Detention of China Officials May Curb Foreign Deals

SHANGHAI (Reuters) – China appears to be tightening supervision of foreign investments in the country amid a widening investigation of two senior commerce ministry officials, people with direct knowledge of the matter said.

Beijing has warned the commerce ministry and departments with power to approve foreign investments to be “increasingly cautious” when reviewing major deals, the sources told Reuters.

Chinese special investigators are also reviewing foreign investment cases involving at least two U.S. law firms with offices in Hong Kong and Beijing, part of a growing corruption probe, the sources said, declining to name the firms.

The clampdown came after Guo Jingyi and Deng Zhan, two senior officials in charge of approvals for foreign investments at China’s Ministry of Commerce, were detained by special investigators in August and September, according to reports by state media and confirmed by the sources.

The detentions were related to a corruption probe, but no clear reason was given, state media said.

“Initially, people thought it was just one or two single corruption cases, but step by step, Beijing apparently wanted to have a full story and thus to expand its investigations,” said one of the sources close to the commerce ministry.

“This thing makes people get nervous and will naturally slow down or even tighten deal approvals involving foreign investments before the government gets the full story,” he said.

A spokeswoman at the commerce ministry said she could not comment. The sources declined to be identified due to the sensitive nature of the matter.

Guo, director general of the treaty and law department at the commerce ministry, is responsible for interpreting China’s foreign investment rules, making his role particularly important when a deal is considered sensitive to China.

Deng, deputy head of the foreign investment division at the ministry, is responsible for issuing approvals and licences to foreign investors and often works with Guo to review deals.

Foreign investors must seek approval from the commerce ministry for any deal valued at over $50 million if it involves investment in a sector that Beijing defines as a “restricted industry”.

For a deal valued at more than $100 million in a sector where the government encourages foreign investment, commerce ministry approval is also required.

The case has attracted growing concern among China-focused foreign investors, including big multinational corporations and global private equity firms fearful the probe will lead to a crackdown on planned deals.

Foreign investors, while attracted to China’s booming economy and huge consumer market, have found it difficult to seal deals in part because of government intervention.

Beijing has decided to expand its investigations of lawyers and other agencies, according to the sources and Chinese media.

Two lawyers specialising in helping foreign clients seek approval of deals were detained amid the corruption probe related to Guo, according to the magazine Caijing.

Both had worked at Chinese law firm Seafront, also known as Si Feng in Chinese, which has often been asked by the commerce ministry to contribute suggestions when Beijing drafts foreign investment rules, Caijing reported.

One was a Peking University classmate of Guo, and the other was a former colleague of Guo at the commerce ministry, the magazine reported.

Seafront, based in Beijing, could not be reached for comment.

By George Chen
(Additional reporting by Michael Flaherty in HONG KONG; Editing by Ken Wills and Lincoln Feast)