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Once again, foreign deals in China are being challenged amidst a growing mood of protectionist sentiment directed against foreign acquisitions of Chinese domestic companies. Whilst there is nothing new in such complaints, the current global trade climate and sustained M&A wave have heightened concern and combined to produce the strongest reaction in recent years.
A series of critical comments were made by senior officials during the annual session of the National People's Congress (NPC), China's parliament, in the first half of March. In his report to the NPC on 5 March, National Development and Reform Commission (NDRC) chief Ma Kai stated that "...in order to protect our industries, we will guide foreign investment towards certain industries and regions, and improve and standardise policies related to corporate takeovers...". Meanwhile, Premier Wen Jiabao told the session that in opening wider to the outside world China must "pay particular attention to safeguarding China's economic security".
Other officials were more direct. National Bureau of Statistics (NBS) director Li Deshui warned the NPC that the acquisition of promising local companies by multinational investors was creating monopolies in a number of sectors. Li claimed that by 2005 multinationals controlled more than 80% of China's large-scale supermarkets, with foreign companies also enjoying virtual monopolies in other categories such as beer and skin care. He added that "there should be severe measures to curb and punish hostile takeovers aiming to monopolise the Chinese market". Other senior officials addressing the congress referred to acquisitions of Chinese companies by foreign firms as "malicious". The local media has since built on these statements, using phrases such as "M&A waves led by international crocodiles" - the term "crocodiles" referring to the large hedge funds which were perceived to have damaged Asian currencies in 1997 and so sparked a regional financial crisis.
While the criticisms voiced at the NPC gained widespread media exposure, accusations of monopoly-building by foreign companies in China are not new. In a 2004 report entitled "The Competition-restricting Behaviour of Multinational Companies in China and Countermeasures", the State Administration for Industry & Commerce (SAIC) points to China's camera film sector (where multinational companies control some 75% of the market) and sterilised paper-packaging sector (of which multinationals have 95% control) as examples of foreign monopolies. In 2005, there were further accusations of a "fire sales" of state assets to foreigners as multinational banks acquired stakes in state-owned commercial banks. Growing foreign influence in strategic sectors such as banking is a particularly sensitive issue.
Several factors have contributed to the deterioration in the climate, including national pride, lingering resentment over Chinese oil giant CNOOC's failed US$18bn bid for Unocal in 2005, and a protectionist resurgence amongst economic policy-makers, partly in response to growing protectionist sentiment in the US and Europe against low-cost Chinese exporters. However, calls for protection for 'national champions' against a global wave of M&A activity are by no means unique to China, and are also being heard loudly in developed countries such as France and the UK.
It remains to be seen whether the tougher conditions being imposed on foreign investors will result in longer-term restrictions on foreign takeovers of Chinese companies and the creation of an anti-trust regime that is aimed at foreigners. Although China's anti-trust law has been under consideration for a decade without being approved (and is due to be considered again in June), hints of what an anti-trust framework might look like were included in The Interim Regulations on Merger and Acquisition of Domestic Enterprises by Foreign Investors, issued in 2003, which already classify multinationals as monopolies if they control market share of 50% for a single company, 67% for a duopoly and 75% for three companies.
Indeed, until China implements such a law, these concerns are likely to persist, and even after its passing, there is by no means any certainty that its judgements will placate the various constituencies whose interests often diverge. Clearly, when so many industries remain dominated by state-owned players, passing an anti-trust law will be controversial. But it would represent the putting into place of the final building block of an M&A framework that is currently missing.
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