VZCZCXRO2533
RR RUEHCN RUEHGH
DE RUEHGH #0337/01 1521139
ZNR UUUUU ZZH
R 011139Z JUN 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 5903
INFO RUEHBJ/AMEMBASSY BEIJING 1158
RUEHCN/AMCONSUL CHENGDU 0712
RUEHGZ/AMCONSUL GUANGZHOU 0692
RUEHHK/AMCONSUL HONG KONG 0821
RUEHSH/AMCONSUL SHENYANG 0714
RUEHIN/AIT TAIPEI 0584
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 6311

UNCLAS SECTION 01 OF 02 SHANGHAI 000337 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM AND EEB 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/ALTBACH/READE 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN/GLICK/LUNG; NEW YORK FRB FOR CLARK/CRYSTAL/MOSELEY 
STATE PASS CFTC FOR OIA/GORLICK 
CEA FOR BLOCK 
USDOC FOR ITA DAS KASOFF, MELCHER AND OCEA/MCQUEEN 
TREASURY FOR OASIA - DOHNER/CUSHMAN 
TREASURY FOR IMFP - SOBEL/MOGHTADER 
NSC FOR KURT TONG 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV PREL CH
SUBJECT: PROBLEMS LOOMING FOR M&A AND VENTURE CAPITALISTS 
 
REF: A. TARNOWKA-LOEVINGER 5/18 EMAIL 
 
     ¶B. SHANGHAI 70 
     ¶C. SHANGHAI 250 
 
(U) This cable is sensitive but unclassified and for official 
use only.  Not for distribution outside of USG channels. 
 
¶1. (SBU) Summary:  International private equity (PE) and venture 
capitalist (VC) representatives told visiting Embassy Finatt, on 
May 16, that Chinese regulations which took effect in September 
2006 have effectively shut them out from doing business in 
China.  Since the "Provisions for Foreign Investors to Merge 
with Domestic Enterprises" rule took effect last year, no 
Chinese company had been granted permission to form a special 
purpose vehicle (SPV) that in preparation for listing on a 
non-Chinese stock exchange.  As a result, international VC and 
PE firms were reluctant to invest in China since they had no 
exit strategy.  The company representatives asked that this 
concern be raised within the context of the Strategic Economic 
Dialogue (SED).  While this regulation would eventually hurt 
NYSE and NASDAQ, enough companies had received permission prior 
to this rule's enactment to not impact their current business, 
according to the NYSE.  End summary. 
 
¶2. (SBU) Shanghai-based international PE and VC representatives 
The Carlyle Group China Chief Representative Luo Yi, ChinaVest 
Chairman Robert Theleen, and New Access Capital Managing Partner 
Andrew Qian discussed China's mergers and acquisition's (M&A) 
environment with visiting Embassy Finatt on May 16.  They raised 
serious concerns about China's "Provisions for Foreign Investors 
to Merge with Domestic Enterprises" rule that took effect 
September 8, 2006.  (Note: These rules required that any Chinese 
company seeking to list overseas via a special purpose vehicle 
(SPV) and therefore transfer company assets overseas be approved 
by six government agencies.  These were the Ministry of 
Commerce, State Assets Supervision and Administration 
Commission, State Taxation Bureau, State Administration of 
Industry and Commerce, State Administration of Foreign Exchange 
and China Securities Regulatory Commission (CSRC) (Ref B).  End 
note.) 
 
¶3. (SBU) According to Carlyle's Luo, there had been no PRC 
approval for any Chinese company to create an SPV since the 
rules took effect on September 8, 2006.  Forming an SPV was the 
best, and often only, route for small- to medium-sized Chinese 
companies to list on foreign stock-exchanges as it created a 
"clean" company unencumbered by potential contingent 
liabilities.  They claimed, unless modified, the rule could have 
a major negative impact both on U.S. exchanges (NYSE and NASDAQ) 
and on the ability of Chinese start-up firms to access the 
capital they need to research and develop innovative products. 
 
¶4. (SBU) Additionally, international VC and PE firms would be 
reluctant to invest U.S. dollars in Chinese start-ups if they 
were unable to list overseas since they would find it otherwise 
difficult to capitalize their gains and exit out of their 
investments.  Most Chinese start-ups did not receive bank loans 
and were unable to meet listing requirements for Chinese 
exchanges, which had more stringent profitability requirements 
than NASDAQ, said Theleen. 
 
