PRINT THIS PAGE Guide to mergers and acquisitions: China09/08/2006. Source: Baker & McKenzie.
The foreign investment regime of the People's Republic of China has evolved considerably since the reformist policies of China's former leader, the late Deng Xiaoping, first opened China to the outside world, says Baker & McKenzie. With its vast reserve of inexpensive labour and its rapidly expanding and potentially enormous market size, the consensus of international investors is that by most counts China is currently one of the most promising jurisdictions in the world for foreign investment. However, international investors have also pointed out that the current foreign investment regime in China is far from perfect. Despite its determination to pursue a market economy and comply with international practices, China remains a socialist state with planned economy influences, and its government still emphasizes stability and control above all else.
Pioneering foreign investors who have been operating in the PRC during the last few decades have long been used to a highly non-transparent and bureaucratic system that requires foreign investors to unravel opaque local laws and practices, pay high import tariffs for most products, and navigate around numerous restrictions that only apply to foreigners.
Complex approval processes, layers of government bureaucracy, undue political pressure, together with inconsistent interpretation and enforcement of laws are phenomena that have long plagued foreign investors operating in this country.
China and the World Trade Organization
On December 11, 2001, the 15-year campaign for China to join the World Trade Organization (WTO) came to an end when China became a full member of the WTO. The immediate effect of China's entry was that, as a WTO member, China was obliged to open its domestic market further. Perhaps an even more significant long-term effect of China's WTO accession could be a strengthening of its rule of law and an eventual overall improvement of its foreign investment environment-although such improvement has not been materializing at the pace that had been hoped by some.
In keeping with its WTO commitments, China has been revising large numbers of laws and regulations, including those affecting foreign investment in China. In this respect, China's WTO accession has encouraged and continues to encourage an increase in merger and acquisition activities in the country, as various restrictions or prohibitions against foreign acquisitions of certain types of companies or assets of companies in certain industries continue to be lifted. In particular, foreign acquisition of listed and non-listed companies and state-owned enterprises ('SOE'), especially in sectors where foreign investment has hitherto been restricted or prohibited, are becoming more frequent. Signs of increased market activity are apparent, and in highly competitive sectors such as financial services and telecommunications, greater industry consolidation could take place in the next few years.
While certain features of the Chinese system, especially those that are not covered by the WTO commitments, will likely not change much in the near term, on the whole the China market can only become more attractive in the future. For international investors, post-WTO China presents real opportunities by promising social, economic and legal changes that will substantially improve the rule of law and the investment environment in the country over time.
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