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China has lifted restrictions barring the foreign acquisition of shares in Chinese companies listed on the popular domestic stock markets that boast a collective market capitalization in Asia second only to Hong Kong. A groundbreaking circular issued Monday and carried in the official Securities Daily took effect immediately. Until Monday, foreign investors were allowed only to buy shares in a notoriously moribund class of stock, the foreign currency denominated B-share market. Immediately, the circular legitimizes the acquisition by Newbridge Capital Group in Shenzhen-listed Shenzhen Development Bank. It may also help hasten acquisition talks between Citigroup and the listed Shanghai Pudong Development Bank. For the first time, the Chinese government has defined the rules on foreign acquisition of shares of listed companies and the procedures to follow. It also tightens oversight under the central government, stripping local governments of such authority. The regulations reverse an eight-year ban imposed in 1995 against foreign acquisition of shares in listed companies. Such shares are generally held by the state and government-affiliated agencies and tend to comprise as much as two-thirds of the stock of domestically quoted companies. Even before the ban, placed after a 25 percent acquisition of Beijing Light Bus Corp. Ltd. by Japan’s Isuzu Motors Ltd. and trading firm Itochy Corp., interest in foreign acquisition was scant. The breakthrough was long overdue, coming years after early attempts by Chinese enterprises to transform themselves from state entities into corporate structure in 1992 and 1993. “It is difficult to speculate how and why such an important policy has come to be announced in the run-up to the 16th Party Congress” said Nicholas Howson, partner at international law firm Paul, Weiss, Rifkind, Wharton & Garrison’s Beijing office. “This key breakthrough has very serious commercial and ideological implications — perhaps the departing leadership thought it should pass the idea prior to the formal change to a new leadership.” The new regulations don’t come without restrictions and doubts. For example, the state shares won’t be sold on the open market due to the lack of convertibility of the Chinese currency. Instead, foreign companies can approach Chinese companies trading on China’s two stock exchanges to arrange private purchases. China also plans to allow foreigners to buy shares publicly traded in the two domestic stock exchanges in Shanghai and Shenzhen but that could occur only after China relaxes currency controls. New buyers of public shares are committed to hold the shares for one year, but the regulations don’t specify whether a public tender is required to sell them. Another restriction: Repatriating dividends and profits from the share sales must be cleared by foreign exchange authorities. Investors with investment in China can draw on their own existing renminbi reserves. The new rules in terse nine articles also apply to investors in Taiwan, Hong Kong and Macau, long classified as foreign under the Chinese rules. The new rules leave other doubts. For example, they leave a gray area among three central authorities governing such foreign acquisition: the State Economic and Trade Commission, which supervises state asset sales and restructuring; the Ministry of Finance, which oversees state share sales; and the State Council, the nation’s top decision-making apparatus. Copyright �2002 TDD, LLC. All rights reserved.

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