China clamps stern rules for acquisitions by foreign firms

China, a major destination for foreign direct investment (FDI), has imposed stern rules on foreign companies to buy or merge with domestic companies, especially those dealing with defence equipment.

China will establish a ministerial panel to review foreign firms' attempts to buy or merge with domestic companies, laying the ground for the country's first formal process for scrutinising national security questions that arise from international deals, official media here reported.

"A panel would be established to examine proposed foreign acquisitions of local companies dealing in military or national security work," the Chinese Cabinet announced.

It said the committee will review foreign companies' attempts at buying or merging with domestic companies whose business pertains to defence, agriculture, energy, resources, infrastructure, transportation, technology or equipment manufacturing.

The National Development and Reform Commission, China's top economic planning organisation, and the Ministry of Commerce (MoC) will lead the review panel, according to the new rules.

The arrangement forms a part of China's long-term plan to build a formal process to judge the merits of foreign takeovers.

China brought about an anti-monopoly law in 2008 that requires foreign firms to pass tests meant to prove that they pose no threat to China's national security.

The law also calls for the protection of important Chinese industries.

Such provisions led to the cancelling in 2009 of Coca-Cola's $2.4 billion bid to take over the Chinese fruit juice maker Huiyuan Juice Group.

Before that, multinational firms that wanted to buy or merge with Chinese companies faced little scrutiny and had to meet few requirements.

Despite global down turn, China last year attracted $105.74 billion last year, an increase of over 17% compared to last year.

It is to be seen what impact the new regulations would have on FDI.

China recorded 1,798 mergers and acquisitions in 2010.

The transactions had a disclosed value of $82 billion, an increase of 13.8% above the amount in 2009, according to figures from ChinaVenture Group, a Beijing-based investment consulting firm.

And the number of foreign takeovers grew by 57.9% over the previous year.