Draft Regulations on M&A Loans Relax Restrictions, Boost Foreign Investment

A bank employee counts stacks of 100-yuan notes. China’s banking regulator is loosening lending constraints to make such capital more readily available for mergers and acquisitions, including deals by foreign investors.

China’s National Financial Regulatory Administration (NFRA) released draft regulations in August 2025 that would significantly ease restrictions on merger and acquisition (M&A) loans. The proposed rules expand banks’ lending scope to cover minority equity acquisitions for the first time, whereas previously only takeovers involving a controlling stake qualified for financingifre.com. By enabling loans for minority-share M&A deals, regulators aim to stimulate deal-making in a slowing economy and attract more foreign capital into China’s markets. This policy shift is expected to give global investors greater access to local funding and encourage inbound investmentsifre.com. The draft rules are currently open for public comment and signal a more accommodative stance in China’s financial policy toward both domestic and foreign M&A activity.

Key Changes in M&A Loan Policy

The NFRA’s draft guidelines introduce several notable changes to commercial bank M&A lending rules in China. Key provisions include:

• Financing Minority Stake Deals: Banks would be permitted to extend loans to finance acquisitions of minority equity stakes (defined as at least a 20% ownership stake in the target) – a practice not allowed under previous rules that limited M&A loans to controlling takeoversyicaiglobal.comyicaiglobal.com. If an acquirer already holds 20%, any additional purchase must be at least 5% to qualify as an “equity acquisition” under the new frameworkyicaiglobal.com.
• Higher Loan-to-Value Limits: The draft raises the ceiling on how much of a deal value banks can finance. For majority-control acquisitions, up to 70% of the purchase price may be funded by bank loans (an increase from the prior 60% cap), while loans can cover up to 60% of the value in minority-stake dealsyicaiglobal.com. This higher leverage aims to lower upfront capital needs for buyers.
• Extended Loan Tenors: M&A loan maturities are being lengthened to provide more flexibility. For controlling acquisitions, banks could offer loan terms up to 10 years (up from the current 7-year limit)yicaiglobal.com. Loans for minority-stake deals would remain capped at 7-year tenors, reflecting the relatively higher risk of financing non-controlling investmentsifre.com.
• Eligibility Thresholds for Banks: Only sufficiently large and stable banks will be allowed to engage heavily in M&A lending. Under the draft, banks must have at least CNY 50 billion (USD 7 billion) in consolidated assets to make loans for control acquisitions, and a higher threshold of CNY 100 billion (USD 13.9 billion) in assets to finance minority equity dealsyicaiglobal.com. This limitation ensures that smaller banks do not overextend into risky M&A finance.
• Risk Exposure Limits: Stricter risk management rules accompany the expanded lending. A bank’s total outstanding M&A loans may not exceed 50% of its Tier-1 capital. Within that, loans for minority-equity deals can account for at most 30% of the bank’s M&A loan book. Additionally, exposure to any single borrower is capped at 5% of Tier-1 capitalyicaiglobal.com. These caps are intended to prevent excessive concentration of risk arising from acquisition financings.
• Refinancing Restrictions: The draft explicitly limits the refinancing of M&A loans to discourage excessive leverage and short-term “bridge” financing tactics. Banks may provide loans reimbursing an acquirer’s equity payment in a closed deal, but any such refinancing must occur within one year of the original transactionifre.com. Moreover, banks are prohibited from using M&A loans to refinance other acquisition debt – for example, an onshore M&A loan cannot be used to pay off interim bridge loans that financed the takeoverifre.com. This rule closes a loophole that previously allowed evergreening of acquisition debt and will likely push banks and borrowers to structure more sustainable, longer-term financing from the outset.
• Public Consultation Timeline: The NFRA has opened these draft rules for public comment until September 20, 2025, after which the regulations may be finalized and implementedifre.com. During this consultation period, banks, investors, and other stakeholders can provide feedback on the proposed changes. Regulators will then refine the rules as needed before formal issuance.