¶5. (SBU) Qian had also heard rumors of even more restrictive 
implementing regulations soon to be issued (including a possible 
requirement of USD 1 billion market capitalization to qualify 
for an overseas-only listing).  This had exacerbated the 
international VC and PE companies' concerns, he added. 
 
¶6. (SBU) Luo, Qian and Theleen provided talking points that 
could be used by Treasury in upcoming SED meetings (transmitted 
Ref A).  They understood it was likely too late to have their 
concerns in the May 22-23 SED II meetings in Washington. (Note: 
Finatt plans to seek appropriate opportunities to raise these 
concerns with relevant Chinese authorities in Beijing, including 
 
SHANGHAI 00000337  002 OF 002 
 
 
the National Development and Reform Commission, CSRC and MOFCOM. 
 End note.) 
 
------------------------------------------ 
The Jurassic Park Rule: Nature Finds a Way 
------------------------------------------ 
 
¶7. (SBU) In a separate meeting on May 16, Gaohua (Goldman Sachs) 
Securities Company Executive Director Raymond Yin told Finatt 
that there had been "a very direct message" to state-owned 
enterprises that they should not list overseas, but should list 
in China.  This was a clear move, he said, to provide more and 
better stock offerings into the Shenzhen and Shanghai stock 
exchanges in an attempt to provide more supply and contain 
upward pressure on stock prices.  He said that restrictions on 
SPVs were a reflection of this.  However, he added, he had also 
heard that these restrictions originated with Chinese leaders 
unhappy with the "Unocal failure." 
 
¶8. (SBU) Nevertheless, Yin said that the Jurassic Park movie 
tagline, "Nature finds a way," also applies to the market. 
"Smart venture capitalists" would always be able to find a way 
for their capital to both enter and exit China.  This would 
lead, he believed, to companies resorting to the unregulated 
over-the-counter (OTC) market. 
 
-------------------- 
NYSE Not Yet Worried 
-------------------- 
 
¶9. (SBU) Asia Pacific NYSE Group Executive Director Michael Yang 
told Econoff on May 23 that his contacts at the CSRC had 
indicated that the September rules were aimed largely at 
preventing state-owned enterprises (SOEs) from "being sold too 
cheaply to foreigners."  Yang said that another genesis of these 
regulations was Carlyle's attempted purchase of a controlling 
stake in the Xugong Group Construction Machinery Company.  This 
had worried Chinese leadership who were concerned about foreign 
ownership of Chinese companies, he said.  Yang also believed 
that CSRC's leadership wanted to promote China's stock exchanges 
and wanted more good companies to list in China. 
 
¶10. (SBU) Nevertheless, Yang said companies that had finished 
the paperwork necessary to form an SPV prior to September 8, 
2006 were able to list overseas.  Yang estimated that there were 
"many hundreds, up to a thousand" such companies.  While not all 
of these companies would meet U.S. standards for listing, Yang 
said that he knew of between 40 and 50 Chinese companies that 
were planning to list on NYSE or NASDAQ this year and an equal 
number in 2008.  Unless there were changes after 2008, however, 
the "Provisions for Foreign Investors to Merge with Domestic 
Enterprises rule" would "begin to hurt our business," he said. 
 
---------------------------------- 
NYSE Ready To Apply for Rep Office 
---------------------------------- 
 
¶11. (SBU) Yang said that NYSE would submit its application for a 
representative office on July 1, as soon as allowed by CSRC (Ref 
B).  Yang said that he had heard from CSRC contacts that the 
regulations to allow representative offices had been drafted in 
such a way to try to exclude stock exchanges from countries 
other than the United States from qualifying.  He attributed 
this to the CSRC wanting to be as protectionist as possible 
while still fulfilling its commitment to Secretary Paulson. 
Yang reiterated that being allowed to have a legal presence in 
China would be a huge symbolic boost for NYSE's business.  He 
expected that 2007 would be NYSE's best year for listing Chinese 
companies, noting that four had listed so far and two more 
companies would list in early June. 
 
¶12. (U) Embassy Finatt cleared on this cable. 
JARRETT