Foreign Strategic Investments Rules in China

I took a class about investment in China and its related laws while I was in law school. The class was somewhat difficult, given the large amount of reading materials and the very dry and boring task of reading the text of various statutes that were translated from Chinese to English. I can read legal statutes fairly fast, and I think most people can too, but the hard part is to understand what is actually important in the statutes and what are some of the potential troubling issues that can possesses a problem. It is a class very different from the typical US law related classes, since for most of those classes, there are numerous outside resources that can be relied on, information that already interpreted the statutes for you and already synthesized the statutes in a manner that is easy to learn and understand. However, given my interest in China, I stuck with the class, and I thought I actually learned something.

The reason I mentioned about the China investment law class was because of this article I saw on thedeal.com today, which talked about the FSI rules (new rules governing foreign strategic investments in China’s listed companies). From what I understand, there is a movement by many of the top private equity firms to set their sights towards China. Previously, the only route for foreigners to purchase shares (A-shares, which are more liquid, and not the B-shares which have being available to foreigners for a while, but was much less liquid) in a listed company in China was through the QFII (qualified foreign institutional investor) route, which allow certain institutions that met a very high asset threshold (amongst other requirements) to purchase shares of listed companies through a quota system (and I believe only up to a certain limit in each company). I think there are only about a handful institutions that qualify as QFIIs. In addition, many listed companies has non-tradable shares that are held by the state which I believe, are difficult to sell to foreigners (I think I learned something about this before, but forgot). Apparently, China launched a reform last year to convert the non-tradable shares of almost all listed companies into freely tradable shares. In addition, the FSI rules has much less stringent asset requirement of owning at least $100 million of assets or have $500 million of assets under management (still a lot to me personally, but probably nothing for firms like KKR, Blackstone and etc.), and there are no limits in the amount of stake such foreign investor can purchase in a given company. There are some other requirements to the FSI rules as well, such as must hold on to the investment for 3 years, but this new rule could signal more interesting deals to come in China, and perhaps even more opportunities. It often boggles my mind how fast China is developing and the possibilities that are out there.