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O6 PC OAInNPHoDEvN AIle NiPCcOQsALUytIICmS IRIETSIeOe TNnOvSW tiAe R wDS sMERGERS E C D In v e s t m e n t P o The full text of this book is available on line via these links: lic http://www.sourceoecd.org/finance/9264021930 y http://www.sourceoecd.org/emergingeconomies/9264021930 R e v Those with access to all OECD books on line should use this link: ie http://www.sourceoecd.org/9264021930 w s SourceOECD is the OECD’s online library of books, periodicals and statistical databases. For more C information about this award-winning service and free trials ask your librarian, or write to us at H [email protected]. IN A www.oecd.org ISBN 92-64-02193-0 -:HSTCQE=UWV^X]: 2006 20 2006 01 1 P 2006 OECD Investment Policy Reviews China OPEN POLICIES TOWARDS MERGERS AND ACQUISITIONS 2006 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members. This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries. Also available in French under the title: Examens de l’OCDE des politiques de l’investissement Chine Politiques ouvertes envers les fusions et acquisitions 2006 © OECD 2006 No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to OECD Publishing: [email protected] or by fax (33 1) 45 24 13 91. Permission to photocopy a portion of this work should be addressed to the Centre français d'exploitation du droit de copie, 20, rue des Grands-Augustins, 75006 Paris, France ([email protected]). FOREWORD Foreword T his OECD report charts China’s recent rapid progress in developing a regulatory framework for cross-border mergers and acquisitions (M&As). It examines the challenges that still face the Chinese government in its efforts to encourage inflows of foreign direct investment (FDI) by this route and draws on the experience of OECD member countries to offer a range of policy options to address these challenges. China has become one of the world's leading destinations for FDI. However, while cross-border M&As have become the dominant form of global FDI flows, they remain a relatively small part of FDI flows into China. Improving the regulatory framework for cross-border M&A can be of great benefit to domestic as well as foreign investment in China. Cross-border M&As can play an important part in the restructuring of state-owned industries, especially in the old industrial heartland in North East China. The Chinese government has enacted legislation to open the economy to cross-border M&A since the late1990s, but there is still scope for the regulatory framework in this area to be rendered more open and transparent. Cross-border M&A transactions could be facilitated by the relaxation of foreign ownership restrictions, greater regulatory transparency and the early enactment of a sound competition law. More also needs to be done to promote good corporate governance and disclosure so that investors considering mergers or acquisitions may conduct effective due diligence. Cross-border M&A can be made easier by further opening of China’s capital markets to foreign investors. This second investment policy review of China follows recommendations made in the first review, which was published in2003. It forms part of the continuing programme of OECD-China co-operation on investment policies which began in1995. This programme focuses on developing a mutually beneficial exchange of experience to promote an open and transparent policy framework for investment in China. A rules-based framework can encourage more and better foreign investment while maximising spill-over benefits to the domestic economy, stimulating economic growth and development. Manfred Schekulin Chair, OECD Investment Committee OECD INVESTMENT POLICY REVIEWS – CHINA – ISBN 92-64-02193-0 – © OECD 2006 3 NOTE BY THE EDITOR Note by the Editor T his Review, a follow-up to the2003 investment policy review of China, has been undertaken under the aegis of the OECD Investment Committee as a tool for furthering dialogue and co-operation between the OECD and the Chinese authorities in support of China’s reform efforts in the field of international investment. The Review, which is published under the responsibility of the Secretary-General of the OECD, has benefited from co-operation with the Ministry of Commerce of the People’s Republic of China (MOFCOM) and other Chinese government agencies at national and local levels. The Review also benefited from input from OECD member country governments, private-sector practitioners, and participants in three important events: the 21February2005 Changchun OECD-China Launch Conference for the North-East China Pilot Project on Open Policies towards Cross-Border Mergers and Acquisitions; the OECD-MOFCOM Seminar on Open Policies towards Cross-Border Mergers and Acquisitions at the 9th China International Fair for Investment and Trade held on 8September2005 in Xiamen; and, the 8-9December2005 OECD-China Symposium in Beijing on China’s Policies towards Cross-Border Mergers and Acquisitions. It is based on a background study prepared by Kenneth Davies, Senior Economist in the Investment Division of the OECD’s Directorate for Financial and Enterprise Affairs, with input from its Competition and Corporate Affairs Divisions. OECD INVESTMENT POLICY REVIEWS – CHINA – ISBN 92-64-02193-0 – © OECD 2006 5 TABLE OF CONTENTS TTaabbllee ooff CCoonntteennttss Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Chapter 1. Background to the Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Chapter 2. The Case for Open Cross-border M&A Policy inChina . . . . . . 17 Chapter 3. China’s Regulatory Framework for Cross-border M&A . . . . . . 23 Chapter 4. Lessons from North-East China experience. . . . . . . . . . . . . . . . 33 Chapter 5. Problems Faced by Investors inPursuingmergers and Acquisitions inChina. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Chapter 6. Recommended Policy Responses. . . . . . . . . . . . . . . . . . . . . . . . . 67 Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Annex A. Informal External Advisory Group on OECD Investment Committee-China Investment Policy Co-operation . . . . . . . . . . . . . . . 75 Annex B. Survey of Company Experiences Regarding Cross-border M&A Transactions in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Annex C. Statistical Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 List of boxes 4.1. North-East China’s three provinces: basic data. . . . . . . . . . . . . . . . . . . 36 4.2. FDI in Jilin province . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 4.3. Case study: Hualin Tyre Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5.1. Some examples of due diligence problems . . . . . . . . . . . . . . . . . . . . . . 58 List of tables 2.1. Cross-border MA in China and the world . . . . . . . . . . . . . . . . . . . . . . . . 19 4.1. 100key projects for foreign investment in Jilin in2005 . . . . . . . . . . . . 41 C.1. Growth of FDI inflows, 1979-2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 C.2. Growth of cumulative FDI, 1979-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 C.3. FDI inflows to China and all OECD member countries, 1998-2004 . . . 79 C.4. FDI by type, 1979-2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 C.5. Changing sources of FDI inflows to China, 1986-2005 . . . . . . . . . . . . . 81 C.6. Regional distribution of FDI inflows into China in2005. . . . . . . . . . . . 82 OECD INVESTMENT POLICY REVIEWS – CHINA – ISBN 92-64-02193-0 – © OECD 2006 7 TABLE OF CONTENTS C.7. FDI inflows to East, Central and West China in2005 . . . . . . . . . . . . . . 83 C.8. Sectoral distribution of FDI inflows in2005: specific sectors. . . . . . . . 84 C.9. Share of FIEs in total exports and imports, 1986-2005 . . . . . . . . . . . . . 85 C.10. FIE Exports and imports, 1986-2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 C.11. Top ten destinations of China's outward FDI in2004 . . . . . . . . . . . . 86 C.12. Top ten destinations of China's outward FDI cumulated to end-2004 87 C.13. Sectoral distribution of China's outward FDI flows in2004. . . . . . . . 88 C.14. Sectoral distribution of China's outward FDI stock in2004 . . . . . . . 88 8 OECD INVESTMENT POLICY REVIEWS – CHINA – ISBN 92-64-02193-0 – © OECD 2006