Guangzhou Automobile Group (GAC) has signed a letter of intent with China FAW to acquire part of it's stake in an unnamed vehicle-manufacturing joint venture through a share issuance, while also raising supporting funds.

GAC announced the proposed major asset restructuring on September 14th, following a full-day trading halt. Under the preliminary plan, GAC would issue shares to acquire part of FAW's equity in the joint venture. If completed, FAW is expected to become GAC's second-largest shareholder and gain strategic influence, while GAC's ultimate controlling party would remain unchanged. GAC said the transaction would constitute both a major asset restructuring and a connected transaction, but would not amount to a backdoor listing.

GAC's A-shares were suspended from trading from the market opening on September 14th, with the suspension expected to last no more than 10 trading days. Trading in its Hong Kong-listed shares was also halted. GAC said the identity of the target joint venture has temporarily been withheld because the asset involves an overseas-listed company. No definitive transaction agreement has been signed, and the proposed deal remains subject to GAC's internal decision-making procedures and regulatory approvals.

During the trading suspension, GAC will work with professional advisers on the proposed restructuring. The company plans to apply for the resumption of trading after its board reviews the restructuring proposal. It also said it will continue to disclose material developments while informing investors about the risks and uncertainty surrounding the transaction.

State-owned Economic Daily reported that the undisclosed joint venture is FAW Toyota, citing sources. Toyota did not immediately respond to a request for comment. Both FAW and GAC operate joint ventures with Toyota in China, through FAW Toyota and GAC Toyota respectively. GAC also operates joint ventures with Honda, while FAW has partnerships with Volkswagen and Audi in addition to Toyota.

According to Economic Daily, the proposed transaction could indicate that the consolidation of FAW Toyota and GAC Toyota has entered a substantive phase. Under a proposed structure reportedly supported by Toyota's Japanese side, Toyota would hold a 50% stake in a merged Toyota sales company in China, while FAW and GAC would each hold 25%. Dealer networks would be integrated under the proposed new company, allowing it to sell and service all Toyota models in China. Toyota has not confirmed the reported structure.

The proposed GAC-FAW transaction comes as Beijing encourages greater consolidation across China's automotive industry. The Ministry of Industry and Information Technology and eight other government agencies pledged on September 11th to intensify efforts to promote mergers, reorganisations and cross-regional integration among carmakers, while advancing reforms towards group-based management.

The letter of intent is the latest indication of potential resource consolidation between centrally and locally administered state-owned automotive groups. Market speculation had previously pointed to a possible cross-shareholding partnership between FAW and GAC. The proposed transaction could represent an example of cross-regional consolidation between central and local state-owned carmakers during China's 15th Five-Year Plan period.

GAC said the transaction is intended to integrate industrial resources among local and central state-owned enterprises and improve the operational efficiency of listed companies.

China International Capital Corporation said the restructuring, if completed, could establish a precedent for cross-regional consolidation between central and local carmakers, affect competition within the industry and influence market sentiment. In this context, "involution", or neijuan, refers to excessive competition in which additional resources are invested without corresponding increases in returns or reinvestment in research and development.

GAC's Hong Kong-listed shares rose as much as 16% on September 15th before trimming gains to 5.5% by the midday break, while trading in its Shanghai-listed shares remained suspended.

The proposed restructuring comes amid weakening domestic demand and increasing pressure on Chinese automakers' profitability. Although China's vehicle exports remain strong, domestic sales have slowed sharply following years of rapid growth and the withdrawal of subsidies. China Passenger Car Association data showed that retail vehicle sales fell 20.8% year on year to 11.7 million units in the first eight months of the year, while industry profit margins declined by one percentage point to 3.6% during the January-July period.

Joint ventures between Chinese and foreign automakers, which previously held a significant share of China's domestic market, have also faced pressure as the country shifts towards electric vehicles. In August, retail sales of petrol-powered cars and EVs from joint ventures fell 35% year on year to around 310,000 units, accounting for 4.3% of China's EV market, according to CPCA data.

GAC has faced increased competition from domestic EV manufacturers such as BYD. Its net loss for the first half of the year widened 76% year on year to 4.5 billion yuan (US$670 million).

The GAC-FAW transaction remains at the planning stage, with its completion dependent on internal approvals and regulatory clearance. The target joint venture, transaction value and final structure have yet to be officially disclosed, leaving uncertainty over whether the proposed restructuring will ultimately proceed.