New China M&A loan rule worries foreign dealmakers

By George Chen

HONG KONG (Reuters) - Foreign dealmakers are worried that Beijing's recent move to encourage Chinese banks to lend money to boost domestic mergers and takeovers will make winning deal mandates in China even harder next year.

Chinese banks have long been barred from offering more sophisticated financial tools such as equity-linked loans or convertible bonds to finance takeovers within China.

But in a surprise policy shift earlier this month, Beijing said it would allow its banks to lend money to Chinese enterprises to buy smaller domestic rivals, one of a number of measures announced to promote consolidation and economic growth.

In the past, some major Chinese companies have been supported by big state-owned banks for funding large, high-profile offshore M&A deals such as Lenovo Group's acquisition of IBM's PC arm in 2005 for $1.25 billion.

But until now, Chinese lenders have been prevented from offering such services at home.

Armed with a war chest of $2 trillion in personal savings, Chinese banks are expected to begin arranging financing for such deals early next year.

That's worried some foreign dealmakers, who say they will be disadvantaged when they have to compete with big Chinese funds.

Earlier this year, U.S. buyout giant Carlyle Group finally walked away from three years of negotiations to buy Xugong, China's top construction equipment maker, after running into bureaucratic obstacles.