Carlyle Group, a private equity firm from the United States, has agreed to reduce its stake in Xugong Construction Machinery, a leading Chinese construction machinery manufacturer, from 85 percent to 50 percent.

The state-owned Xugong Group will have the other 50 percent stake, according to a new deal signed Monday, Xugong's Shenzhen-listed unit, Xugong Technology (000425), said in an announcement Wednesday.

The Carlyle deal was submitted to the Ministry of Commerce for approval in December last year, but was turned down amid rising concerns that foreign control of key Chinese firms could threaten the country's economic security.

Carlyle originally offered about 320 million U.S. dollars for an 85-percent stake in Xugong. A report in the Shanghai Securities News said Carlyle would pay slightly more per share under the new deal, but no details were given.

Carlyle also loses the board chairmanship to Xugong, but will have equal representation on the board.

Under the old deal, Xugong would have had only two members on the board, compared to six from Carlyle.

The new deal has been approved by the congress of employees as well as the Xuzhou city government and the government of east China's Jiangsu Province, where the company is located. It will be submitted to central authorities for approval soon, the report said.

The Carlyle deal has sparked off a hot debate in China about the potential impact of foreign control of leading firms in the manufacturing sector.

The Carlyle controversy is drawing attention to other "questionable" deals, such as the proposed takeover of the Luoyang Bearing Corporation, a leading bearing producer in China, by German-based Schaeffler Group.

The debate prompted the Ministry of Commerce and other authorities to promulgate new rules in August concerning the acquisition and takeover of Chinese enterprises by foreign investors.

The new rules, which took effect on September 8, state that such acquisitions and takeovers must be approved by central authorities in three cases.

The three cases are: the foreign bidder has a market share of over 20 percent and annual sales in China of over 1.5 billion yuan (190 million dollars); the market share of one of the parties to the deal will reach 25 percent after the acquisition; the foreign bidder has acquired more than 10 Chinese enterprises in one year.

In its 11th five-year-plan released last week, the Ministry of Commerce said China will seek to improve the quality of foreign investment and put in place a system for monitoring the impact of foreign investment on domestic industries.

This, however, does not mean that China will close its door to foreign investment, which has played a key role in China's economic growth over the last two decades.

"The Chinese government will continue to adhere to the policy of opening ourselves to the outside world," Premier Wen Jiabao told British and Chinese business leaders during his visit to London in September.

Zhao Jinping, a scholar with the Development Research Center under the State Council, said it is common international practice for governments to impose restrictions on mergers and acquisitions by foreign companies.

"As rules and regulations are fine-tuned, the government will be able to handle such cases more easily and transparently," he said.

He Manqing, an expert on multinational companies with the Ministry of Commerce, predicted that mergers and acquisitions by foreign investors in China will increase sharply over the next few years, now that the rules have been set.

For some people, however, Carlyle's new offer is still not good enough.

Xiang Wenbo, who vehemently opposes the deal, sparked the debate by revealing the deal in his blog. He said the 50-50 share structure would not guarantee the Chinese side's control of the new firm, as required by government rules.

"Will the deal be approved by the Ministry of Commerce and the State Assets Supervision and Administration Commission because Carlyle's share has been reduced? I am doubtful." he said.

Xiang is general manager of Sany Heavy Industries Co., a rival who also bid for Xugong. Xiang said Xugong had deliberately excluded Sany and all other rivals from the deal.

Source: Xinhua