Foreign direct investment (FDI) has been, and continues to be, a subject of fundamental importance to the development of economies worldwide, including mainland China. This paper focuses on the inbound investment opportunity into mainland China, specifically through mergers and acquisitions (M&A), following the coming into force of the Foreign Investment Law (FIL) and associated laws, regulations and policies that aim to catalyse and encourage foreign investment into mainland China.

The paper is divided into three sections, whose findings are summarised below:

Section 1 is a review of the new FIL and associated laws and regulations such as the Implementing Rules for the FIL, the Ministry of Commerce of the People’s Republic of China’s (MOFCOM’s) overhaul of the foreign investment filing system, the ongoing reduction of the Negative List, the ongoing extension of the Encouraged Industries Catalogue, reform measures by the State Administration of Foreign Exchange (SAFE), changes to securities law, new measures from the State Administration for Market Regulation (SAMR), and other Covid-19 response policies from the State Council, MOFCOM and the National Development and Reform Commission (NDRC).

These measures have significantly accelerated and encouraged foreign investment into mainland China via M&A by streamlining processes, offering reassurances in relation to equal treatment, widening the range of business activities that are available for foreign investment, and improving capital market access for foreign investments.

Section 2 is a review of how dealmaking by foreign investors has changed in the light not only of the FIL coming into force on 1 January 2020, but also the backdrop of the Covid-19 pandemic of 2020. Some of the major trends we identify include: a strong recovery in mainland Chinese inbound M&A in 2020 despite a fall in the first quarter of 2020; significant activity in sectors such as new energy, consumer and retail, healthcare, industrials, automotive and high technology, all of which reflects demographic shifts on the consumer side of mainland China’s economy as well as the ongoing advancement of the production side of mainland China’s economy up the global value chain; and increasing international diversification among acquirors of, and investors in, mainland Chinese businesses.

We suggest that China’s rapid and robust handling of the Covid-19 pandemic has helped deal flow to recover to pre-Covid-19 levels and highlighted the strength and attractive prospects of mainland China’s economy, including as an even more attractive destination for M&A and other forms of foreign investment. Nevertheless, the pandemic has led to a lengthening in deal duration, new areas for negotiation and due diligence between acquirors and sellers, and reappraisals of business models across industries.

Section 3 of this report suggests areas of consideration for policymakers and dealmakers in light of these findings. These areas include a recognition of the importance of on-the-ground expertise (particularly operational expertise) in order to successfully source and close deals; a recognition of the increasing importance of transparency in obtaining regulatory clearance; the increasing role that the capital markets will have to play in connecting mainland Chinese businesses and international investors; and ongoing questions about the role of variable interest entities.

Dealmakers and policymakers therefore have a significant opportunity to accelerate investment into mainland China by engaging in dialogue, education and networking around these and other issues.  Such dialogue is particularly important given ongoing global tensions in relation to trade and foreign investment scrutiny, which are a potential threat to deal flow. We also suggest that there is an exciting opportunity for mainland Chinese businesses and policymakers to continue to share their experience and insights of managing the Covid-19 pandemic, with corresponding benefits not only to China but also the world.

Download the full report：Inbound M&A into China in 2020 and beyond: trends and recommendations in the light of the new Foreign Investment Law and the pandemic