In a move that could keep investors out of China, the regulators have increased the lock-up period for foreign investors with stakes in banks.
At the end of March, China Banking Regulatory Commission announced that foreign investors would be required to maintain their position in Chinese banks for five years, rather than the three years previously necessary.
“If this restriction had applied when foreign investors invested in ICBC, China Construction Bank and Bank of China, the financial investors would not have done the deal and perhaps several of the strategic investors would have also thought twice,” said Edward Sun of Milbank Tweed Hadley & McCloy.
By extending the lock-up period, the government hopes to encourage foreign banks entering China to take a long-term view of their investment, and encourage foreign investors already in China to remain.
UBS reportedly sold its entire stake in Bank of China at the end of 2008, while Bank of America recently reduced its stake in China Construction Bank. The regulator wants to prevent further exits of capital from China as western banks try to consolidate their balance sheets.
Despite an 18-month to three-year lock-up being more common for non-bank foreign investments, banks already in China have suggested they will also comply with the new guidelines.
Goldman Sachs, for example, has confirmed that it will not sell its shares in ICBC before 2010 but as Sun says, “Agricultural Bank of China’s efforts to woo strategic investors later this year may reveal the depth of the impact of the expanded lock-up”.
CBRC has not yet given its policy change statutory backing (the regulator’s remarks were made at a seminar held by the Chinese Academy of Social Sciences) but further confirmation looks unlikely and is not necessarily needed. CBRC oversees foreign investment, reviewing all deals before they go ahead. It can simply reject investments that do not include a five-year lock-up.
But Antony Dapiran of Freshfields Bruckhaus Deringer thinks that the rule change is about projecting the right public message:
“This seems to be more a case of good PR management than anything else. It is understood that these new lock-up rules will only apply to new investments. Most Chinese banks already have overseas strategic investors in place, and in any event foreign financial institutions have neither the capital nor the appetite for further investment adventures in China at the moment.”