Foreign investors subject to new, higher hurdles.

• Author: Marshall, Jeffrey
• Position: CHINA

Investing in China is getting more difficult, and more competitive, as Chinese regulators clamp down on vehicles for foreign investors and put new strictures on foreign-led mergers.

Those were among the key themes sounded in a winter forum on Chinese investment opportunities sponsored by law firm Paul, Hastings, Janofsky & Walker LLP. The New York City event drew hundreds of attorneys, investment bankers, private equity managers and others eager to hear the latest scoop on putting capital into China.

One problem is that the finely tuned U.S. buyout model isn't readily accepted in China, and a "longer lead time" is needed, said Steven Costabile, global head of the Private Equity Funds Group for AIG. Cultivation of high-level officials--known as guanxi, or "connections," in China--will be a key to success, he said, as will bringing in strong management talent.

Costabile added that at this point, there is more capital seeking deals than there are realistic growth opportunities--"the reverse of what it was 10 years ago." Meanwhile, the mounting sophistication of the Chinese marketplace has taken the business model there far beyond its original goal of arbitraging the difference in labor costs (see figure below).

David Wang, a partner with Paul Hastings in Shanghai, noted that Chinese officials are taking a much harder line on "offshore" investment vehicles set up to buy Chinese firms via companies domiciled in low-tax havens like Hong Kong, the Cayman Islands and the British...