Context: This nationwide draft policy builds on earlier limited experiments by Chinese regulators to loosen M&A financing constraints. In March 2025, the NFRA launched a pilot program for technology-sector M&A lending, allowing select banks in 18 cities to offer higher loan-to-value ratios (up to 80%, from 60%) and longer tenors (up to 10 years, from 7) for tech industry acquisitionsyicaiglobal.com. The success of that pilot in boosting tech investments set the stage for the broader easing of M&A loan rules now proposed. By extending similar or slightly scaled-back terms to the wider market (70%/60% LTV caps and 10/7 year tenors), the draft regulations aim to revitalize M&A activity economy-wide while keeping risks in check through the above prudential limits.

Stimulating M&A Activity and Foreign Investment

Chinese authorities clearly intend these regulatory changes to invigorate the M&A market and channel more capital into corporate restructuring and expansion. Analysts predict the new lending flexibility could trigger a surge in deal-making, particularly in minority-stake acquisitions that previously had to be financed entirely with equity. “This policy shift could trigger a surge in M&A activity in China, especially minority stake acquisitions,” noted one senior banker, as it “opens the door for mid-sized companies and private equity firms to pursue strategic investments, joint ventures and partial acquisitions that could only be funded by cash previously”ifre.com. Greater availability of bank financing is expected to encourage companies – including privately-owned firms – to explore acquisitions that bolster their market position. Fast-growing and capital-intensive sectors such as technology, healthcare, renewable energy, and advanced manufacturingare poised to be among the primary beneficiaries of the expanded M&A credit supportifre.com, since banks can facilitate market-driven consolidation and innovation in these areas. Notably, China’s M&A activity was already on an upswing in 2025: the first half of the year saw completed domestic M&A deals totaling about USD 117 billion, roughly double the value from the same period a year earlierifre.com. With the draft measures lowering financing barriers, deal volumes could climb further, aiding China’s efforts to stimulate growth through investment and business reorganization.

Crucially, the reform is also geared toward attracting more foreign investment by aligning China’s M&A financing practices closer to international norms. In the US and Europe, it is common for banks to finance partial equity stakes in acquisitions, and global private equity (PE) firms frequently leverage such loans in deal structures. By permitting minority stake loans, China is making its M&A landscape more accessible to foreign investors who often enter the market via joint ventures or minority partnerships. As one industry expert observed, these changes will give international PE funds and strategic investors more flexible tools to structure their investments in Chinaifre.com. Foreign investors – who in the past were frequently restricted to minority stakes in Chinese companies due to regulatory limits – can now benefit from local financing options to support those positions. This reduces the capital burden on foreign acquirers and could enable larger or more numerous investments by overseas firms in Chinese businesses. The draft M&A loan policy thus complements Beijing’s broader initiatives to bolster investor confidence: China has been rolling out various reforms to improve its business climate, lower barriers for foreign investors, and encourage inbound FDIsantandertrade.com. If implemented, the new lending rules will send a positive signal that China is opening its financial system to facilitate legitimate foreign participation in its economy, all while fostering a more robust, credit-supported domestic M&A environment.

Implications for Foreign Law Firms

For foreign law firms specializing in M&A and corporate finance, the NFRA’s proposed rules will necessitate updates to client advisory services. These firms play a key role in helping multinational clients navigate China’s deal landscape, and the expanded financing opportunities call for careful guidance. Foreign legal advisors should be proactive in adjusting strategies and advice in light of the new regulatory landscape:

