X Adjustments expected to rules on foreign investment after 　　accusations of malicious corporate moves
　　Business takeovers by foreign conglomerates in China have attracted significant government attention recently, including concerns that the flurry of business maneuvers is aimed at forming foreign-controlled monopolies in the Chinese market.
　　In early March, Li Deshui, former Director of the National Bureau of Statistics, warned during a high-profile meeting that it’s very risky to let multinational corporations’ “ill-intended mergers and acquisitions” of Chinese enterprises to continue at will. Among his audience was Premier Wen Jiabao, along with the country’s top financial officials including Finance Minister Jin Renqing and Central Banker Zhou Xiaochuan.
　　Li’s “ill-intended mergers and acquisitions” refer to takeovers by those investors in pursuit of a monopoly in the Chinese market. For example, he said, China’s beer market has been carved up by international titans. Coca-Cola has obtained 70 percent of China’s beverage market, while 80 percent of shares of the country’s big supermarkets are controlled by foreign capital.
　　Foreign investment is an important force driving China’s economic growth. But with the deepening of China’s economic reform, the issue of whether foreign capital is too ambitious toward controlling China’s domestic market has received considerable debate in recent years, amid rising outcries for new laws and regulations to more clearly define foreign business practices in the country. Li was the first official at the ministerial level to openly express his views on the subject.
　　According to Li, if China lets foreign investors ride with loose reins, the country will lose its independent brands and drive for innovation, and the core technologies and added value of major domestic enterprises would likely be controlled by multinationals. China might also suffer a deficiency of core techniques, he continued.
　　“If a large amount of profit and social wealth are controlled by multinationals, given the big growth in GDP (gross domestic product), the interests of our country and people will be undermined, and it might further pose a threat to national economic security and national sovereignty,” Li warned.
　　Li is echoed by the All-China Federation of Industry and Commerce, an organization influential within China’s private sector. The organization submitted a bill to this year’s session of the Chinese People’s Political Consultative Conference, the top national advisory body, calling for the early establishment of a national economic security system to guard against the monopoly ambitions of foreign companies.
　　
　　General policy unchanged
　　
　　Li Deshui’s warning has caught the attention of China’s central leadership, and government departments are reportedly working to amend some policies regarding attracting foreign capital.
　　However, there are growing concerns that China will further tighten its policy toward foreign investment.
　　In January, five central government agencies, including the Ministry of Commerce and the China Securities Regulatory Commission, jointly announced to open China’s yuan-denominated stock market to international investors. Under such a situation, mergers and acquisitions involving foreign capital have increased in the Chinese market this year.省略, one of the biggest financial web portals in China.
　　Regarding the concerns his warning might raise among people outside China, Li also emphasized that China’s policy of actively utilizing foreign investment would remain unchanged. He said China welcomes any foreign investment as long as it is in the interests of both parties, conducive to China’s economic development and not a threat to national economic security.
　　In an attempt to minimize a negative reaction, senior officials with the Ministry of Commerce openly refuted the blame that “foreign investment threatens China’s economic security.”
　　“So far, not a single region or industry in China is monopolized by foreign capital, let alone the country’s economic arteries,” said Hu Jingyan, Director General of the Foreign Investment Department under the Ministry of Commerce.
　　Hu said that foreign investment should comprise no more than 3 percent of the market share in China’s key industries. At present, foreign direct investment in China totals $600 billion, accounting for 35 percent of China’s GDP, or a little higher than the average world level. But per-capita foreign investment is merely $41, less than half the world average.
　　
　　Faster pace
　　
　　Since 2000, there has been an increase in cases of foreign takeovers of Chinese enterprises, especially pivotal enterprises. Foreign investors are no longer satisfied with establishing joint ventures or equity participation.
　　In recent buy-ins, according to Li, multinational enterprises persist in three principles--control of the acquired company, leading position in the industry, and more than 15 percent of expected annual return. The targeted fields are mainly oil, heavy machinery manufacturing and financial services.
　　Caterpillar Inc., the world’s largest manufacturer of construction and mining equipment, has launched a large acquisition campaign in China. The U.S. company is negotiating with China’s leading heavy machinery manufacturer, and has the ambition of expanding its business and swallowing China’s heavy machinery manufacturing industry, according to industry insiders.
