China's Free-Trade Credentials Under the Spotlight

Fear of worldwide protectionism grows, but China's anti-monopoly law might lead to more transparent commercial practices

By Rupert Walker

The more China is attacked by Western governments for unfair trade practices or hostile behaviour towards foreign businesses, the more it seems keen to defy them. The detention of four Rio Tinto executives on July 5, allegedly for spying and broader accusations of bribery during the Anglo-Australian mining company's negotiations with China's steel companies over iron ore prices, has taken the issue to a new level. It's as if the Chinese authorities are continually raising the stakes, knowing that the response will be belligerent words but appeasement in action.

Yet, it is arguably too easy to paint China as the pantomime villain. Although its legal system is widely considered opaque, China has had an anti-monopoly law in place since August 2008, which might form the basis of more transparent and consistent commercial practices and which could eventually give foreign investors greater confidence.

And perhaps China itself has legitimate reasons for complaint at how it is treated by its usual critics, not only with regard to the barriers erected against its exports, but also the resistance its companies face when they target so-called "strategic" overseas businesses for an acquisition.

Nevertheless, China's ministry of commerce (Mofcom) shocked bankers and lawyers in March when it rejected what would have been the biggest ever foreign takeover of a Chinese company—Coca-Cola's $2.4 billion bid for Huiyuan Juice, originally launched in September 2008.

The rejection raised concerns about whether China is playing fair within the shifting rules of overseas investment at a time when the economic downturn has led to an increase in accusations and counter-claims of protectionism in many countries. Safeguarding jobs, supporting domestic industries and championing exporters have become imperatives, while the world's free-trade regulations are increasingly breached.

Backed by its recent anti-monopoly law, Mofcom ostensibly ruled against Coke on competition grounds, arguing that the company might abuse a dominant position in China's carbonated drinks market by bundling sales of juice drinks, and that the country's smaller soft-drink makers would suffer.

But some commentators assumed that the bid was turned down for national interest reasons. Certainly, according to internet chat-rooms, the proposed takeover seemed unpopular with much of the Chinese public and domestic drink producers lobbied the government to turn down the deal.

Alternatively, maybe the rejection of the takeover bid was a belated case of tit-for-tat—a response to the U.S. government's blocking of the acquisition of U.S. oil company Unocal by China Offshore Oil Corporation (CNOOC) in 2005. Even if that were the case, the key common element is a regard for public opinion.

And although it is clear that the Chinese need to convince potential overseas investors about the independence of the country's commercial legal system, so far Coke's bid is the only foreign-led M&A deal to be turned down by Mofcom under the anti-monopoly law.

Healthy M&A volumes

Last year, there were 938 inbound M&A deals in China worth $43 billion, according to data-provider Dealogic, compared to a similar number of deals valued at about $38 billion in 2007 and considerably higher than the $17 billion worth of transactions in 2004. But outbound M&A transactions have shown a far bigger increase based on value: 241 deals worth $50.4 billion in 2008, compared with 172 deals worth $25.4 billion the previous year and just 71 deals worth $4 billion in 2004.

These figures suggest that China is hardly resistant to inward investment, but maybe that it prefers smaller size deals. Already this year, there have been 320 inbound transactions, compared with 116 outbound M&A deals.

More worrying is an indication that China's anti-monopoly law might affect non-Chinese deals that have an impact on the Chinese market. Last November, Mofcom cleared InBev's purchase of Anheuser-Busch but laid down several conditions restricting the combined group's freedom to increase its presence in China.

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