• Update Client Advisories: Law firms should immediately brief their clients (especially international companies and PE funds) on the new availability of bank loans for minority-stake acquisitions. Deals that were previously thought to require all-cash offers or creative offshore financing might now be viable with onshore loan support. Clients will appreciate up-to-date insights on financing options in China’s M&A market so they can capitalize on these emerging opportunities.
• Structure Deals Strategically: Advisers need to work with clients to structure transactions that meet the draft rules’ criteria in order to qualify for M&A loan financing. This could mean planning an initial stake purchase of at least 20% in a target company (to utilize an acquisition loan), or sequencing stake increases in tranches of ≥5% for clients who already hold a significant stakeyicaiglobal.com. By aligning deal size and structure with the regulatory thresholds, law firms can help ensure their clients’ acquisitions are eligible for bank loans under the new framework.
• Navigate Loan Terms and Covenants: With banks now allowed to fund minority deals, foreign firms should prepare for more complex financing terms and due diligence requirements in such transactions. Financing a non-controlling stake entails higher credit risk for lenders, meaning banks will likely impose stricter covenants, detailed financial conditions, and shareholder agreement clauses to mitigate those risksifre.com. Legal counsel must be equipped to negotiate these loan agreements on behalf of clients, ensuring that covenant packages and financing conditions remain reasonable and in line with international standards. This may involve coordinating closely with Chinese banks’ legal teams and potentially local co-counsel to bridge any gaps between common international loan practices and Chinese banking requirements.
• Manage Regulatory Risk and Compliance: Foreign law firms should help clients understand and comply with the risk management limits embedded in the new rules. For instance, if a client plans a large acquisition that might push a lender’s exposure near regulatory caps (such as the 50% of Tier-1 capital limit or the single-borrower 5% capyicaiglobal.com), the firm should assess whether multiple lenders or a syndicated loan might be necessary to remain within allowed bounds. Additionally, clients will need guidance on possible approval processes or disclosures associated with obtaining sizable M&A loans from Chinese banks, particularly if the client is a foreign-invested enterprise. Ensuring compliance with both the letter and intent of the regulations will be key to executing deals smoothly under the new regime.
• Plan for Financing and Refinancing Constraints: The draft rules’ limitations on refinancing M&A loans mean that deal financing plans must be crafted carefully. Lawyers should caution clients that conventional tactics like using short-term bridge loans (often arranged offshore) and later refinancing them with cheaper onshore loans may no longer be feasible under the upcoming rulesifre.com. Instead, acquisitions may need to be financed with longer-term facilities from the start, or any bridge funding must be refinanced within 12 months onshore to comply with the one-year ruleifre.com. Law firms should incorporate these constraints into the deal timeline and financing documents, advising clients on alternative funding structures if needed (such as keeping some financing offshore or using equity for a portion of the deal) to avoid regulatory pitfalls.
• Monitor Developments and Engage: Since the M&A loan regulations are still in draft form, foreign firms should closely monitor the finalization process. The rules could be tweaked after the public consultation period ends on Sept. 20, 2025ifre.com. Firms may consider contributing to industry feedback through chambers of commerce, business associations, or directly (if they have a China presence), advocating for any clarifications or adjustments that would benefit cross-border deal-making. Once the rules are formally adopted, firms must promptly update their standard operating procedures and training for staff on the new law. Being ahead of the curve will enable foreign law firms to guide clients confidently as the regulatory environment shifts.

Conclusion

China’s draft M&A loan regulations mark a significant liberalization of acquisition finance that could reshape deal-making dynamics. By allowing banks to fund minority stake purchases and by loosening lending limits, China is providing both domestic and foreign investors with new levers to pursue M&A opportunities. These changes have the potential to energize China’s M&A activity, facilitate much-needed corporate restructuring, and draw in overseas capital that sees greater financing support on the groundifre.com. At the same time, the accompanying safeguards – from bank size requirements to exposure caps – reflect regulators’ intent to balance growth with financial stability.

For foreign businesses and investors, the message is one of increased openness and support for inbound investment, albeit within a clearly defined risk-managed framework. Those able to navigate the new rules astutely, with the help of informed legal counsel, stand to benefit from easier access to credit for acquisitions in China’s market. As the draft moves toward formal implementation, all stakeholders will be watching closely. If enacted as expected, the relaxed M&A loan regime will become a cornerstone of China’s efforts to bolster investor confidence and economic expansion, offering a more level playing field for both local and foreign players to participate in the country’s growth story.