Caixin Online: The basics of Chinese inbound investment deals

By Andrew Ross
BEIJING (
Caixin Online
) — An accelerating number of Chinese companies are engaging in acquisitions and joint ventures in the United States and while it’s generally understood that a large number of other Chinese companies are also considering doing so, many still hesitate.
The first point to note is that the rate of deals is increasing, and is doing so dramatically. A second point is that as a percentage of the total number of deals, small- to medium-size deals make up the majority, although there are a few larger ones, and the buyers are generally not SOEs (state-owned enterprises). Third, the industries of the acquired companies cover a broad range, from technology, apparel, consulting services, auto parts, hotels and many more.

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In 2011, several Chinese companies announced their intentions to enter into deals in the U.S., including Shanghai Pharmaceuticals

, with its publicly stated reasons being to seek new drugs to expand its product line and noting declining overseas prices and a strong Yuan, Bright Food Group, China National Materials Co. (Sinoma)

 and Fosun Group, which stated it is looking at consumer brands. Many Chinese companies are going global in the U.S., more and more will be doing so, and for those Chinese companies for which this makes sense and which proceed to do so, they will be in very good company.
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So what are some of the strategies, procedures and lessons on pitfalls that can be garnered from recent deals?
Perhaps one of the most important points regarding engaging in transactions in the United States is to recall the reaction of many Chinese businesses when foreign companies came to China and sought to dictate that deals in China be done in the same manner as in those companies’ respective homelands. This generated ill feelings and often did and can easily result in failure in a deal. The same is true in the United States. Companies from many different countries make acquisitions in the U.S. all the time, and one of the accepted norms is that the deal will be done in “U.S. style.”
While not successful on occasion, the advisor for the U.S. company looking to be sold (especially a “hot” company) may seek to create an auction for the company, thus seeking to maximize the price and otherwise obtain the most favorable terms. Even if they do not succeed in doing this, they will generally seek to have the process move as rapidly as possible. Prospective buyers who are unwilling to follow an auction process when established or move too slowly are simply left behind. An important aspect in dealing with this is to be prepared. This means having done industry and market analysis in advance so as to be able to readily determine one’s interest and willingness to devote the necessary resources to explore the deal, and have ready or be able to quickly assemble a team of qualified Chinese and U.S. advisors.

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Many U.S. businessmen object to the alleged slow deal pace of foreign businessmen (and not just Chinese), thus often giving U.S. buyers an advantage. Timing delays are, of course, a tactic to be considered; however they should only be used as deemed appropriate, such as to express reservations or concerns so as to try and enhance one’s bargaining position. However, a buyer should not allow its perceived slowness to cost it a deal it otherwise wants.
While most people properly say “a deal is not done until it is done,” in many U.S. negotiations the same often is not true of individual issues. Once an issue is resolved, it is generally not renegotiated absent special circumstances. A party which acts contrary to this undercuts its counter-party’s trust in it.
There is great significance in the U.S. placed on the transaction contract, as each party seeks to maximize its benefits and protections. As a general rule, legal counsel for a U.S. party, will seek as much protection for its client and clarity in the terms of an agreement as possible. This can be especially important for a buyer or investor. This often means lengthy detailed contracts, and also emphasizes the need for the parties to make decisions relatively quickly with respect to the many points involved. In fact, one view is that many U.S. business persons and their lawyers will only encourage ambiguity in an agreement if they think that addressing the ambiguity in the negotiations would result in it being resolved contrary to their interests or if they think they will have greater negotiating leverage on the point once the agreement is signed or the deal is consummated.
By having a contract be as detailed and precise as possible, the likelihood of a dispute is reduced. This is augmented by the fact that in the U.S. there is a very substantial body of court rulings and laws which help determine what a particular contractual phrase will mean in a particular context, thus creating even greater potential certainty. Finally, it should be recognized that other than private arbitrators and mediators and the courts — all of which are objective but the last of which is slow — no governmental entity or person such as a governmental bureaucrat plays a meaningful role in resolving contractual disputes.
While concerns abound over the possible legal burdens that Chinese companies face in the U.S., there are many reasons for Chinese companies to go global, and in particular to do so in the United States.
Read this commentary on Caixin Online.

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Andrew Ross is partner and chair of the mergers and acquisitions practice group at Loeb & Loeb LLP. This article is an abridged version of a paper titled, “Acquisitions by Chinese companies in the United States: The case for moving forward now.”

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Caixin Online: China pension funds closer to stock investing

By Lan Fang
BEIJING (
Caixin Online
) — China’s struggling securities market is getting a psychological shot in the arm on rising expectations that pension funds may soon provide hundreds of billions of yuan in new investment cash.
Since his appointment in late October, China Securities Regulatory Commission (CSRC) Chairman Guo Shuqing has mentioned several times that he wants to widen securities market access for pension and housing provident funds.
Chen Liang, director of fund oversight at the Ministry of Human Resources and Social Security (MHRSS), said a consensus could be reached soon among key parties involved in pension fund investment talks.

