Recent headlines in the Chinese press, including articles such as “China to review foreign M&A of domestic firms” explain that a new regulation issued by China’s Ministry of Commerce (MOC) will add another layer of red tape as the Chinese government will review mergers and acquisitions of domestic companies by foreign investors for national security purposes.
As overseas buyers, one common way to quickly expand sourcing operations is to get a footprint in China by acquiring an existing company already in operation there. For example, if a large American retailer wants to set up a sourcing operation to check quality or their purchases and consolidate freight, they may purchase an existing sourcing office and warehouse in a place like Shenzhen or Shanghai.
Taking ownership of a Chinese entity is complex enough already, I was worried that these new regulations would create more barriers. Even if you and your acquisition target were of no threat to national security, the fact that you have to apply and state your case to yet another government arm in China could become one more hurdle for foreign to clear when doing business in China.
I asked my friends at Fiducia to comment on the impact of this law as they help foreign companies set up operations in China and keep a finger on the pulse of international business in China. I am happy to let you know that according to Thaddaeus Mueller,
“we doubt that many among the CSIC readership and audience would fall over the threshold of the scale of operations that is currently being reviewed by the government for security purposes. But if your business is related to industries such as defense, communication and publication, you may find additional scrutiny when it comes to M & A.”
So for the moment, while the rule may be on the books, it appears that it is having little impact on the typical M & A.
Wishing you successful China sourcing!
About the blogger
Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center (www.ChinaSourcingInfo.org). He is also the author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)