China’s New Measures Open A-Share Market to Foreign Investment

The 2024 updates to China’s strategic investment rules simplify entry for foreign investors in the A-share market by lowering shareholding thresholds, reducing lock-up periods, and expanding investment options, signaling a commitment to increased market openness and flexibility through these new measures.

China’s capital markets are undergoing a significant transformation as part of the nation’s ongoing commitment to economic reform and openness. The recent update to the Administrative Measures for Strategic Investment in Listed Companies by Foreign Investors (hereinafter, the “new measures”) reflects this commitment, targeting an increase in foreign investor participation in China’s A-share market. For nearly two decades, China’s “strategic investment” pathway provided foreign investors with access to shares in A-share listed companies, but strict requirements—such as high minimum investment thresholds and prolonged lock-up periods—made it accessible only to select large investors.

The new measures, effective December 2, 2024, relax many of these restrictions to attract a broader and more diverse range of foreign investors. Key changes include lowering the minimum shareholding threshold from 10 percent to 5 percent, reducing the asset requirements from US$100 million to US$50 million in assets, and shortening the lock-up period from three years to one. Additionally, foreign investors can now use equity from unlisted overseas companies as consideration, while new investment routes, like tender offers, enhance flexibility.

These updates signal a shift toward a more open and dynamic investment environment, underscoring China’s efforts to draw high-quality foreign capital to drive growth and innovation in its markets. In this article we examine these strategic investment reforms in detail, discussing their historical context, scope, and implications for foreign investors eager to deepen their participation in China’s economic landscape.

Background and historical context

2005 establishment of the Strategic Investment Regime

In 2005, China introduced the Strategic Investment Regime as part of its broader efforts to open up its financial markets to foreign capital while retaining a level of control over sensitive industries. This framework allowed qualified foreign investors to acquire strategic stakes in Chinese A-share listed companies, aiming to promote foreign participation in the domestic market.

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However, the stringent requirements—such as high minimum investment thresholds and extended lock-up periods—restricted this pathway to a limited pool of large, multinational investors. The regime reflected China’s cautious approach at the time, seeking to balance openness with economic stability and control over critical sectors.

2015 amendments

A decade later, in 2015, China implemented its first significant revisions to the Strategic Investment Regime. These amendments sought to make the investment process more accessible by easing certain restrictions, aiming to encourage foreign capital inflow as China continued its gradual integration into global markets.

While some requirements were relaxed, the fundamental limitations—such as high entry thresholds and complex approval processes—remained in place, meaning that access to China’s A-share market was still primarily confined to major institutional investors with substantial capital.

2018-2024 developments

Between 2018 and 2024, China undertook a series of reviews and consultations to further modernize its foreign investment framework. This period saw increasing pressure on China’s economy, both from slowing domestic growth and heightened global competition.

Recognizing the need to attract high-quality foreign investment to support economic resilience, Chinese policymakers began working on a comprehensive overhaul of the strategic investment regulations. The culmination of these efforts is the 2024 amendment, which introduces significant changes, including a lower entry threshold, reduced lock-up periods, and broader investment options, marking a pivotal shift in China’s approach to foreign capital.

Key provisions of the new measures

Scope of application

The new measures outline specific qualifications for investors and expand the range of eligible investees.

• Who qualifies as an investor: Under the updated rules, the scope of qualified investors now includes a broader range of participants. Foreign enterprises, individual investors, and entities from Hong Kong, Macao, and Taiwan are eligible to participate in strategic investments in Chinese A-share companies. In addition, overseas Chinese individuals—those with Chinese heritage residing outside mainland China—are also recognized as qualified investors, allowing a wider international audience to engage with China’s capital markets.
• Types of investees: The new measures extend the types of companies that can receive strategic investment from foreign entities. In addition to companies listed on the A-share market, companies listed on the National Equities Exchange and Quotations (NEEQ), commonly referred to as the New Third Board or Xinsanban, are also included. This expansion enables foreign investors to participate in a broader segment of China’s financial market, encouraging more diversified and strategic capital inflows.

Regulated and exempted investment types

The new rules distinguish between types of investments that fall within the regulatory framework and those that are exempt, streamlining the process for strategic foreign investment.

• Investments covered: The new measures cover various types of investments, including private placements, block trades, and tender offers. These investment methods provide flexibility for foreign investors, allowing them to choose different strategic approaches when acquiring shares in Chinese companies.
• Investments exempt: Certain investment avenues are explicitly excluded from the new regulations. Investments made under the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programs, as well as transactions conducted through the Stock Connect mechanisms, are not subject to these updated strategic investment rules. This exemption underscores the government’s intention to differentiate between strategic, long-term investments and more liquid, portfolio-based foreign investments, thereby creating a targeted regulatory environment.

