China can effectively increase its foreign investment in the future by encouraging foreign companies to merge with or acquire Chinese firms, a senior official said Tuesday.

Zhang Yuqing, director of the Ministry of Commerce's Department of Treaties and Laws, told a high-level forum in Beijing Tuesday that mergers and acquisitions will be a fresh way for China to attract more foreign direct investment.

The forum on foreign mergers and acquisitions in China was hosted by the Chinese Academy of International Trade and Economic Co-operation, a ministry think-tank.

A temporary rule governing mergers with and acquisitions by foreign investors took effect on April 12 this year to attract foreign investment.

Zhang said his ministry will try to improve the environment for mergers and acquisitions by further completing the rule, which is currently only at a tentative stage.

A recent breakthrough took place when the ministry has removed the 25 per cent minimum standard for foreign investment, Zhang said.

Companies with foreign funding of less than 25 per cent can now also be regarded as Sino-foreign companies, although they cannot enjoy part of the favours offered by the Chinese Government to other Sino-foreign firms, Zhang said.

The policy change will stimulate mergers and acquisitions involving foreign investors that would like to take a small share in Chinese companies, Zhang said.

The State Administration of Taxation also issued a notice in June saying that foreign companies with a stake of more than 25 per cent in a Chinese firm as a result of a merger or acquisition will enjoy the same tax rate as foreign-funded companies.

The income-tax rate for Chinese companies is 33 per cent, while that for foreign-funded companies is 17 per cent on average.

Zhang said he believed that a greater number of mergers and acquisitions involving foreign firms will help improve the operations of some State-owned and township enterprises that are in dire straits.

But Zhang urged the Chinese side not just to offer badly operated assets for mergers and acquisitions.

"We should change the way of thinking. Well-performing companies can also be sold to foreign investors for a win-win solution and long-term development,'' he said.

The government took a bold step at the end of July by inviting outside investment in 104 State-owned enterprises.

These enterprise are generally in sound condition and need only capital support to further enlarge their business scale and upgrade their technology.

Jin Baisheng, a senior researcher with the Chinese Academy of International Trade and Economic Co-operation, said China's foreign direct investment will greatly increase when mergers and acquisitions become more frequent.

Foreign investment attracted via mergers or acquisitions only accounts for 5 per cent of China's annual foreign direct investment, compared with 80 per cent worldwide, according to Jin.

He predicted that China's foreign direct investment would still reach its target of US$60 billion this year, despite the SARS crisis.

China's actual use of foreign direct investment surpassed that of the United States for the first time last year to become the world's largest. It rose 12.51 per cent over the previous year to US$52.74 billion.

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