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New China law changes rules for foreign business
2007-08-27
China is preparing to pass a tough new anti-monopoly law this week, underlining what analysts say is a major shift in policy on incoming foreign investment. The law will require a national security investigation as well as anti-monopoly checks into foreign companies that are planning to merge with or take over Chinese enterprises. Analysts say the new measures, which state media say are due to be approved this week, have grown out of fears that the increasing muscle of foreign firms is putting the squeeze on home-grown companies. But they are also the product of a booming economy whose biggest problem now is trying to get money flowing out of the country -- not coming in. "China isn't desperate for foreign investment anymore," said Chen Xingdong, chief Chinese economist with BNP Paribas Securities in Beijing. "Some foreign mergers and acquisitions have added competitive pressure on local companies, so a policy change is necessary," he told AFP. China has long signaled growing anxiety about the expanding power of foreign enterprises at home, especially since the country joined the World Trade Organisation in 2001. Officials have warned about multinationals using their advantages in technology, branding and capital to weed out Chinese competitors, citing giants like Microsoft that have become dominant in their sectors. "From the point of view of protecting local companies, it does make some sense," Chen said of the new law. But it also marks a sea-change for policy in China, which for a generation has largely fuelled its economic boom by making it easy for foreign firms simply to show up with a big bag of money -- and get down to business. For the first three decades of economic reform, China was often more than willing to let foreigners in, and allowed them to do business under less stringent rules than locals. A prime example was a preferential tax treatment -- now about to be phased out -- which allowed foreigners to pay as little as half of what their Chinese competitors had to hand over to state coffers. The "spoil-the-foreigners" policy has proven spectacularly successful, funding growth that has catapulted China to the position of the world's fourth-largest economy and its third-largest exporter. But with foreign exchange reserves now topping 1.3 trillion dollars, China is no longer short of cash. "The bottom line is China has got too much money, so the national policy is changing from primarily attracting money to slowing down the inflow and encouraging outflow," said Andy Xie, an independent Shanghai-based economist. Another factor is a rise in the proportion of foreign investment that is accounted for by mergers and acquisitions. According to official statistics, the number of mergers and acquisitions only made up five percent of foreign direct investment in China annually up till 2003, rising to 11 percent in 2004 and almost 20 percent in 2005. But when Chinese companies are bought up by foreign capital, they often are allowed to continue operations largely as before. A foreign plant built from scratch would contribute much more value to the Chinese economy. "Mergers and acquisitions may not add a lot to economic development, but they add a lot of money," Xie said. "They might inflate asset prices at a time when China has a serious bubble problem. When investors all over the world try to squeeze in, it might create a much bigger bubble." Analysts say most foreign firms would now have to consider more carefully what other advantages they bring, such as management skill and technological know-how, when jumping into the market. "Though the law may not be to the advantage of multinational companies, China needs a comprehensive and enforced set of competition laws to become a fully developed economy," Wang Xiaoye, a legal scholar at the Chinese Academy of Social Sciences, told the China Daily newspaper recently.
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