U.S. private equity firm Carlyle Group has agreed to pay 1.217 billion yuan for acquisition of a 40.32 percent stake in Xugong Construction Machinery, a leading Chinese construction machinery manufacturer.

Carlyle will, meanwhile, channel an additional 584 million yuan into Xugong to raise its stake to 50 percent under the deal signed Monday, Xugong's Shenzhen-listed unit, Xugong Technology (000425), said in an announcement Tuesday.

After the deal, Xugong Construction Machinery's total equity interest will reach 3.602 billion yuan, a rise from 2.52 billion yuan under an earlier agreement in which Carlyle sought to only pay about 2.07 billion yuan for a 82.11 percent stake in Xugong.

The statement said that Carlyle would lose the board chairmanship to Xugong, but will have equal representation on the board.

Xugong Construction Machinery will be turned into a joint venture with an aggregated investment of 4.2 billion yuan and a registered capital of nearly 1.5 billion yuan, it said.

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.

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.

China's central authorities have not yet announced their decision on the revised deal.

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; 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 discourage the inflow of foreign investment, which has played a key role in China's economic growth over the last two decades, the Ministry insisted.

Source: Xinhua