BEIJING - China's state assets watchdog has approved the sale of a 50% stake in
Xugong, a leading Chinese construction machinery manufacturer, to Carlyle
Group, a private equity firm from the United States, the Economic Observer
weekly said in its latest issue.
This may put an end to a year-long debate over whether China should sell
controlling stakes in key state-owned enterprises to
foreign investors.
The State Assets Supervision and Administration Commission has approved
Carlyle's revised bid for Xugong. The deal is awaiting approval by the Ministry
of Commerce (MOC) to take into effect, the report said, quoting a source close
to the deal.
Carlyle originally offered US$370 million for a 80% stake in Xugong. The deal
was submitted to the MOC for approval last December but was turned down amid
rising concerns that foreign control of key Chinese firms could threaten the
country's economic security.
The parties signed a new deal in mid-October, in which Carlyle reduced its
stake to 50%, at a cost of 1.8 billion yuan ($229 million). Carlyle also loses
the board chairmanship to Xugong, but will have equal representation on the
board.
The new deal has been approved by the congress of employees as well as the
Xuzhou city government and the government of east China's Jiangsu province,
where the company is located.
The Carlyle deal has sparked off a hot debate in China about the potential
impact of foreign control of leading firms in the manufacturing sector.
The Carlyle controversy is drawing attention to other "problematic" deals, such
as the proposed takeover of the Luoyang Bearing Corporation, a leading bearing
producer in China, by German-based Schaeffler Group.
The debate prompted the MOC and other authorities to promulgate new rules in
August concerning the acquisition and takeover of Chinese enterprises by
foreign investors.
The new rules, which took effect on September 8, state that such acquisitions
and takeovers must be approved by central authorities in three cases.
The three cases are: the foreign bidder has a market share of over 20% and
annual sales in China of more than 1.5 billion yuan; the market share of one of
the parties to the deal will reach 25% after the acquisition; the foreign
bidder has acquired more than 10 Chinese enterprises in one year.
In its 11th five-year plan for China's commerce development, MOC said China
would seek to improve the quality of foreign investment and put in place a
system for monitoring the impact of foreign investment on domestic industries.
Zhao Jinping, a scholar with the Development Research Center under the State
Council, said it was common international practice for governments to impose
restrictions on mergers and acquisitions by foreign companies.
"As rules and regulations are fine-tuned, the government will be able to handle
such cases more easily and transparently," he said.
He Manqing, a MOC expert on multinational companies, predicted that mergers and
acquisitions by foreign investors in China would increase sharply over the next
few years, now that the rules had been set.
For some people, however, Carlyle's new offer is still not good enough. Xiang
Wenbo, who vehemently opposes the deal and sparked the debate by revealing the
deal in his blog, said the 50-50 share structure would not guarantee the
Chinese side's control of the firm, as required by government rules.
Xiang is general manager of Sany Heavy Industries Co, a rival who also bid for
Xugong. Xiang said Xugong had deliberately excluded Sany and all other rivals
from the deal.
