After being in the works for the past 13 years, the Standing Committee of National People?s Congress finally passed the new anti-monopoly law. The new law goes into effect from August 1, 2008. This is one of the many important policy changes such as uniform taxation system and the new labour law, which the government has undertaken in line with its strategy to promote China as a market economy on the world stage.
Prima facie the law reads, ?as well as anti-monopoly checks stipulated by this law, foreign mergers with, or acquisitions of, domestic companies or foreign capital investing in domestic companies? operations in other forms should go through national security checks according to the relevant laws and regulations?.
The new law intends to subject foreign acquisitions of Chinese companies to protect national ?economic? security and creation of monopolies detrimental to consumers and market. It defines monopoly in three situations?when an undertaking reaches a monopolistic agreement; when an undertaking abuses a dominant market position and when an undertaking forms an undertaking cartel.
It goes on to define seven types of agreement as monopoly agreement allowing seven exceptions that are basically to encourage agreements concerning improvement of technology, R&D of new products, improvement of product quality, protecting the environment and increasing efficiency.
The initial reaction by representatives of EU and American chambers of commerce in China were quite euphoric that the new law will create a level-playing field between foreign and domestic companies ultimately benefiting Chinese consumers. But that quickly followed with concerns and questions about how will the law be implemented and if the law will impede their ability to bring more money into the country to gain a bigger share of the market.
With China opening up its economy as per agreement with WTO, foreign companies have pumped in billions of dollars to get a piece of action in the growing Chinese market. Industries such as retail, banking, insurance, automobile and consumer electronics have seen most of action and are now likely to be the most watched under the new law.
It will prevent foreign companies from using their global financial muscle to essentially buy the competition. Foreign companies already having dominant market position will face an uphill battle to seek approval for further growth through acquisition. It will help create a level-playing field for domestic companies to operate in the market.
A closer look at the law reveals that this may actually be beneficial to foreign enterprises opening up strategic markets that are currently under the tight grip of the monopolistic, state-owned enterprises. Since it?s a double-edged sword, local companies that have maintained monopoly in the market through the protection of local government can be expected to be exposed to increased competition going forward.
The most interesting dimension of the new law is that it brings the ?administrative monopolies? under its grasp along with ?commercial monopolies?. That means the state-owned enterprises supported by local provincial government that exercises unfair trade practices due to their monopolistic market condition will come under increased scrutiny by the anti-monopoly commission that is being set up under the state council to be the regulating body governing this law. It is a known fact that the most damaging monopolistic behaviour comes from government abuse of administrative power in the economy but there was no political will to deal with it in the last two decades and hence the delay of 13 years in passing of this new law.
Europe faced similar problems of protectionist state in middle of last century and they had to establish European Economic Community to counter some of those problems although with limited success. These are valuable lessons from history that the Chinese can learn from, while implementing the new law.
Last year, the state council had released a list of strategic sectors in which the state would retain control. These were mainly military-related, power, telecom, aviation and shipping industries. The new law will no doubt be used to block unpopular foreign acquisition of domestic brands or companies, which is detrimental to growth of domestic industry or creates unfair market monopolies. But at the same time, the new law also has an entire chapter that protects the foreign enterprise from local protectionism in China, specifically prohibiting administrative agencies and public organisations from abusing their power.
The law does not state that a foreign enterprise will be treated any differently that the domestic enterprises except for the strategic industries falling under national security list or circumstances where national security is concerned.
Until the new law is fully understood, large deals involving purchase of state asset would be kept under tight wrap until the deal has the blessings from the top and the M&A activities will be mostly concentrated in the mid-market avoiding the radar of the new law.
China is not the first country to implement such a law and it already had basic security check system for foreign M&A such as Carlyle?s bid for Xugong, but the previous law was only to regulate deals exceeding $100 million. EU has had this for quite sometime and uses it effectively to prevent monopolistic behaviour?Microsoft?s anti-trust case.
Recently, EU referred China?s International Marine Container?s bid to acquire Berg Industries for review and as a result the bid was pulled out by the Chinese. Back in 2005, the Chinese withdrew CNOOC?s sensational bid for Unical after it raised national security concerns in the US.
By the passing of this law, China has demonstrated its confidence and maturity in adopting international policies and regulatory framework. It shows its confidence in being able to attract foreign investment in spite of a level-playing field with domestic industry. China has also increasingly started to take a more assertive stance in global arena, be it trade dispute with the US or the recent spate of mass recalls of substandard Chinese manufactured goods.
?The author heads the Beijing branch for Infosys in China and is also a fellow of India China Institute. These are his personal views, and can be reached on hirend@yahoo.com