Qualification requirements for foreign investors

The new measures establish specific criteria for foreign investors, depending on their investment methods and ownership stakes. These criteria focus on the investor’s financial stability, risk management, and operational compliance. Below are the key qualification requirements:

Investment capabilities

Foreign investors are required to demonstrate strong financial standing and significant management experience. This includes the following thresholds:

• Investors must have substantial financial resources, including total assets of at least US$50 million, or manage assets of at least US$300 million.
• If a foreign investor intends to become the controlling shareholder of a listed company after investment, their total assets should be a minimum of US$100 million, or the assets under their management should exceed US$500 million.
• If the investing entity does not meet these criteria, strategic investment may still be allowed if the entity’s controlling investor, who fully owns the entity, meets the asset requirements.

Additionally, individual foreign investors should have the ability to assess and manage investment risks effectively.

Operational compliance

Foreign investors must meet operational compliance standards, which include:

• A proper establishment with a well-defined governance structure, strong internal controls, and adherence to standard business practices.
• A clean legal and regulatory track record, with no criminal or significant regulatory penalties in the last three years (or since establishment, if shorter).
• In cases of cross-border share swaps, the foreign investor must hold legitimate rights to the overseas company involved, which should be registered in a jurisdiction with a robust legal system. Moreover, the company and its management should not have faced any major penalties from domestic or international regulatory bodies in the past three years.

Key changes in the new measures

Cross-border share swaps

One of the significant updates in the new measures is the inclusion of overseas non-listed equity as a valid form of consideration for strategic investments. This adjustment broadens the scope for foreign investors, allowing them to use equity interests in non-listed overseas companies for strategic investments in Chinese entities through private placements or tender offers.

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Previously, such transactions involving equity in overseas companies were not addressed, and MOFCOM approval was required under the M&A Provisions for acquisitions involving cross-border share swaps. With the new measures, the requirement for MOFCOM approval has been removed, streamlining the process for investors. However, foreign investors are still obligated to report these investments to the relevant Chinese authorities post-transaction.

Reduced lock-up period

The lock-up period for strategic investments has been reduced from three years to 12 months. This change aims to encourage foreign investors to engage more actively in the A-share market while maintaining the long-term investment perspective that strategic investments generally require.

Under the new rules, foreign investors are prohibited from transferring, gifting, or pledging their shares, or exercising voting rights, for the first 12 months following their investment. Notably, stricter lock-up conditions may apply if other laws or sector-specific regulations impose longer lock-up periods.

For example, shares in commercial banks have a five-year lock-up period. If a controlling foreign investor invests through a wholly owned entity that does not meet the financial criteria, the lock-up will also apply to equity transfers by that controlling investor.

Minimum shareholding ratios

The new measures revise the minimum shareholding requirements for foreign investors in listed companies. Previously, foreign investors had to hold at least 10 percent of a company’s shares in a strategic investment. Under the new framework:

• For private placements of shares, foreign investors are no longer required to meet a minimum shareholding threshold in the listed company.
• In the case of investments via transfer by agreement or tender offer, foreign investors must acquire at least 5 percent of the company’s shares.

Compliance and regulatory obligations

Foreign investors making strategic investments in China must adhere to a comprehensive set of domestic regulations, including the PRC Company Law, the PRC Securities Law, and sector-specific laws.

In addition to these foundational legal frameworks, foreign investors must comply with the regulations set forth by Chinese stock exchanges, including disclosure requirements and the preparation of reports on any changes in shareholding.

Additional regulatory steps

Foreign investors must also navigate several additional regulatory steps to ensure full compliance with Chinese laws:

• National security review: Investments that could potentially impact national security will undergo a security review under the Measures for the Security Review of Foreign Investment.
• Anti-monopoly review: If an investment results in a concentration of business activities that meets the merger clearance threshold, the authorities must be notified.
• Foreign exchange procedures: Foreign investors must comply with relevant foreign exchange rules for registration, settlement, cross-border payments, and currency conversions.
• Tax compliance: Investors must handle any tax matters related to their strategic investment in accordance with applicable laws.
• Market regulation registration: Depending on the specifics of the investment, registration procedures with the market regulation administration may be required.

Strategic considerations for foreign investors

The new measures create a more favorable environment for foreign investors by simplifying the procedures for cross-border share swaps and reducing the lock-up period. These changes make A-share investments more attractive by lowering barriers to entry and providing greater flexibility in investment strategies. Foreign investors now have easier access to strategic investment opportunities, particularly in non-listed companies and via private placements, fostering a more dynamic investment landscape.

Despite these improvements, there are still complexities associated with regulatory oversight and compliance requirements. Foreign investors must navigate a maze of domestic laws, regulations, and sector-specific guidelines that vary depending on the nature of the investment.

These factors create potential challenges for foreign investors seeking to enter the Chinese market, requiring careful due diligence and a thorough understanding of the regulatory environment to mitigate risks.

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