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Various government authorities including the CSRC, MHRSS and the National Development and Reform Commission have been discussing since late last year broad issues such as investment target qualifications, government policies, fund operations, market oversight and legal responsibilities, Chen said. They’ve also discussed opening the stock market to housing provident funds, which companies manage for employees’ future housing purchases.
A “breakthrough development” that would let urban pension funds — government-run social security funds for most workers in China’s cities — buy and sell stock was recently reached, said Ji Ning, deputy head of the Employment and Income Distribution Department at the National Development and Reform Commission (NDRC).
Discussions are likewise continuing over whether private insurance schemes for rural workers, few of whom are eligible for social security, will be allowed to follow suit.
Neither securities regulators nor fund managers have set a possible timetable for unleashing the full power of pension funds on the nation’s stock exchanges. For now, the government limits market access to certain social security and annuity funds, which can invest up to 40% of their assets in securities.
As of the end of 2010, the nation’s urban pension funds controlled a cumulative 1.5 trillion yuan ($238 billion), including 857 billion yuan managed by the National Social Security Fund Council. The rural insurance plan, an option for farm workers and other self-employed launched in 2009, held 42.3 billion yuan.

Two sides

Supporters and skeptics of pension fund stock investing are among those participating in the ongoing negotiations. The former include government officials, who say funds would help stabilize the nation’s securities markets, which weakened in 2011. Doubters include State Council members, who call stock investing too risky for public funds earmarked for retirees.

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These and related disagreements have brewed for years while, according to reports, some pension-linked insurance funds have gone ahead and invested in stocks.
The State Council’s official position is that any change in pension investment policy should put safety first. The cabinet wants strict supervision of stock trading by pension funds, for example, and has called for tighter laws and regulations before regulators broaden investment channels.
For officials at MHRSS and NDRC, however, a main sticking point has been a disagreement over which government agency would actually invest pensioners’ money.
Caixin has learned MHRSS, NDRC and other agencies have reached a basic consensus on most pension-securities issues. For example, they’ve agreed individual accounts and a trust model should be used for all stock investing.
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Caixin Online: Key China finance meet to avoid some topics

By Zhang Yuzhe, Wen Xiu and Lu Yuan
BEIJING (
Caixin Online
) — In a meeting this week that will set the tone for major financial reforms in the coming year, analysts expect policy makers to remain muted on top leadership changes which could impact the course of policies.
Scheduled for Jan. 6, the two-day conference will consider proposed policy amendments to improve the country’s financial regulatory environment. Sources close to the conference, who declined to be named, told Caixin that opposition remains strong to establishing a consolidated regulatory body for supervising and managing state-owned assets of financial institutions.

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The topic is not included on the meeting’s discussion agenda, according to people familiar with the situation.
In the midst of the rapid expansion of state-owned assets, the Ministry of Finance said as of the end of 2007, the amount of state-owned assets in centrally administered financial institutions alone reached 1.2 trillion yuan ($190 billion), with more than 40 trillion yuan worth of assets under their management.
Figures for financial assets under local-government control are not made available, but are estimated to be enormous as well.
In most circumstances, these financial institutions are owned and controlled by the same government agency and respond to different regulatory authorities, depending on the type of their businesses, which gives rise to conflicts of interest as well as regulatory redundancy and confusion.
Li Shuguang, deputy dean of the China University of Political Science and Law’s graduate school, is among the most vocal proponents for creating a single regulatory agency to unify oversight. He said the government should establish a new commission to represent the ownership of all state-owned financial assets.
The agency would be the counterpart, Li continued, of the State-Owned Assets Supervision and Administration Commission, which manages state-owned assets in centrally administered enterprises, excluding those in the financial industry.
Li’s idea is strongly opposed by Yin Jianfeng, deputy director of the financial research institute under the Chinese Academy of Social Sciences. Yin argued that a consolidated regulatory body would amplify the monopolistic power of state-owned companies, adding that the trend of financial reform should be ownership diversification and more competition.
Opposition voices are also emanating from the halls of the central bank and regulatory authorities in the banking, securities and insurance industries. An official from the central bank, for example, said the proposed agency would overlap the work of Central Huijin Investment Ltd., which already exercises rights and obligations as an investor in major state-owned financial enterprises.
Since policy makers are not expected to broach the contentious topic, analysts say areas of reform perceived as more viable could see change. Some said the meeting is likely to push forward with the creation of a deposit insurance system, which will require financial institutions, mainly banks, to insure against bankruptcy so that even the largest ones have a door to wind down and go bankrupt.
The meeting agenda looks set to focus on the establishment of a consolidated regulatory body for domestic bond markets, where the participants face multiple and often inconsistent administrative requirements from different regulatory authorities.
Inspiring as these topics seem, analysts say they don’t expect the meeting to roll out major, potentially disturbing reform measures, at a time when political leadership is about to change.
Held every five years, the national financial work conference shapes the landscape of China’s financial industry.
The first conference, held in 1997, created authorities to manage the securities industry and social-insurance funds separately. Previously, both responsibilities had been charged with the central bank.
Five years later, the second conference decided to create the banking regulatory commission and carry out share-ownership reform of state-owned banks; China Investment Corp., on the other hand, was established after the third meeting in 2007 to improve returns on China’s massive foreign-exchange reserves.
See this report at Caixin Online

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