments to Navigate the Capital Markets

Enter the Dragon: Understanding Inbound Chinese Cross-Border Transactions

Posted in Capital Markets

Although the economic climate and global business world continues to evolve and change dramatically, the steady increase in the number of cross border transactions, particularly inbound and outbound transactions involving China, has remained constant, and, despite the well documented challenges, the incentives for U.S. domestic firms (e.g., the ability to lower production and manufacturing costs, access to a Chinese economy/markets that have expanded at an average rate of more than 10% since 2005, etc.) and Chinese firms (e.g., access to raw materials, intellectual property, technology and know-how, etc.) are strong.

This past decade has firmly established that, regardless of the perspective, well-structured and properly executed cross-border mergers and acquisitions create value and are important for growth.

This blog post focuses on key issues to consider when contemplating a Chinese inbound investment.

  1. Consider Barriers to Market Entry. At the outset, firms and investors must carefully evaluate and review Chinese laws and requirements relating to foreign investment in the industry in question, specifically: (i) restrictions on the ownership percentage of a foreign shareholder, (ii) qualification requirements, and (iii) the level and scope of oversight by Chinese regulatory authorities.
  2. Structure/Investment Vehicle. Foreign firms and investors now have the ability to choose from a wide range of investment vehicles when entering the Chinese market, including, but not limited to, (i) the Wholly Foreign Owned Enterprise (WFOE), (ii) an Equity or Cooperative Joint Venture, (iii) a Foreign Invested Company Limited By Shares (FICLS), (iv) a Foreign Invested Partnership and (v) a Foreign Invested Holding Company. Each investment vehicle has its advantages and disadvantages, and the “right” vehicle will ultimately come down to the negotiated deal and your individual business goals.
  3. Regulatory Approvals. The regulatory approval process is dependent on the nature and structure of an individual transaction; however, every foreign investment transaction must obtain approval from the Office of the Ministry of Commerce (MOFCOM). Additional registration or approval from, amongst others, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, the applicable Foreign Exchange Bureau and the State-Owned Enterprises and Assets Supervisory Bureau may be, and often are, required.

As the Chinese economy continues to remain one of the fastest growing in the world, foreign investment continues to be strong. By doing your homework, choosing the “right” Chinese partner(s), and properly understanding the risks and requirements, you greatly improve your chances of creating value and meeting your business goals.