x Abu Dhabi, UAESaturday 20 January 2018

Foreigners fear Chinese monopoly laws could change game

Overseas companies worry a Chinese antitrust law will be applied to them.

A vendor removes bags of garlic at a vegetable market in Beijing. In June, China punished garlic farmers for holding production fro the market.
A vendor removes bags of garlic at a vegetable market in Beijing. In June, China punished garlic farmers for holding production fro the market.

Since its introduction two years ago, a Chinese antitrust law has been used against local firms only. But overseas companies are nervous that their turn is still to come

Stabilising the price of noodles, clamping down on farmers hoarding garlic and stifling Coca-Cola's takeover ambitions - the scope of China's anti-monopoly law has been varied and at times controversial.

When introduced just over two years ago, the anti-monopoly law was seen by some as another tool in Beijing's armoury to make life difficult for foreign companies.

There were reasons to believe this view was more than just paranoia on the part of embattled executives from overseas.

Foreign companies were already having to deal with China's "indigenous innovation" rules that favour, in government procurement, the technology of local companies over their rivals from abroad.

And after the law took effect in August 2008, one high-profile early ruling in particular indicated fears voiced early could be justified.

In March last year, the authorities blocked Coca-Cola's proposed US$2.3 billion (Dh8.44bn) takeover of Huiyan, a favourite Chinese fruit juice group.

"This could force consumers to pay higher prices and have less variety of products," China's ministry of commerce said at the time.

Reacting to the ministry's blocking of the takeover, Larry Wan, the deputy chief investment officer at KBC Goldstate Fund Management, said the decision would have "a negative effect on the sentiment of foreign investors".

"It raises questions about the progress of China's opening up," Mr Wan said.

More recently, Novartis was given approval to take over a company called Alcon but only on the conditions that Novartis stopped selling a particular drug in China and ended a relationship with a distributor.

Peter Wang, a Shanghai-based partner with the law firm Jones Day, says the perception among the foreign business community remains the anti-monopoly law is a "tool for protectionism". But he insists the reality is a lot more complicated.

"Is the law intended to prefer domestic companies? On its face the answer is no. On its face it doesn't say it applies to one type of company or another," Mr Wang says.

"The concern then is why are so many people worried about it. It's to do with there being so much broad language in the law."

This broad language is a worry because it leaves significant discretion for the competition authorities in China, and foreign companies believe they are the ones likely to suffer from this.

While Mr Wang says such ambiguous language is not unusual in anti-monopoly legislation, in China it does raise concerns.

The law covers areas including the control of mergers, the prevention of cartels and price fixing, and restricting the abuse of a dominant market position.

"The positive is that we're seeing quite a few cases where China is enforcing antitrust laws against Chinese companies," Mr Wang says.

In March, action was taken against 33 distributors in Guangxi province after they agreed to raise rice noodle prices. In June, punishment was meted out to garlic and green bean producers for withholding production from market and spreading rumours about price rises.

When it comes to abusing a dominant market position, Chinese companies have even filed cases against state-owned enterprises, although none are thought to have resulted in a decision against a government entity.

Overall, Mr Wang says "Beijing has shown considerable" restraint in how it has applied the AML to foreign companies, allaying the worst fears of it becoming a tool to target operators from abroad.

But it remains a fact that the one merger that was blocked, and all of the mergers that had conditions imposed on them, involved multinational companies. Ninety-five per cent of mergers have been approved unconditionally.

"It will be very interesting when we hear news of the first domestic transaction that's been blocked or had conditions imposed," Mr Wang says.

Indeed it will be, although some foreign companies might be forgiven for wondering if it will ever happen.