Policy to drive rebound of foreign equity investment

Foreign equity investment in China may recover this year, as Chinese assets attract growing global interest and the country further opens up to foreign investors, experts and industry observers said.

Their remarks follow the release of an action plan last week by the State Council, China's Cabinet, aimed at stabilizing foreign investment this year.

The plan outlines measures to encourage foreign investors' strategic shareholding in Chinese listed companies, facilitate their participation in mergers and acquisitions, and accommodate the establishment of foreign investment companies while lifting restrictions on their use of domestic loans.

Pan Yuanyuan, deputy director of the international investment department at the Chinese Academy of Social Sciences' Institute of World Economics and Politics, said, "These measures are well-rounded and timely, directly addressing pain points that foreign investors have encountered and indicating a strong commitment to deepening financial opening-up."

The policy efforts coincide with global investors' ongoing reassessment of Chinese companies' valuations, helping create new opportunities for foreign investors to capitalize on China's fast-growing international competitiveness in various sectors, Pan said.

These factors may work together in driving the recovery of foreign equity investment in China this year, possibly even exceeding expectations, Pan added.

According to the action plan, foreign investment companies will be allowed to use domestic loans for equity investments in China.

"This policy is a major boost for foreign investment firms in China, because it will expand their financing channels and reduce costs," said Nancy Li, international tax and transaction services partner at EY China. Previously, such companies relied on offshore funding or reinvested local earnings, as domestic loans were limited for operational use or to designated items, Li noted.

"Using domestic loans for equity investment will create a completed loop throughout investment life cycles, spanning from domestic borrowing to onshore investment and onshore exit, and lower the capital requirements for foreign investment companies," Li added.

The plan also arranges steps to encourage multinational corporations to establish investment companies in China, providing convenience in terms of foreign exchange management, cross-border data transfer and personnel movement.

Dai Guanchun, a senior capital markets lawyer, said that facilitating the operation of foreign investment companies' onshore legal entities will help enhance their investment efficiency in China, addressing the issue of some foreign funds lacking an onshore investment platform and being compelled to rely on partnerships with domestic funds to complete investments.

Highlighting that the plan vows to put the revised rules on foreign investors' strategic investment in Chinese listed companies well into place, Dai said this will ease the hurdles faced by foreign strategic investors such as strict eligibility criteria, long lock-in periods and limited investment tools, making it easier for foreign capital to participate deeply in China's stock market.

The revised rules on foreign investors' strategic investment in listed companies, which were unveiled in November, allow strategic investment through tender offers and ease restrictions on cross-border share-for-share exchanges — both common in global transactions.

The action plan also promises to optimize the provisions for foreign investors acquiring domestic companies, lowering the barriers for them to conduct cross-border share-for-share exchanges in mergers and acquisitions.

Sun Xuegong, director of the department of policy study and consultation at the Chinese Academy of Macroeconomic Research, said that encouraging foreign participation in China's merger and acquisition market will facilitate industry consolidation in various sectors, which is a source of productivity enhancement.

"This is not only for attracting foreign investment, but also for improving productivity and efficiency of the existing capacity," Sun said.

The action plan comes as China's foreign equity investment landscape reflects both challenges and resilience. In January, the country utilized 97.6 billion yuan ($13.5 billion) in foreign capital, marking a 13.4 percent year-on-year decline but a 27.5 percent month-on-month rebound, the Ministry of Commerce said.

Rani Jarkas, chairman of Cedrus Group, a Swiss international financial group with investments in China, said the company sees firsthand that Swiss and other global companies have significant interest in investing and expanding in the Chinese market.

"This is driven by supportive policies, a capable workforce, world-class infrastructure and a large, addressable market," Jarkas said.