　　Studying current merger and acquisition cases in China, multinationals coming from the United States top the list, accounting for 30.2 percent of all such cases. Those from the European Union rank second, comprising 27.3 percent, followed by the Association of Southeast Asian Nations (ASEAN) and Japan.
　　The total value of mergers and acquisitions reached $46.6 billion in 2005, an increase of 34 percent compared with the previous year, according to a report by PricewaterhouseCoopers.
　　The primary reason for the recent upsurge of foreign mergers and acquisitions is that with the fast growth of China’s economy, local enterprises, which basically cover the domestic market, have developed very quickly and cultivated a vast sales network across the country. Thus by controlling these enterprises, it’s easy for multinationals to occupy China’s domestic market.
　　With the gradual opening up of China’s capital market, it has become easier for foreign enterprises to engage in mergers and acquisitions with Chinese companies. China’s stock market nosedived in 2001 and had since showed no sign of revival until the beginning of this year. As a result, the market values of domestic enterprises are largely underestimated. Recent research showed that about 200 of the 1,400 listed companies will become the subject of foreign mergers and acquisitions, while most of their shares are lower priced than their real value. Given this, they may easily be purchased by foreign investors.
　　Another reason for all the foreign mergers and acquisitions is that China still is in the transition period of economic system reform, and its policies and regulations are not yet explicit, which provides an opportunity for multinationals to purchase Chinese enterprises at a low price. Compared with the market in Western countries, the purchasing price is quite cheap, the same as advantage as with Chinese labor.
　　“Without sufficient laws and regulations, the loose merger and acquisition process in China is like a garden with a fence full of holes, so why wouldn’t foreign capital stick its hands in the market while the going is good?” said a comment in The Beijing News, a daily newspaper.
　　
　　Legal boundaries
　　
　　Western countries have been placing more restrictions, such as laws and administrative procedures, on transnational mergers and acquisitions in their critical industries. In Germany, the law states that any merger or acquisition will be prohibited if it leads to market domination or enhances market domination. In 2005, the U.S. Congress forced the China National Offshore Oil Corp., the third largest oil producer in China, to abandon its plan on purchasing U.S. oil company Unocal, under the pretext of national security concerns.
　　Despite the importance of maintaining a free market, safeguarding economic security is a big concern when it comes to certain key fields.
　　However, some experts argue transnational mergers and acquisitions also help achieve an optimal distribution of resources, and are a good way to encourage market competition and lift the industry level. Against the backdrop of economic globalization, it’s irrational to judge transnational mergers and acquisitions on an emotional basis in order to exaggerate the importance of safeguarding national economic security and further use it as an excuse to adopt measures that hamper this normal market practice.
　　A popular view among Chinese academic community and staff working at international enterprises is that a clarification of the boundaries of national economic security should first be made before judging the conduct of foreign investors in mergers and acquisitions.
　　In fact, the Ministry of Commerce has issued an upgraded version of its Catalogue of Foreign Investment Industry Guidance, detailing the industries that are not open to foreign investments. Prior to that, the Interim Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors were issued in 2003, and include some stipulations on the prevention of possible monopoly resulting from foreign mergers and acquisitions.
　　But these regulations fail to offer clear information to investors, and are poor in operability, which has led to mergers and acquisitions that have broken present laws.
　　In addition, more than 10 government departments are involved in managing foreign investment, which explains why the government’s view on monopolies is more influenced by internal interest struggles than by the motivation to create a healthy industry environment.
　　In addressing the issue of ill-willed foreign mergers and acquisitions, a basic solution is to perfect laws and regulations, said Jin Bosheng, Director of the FDI department of the Chinese Academy of International Trade and Economic Cooperation, a think tank under the Ministry of Commerce. Only if China has good command of “international game rules” can it correctly regulate market conduct without hurting the pitch of the country’s market economy.
　　Jin also revealed that the Antimonopoly Law, which China is now drafting, will provide a clear definition as to which department should be responsible for managing foreign investment. “The upcoming Antimonopoly Law will include an unprecedented strong surveillance of foreign mergers and acquisitions,” Jin said.
　　But some experts hold that an Antimonopoly Law isn’t enough to undertake the responsibilities to safeguard the country’s economic security. China needs to develop other yardsticks to create distinctions between full competition industries, limited competition industries and state monopoly industries, to allow foreign investment into different kinds of industries and keep away from the state monopoly sector.

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