ChinaÆs free-trade credentials under the spotlight

Fear of worldwide protectionism grows, but ChinaÆs anti-monopoly law might lead to more transparent commercial practices.

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 US government's blocking of the acquisition of US 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.

And in June, it said that if the revenue of the joint venture between Rio Tinto and BHP Billiton reaches "a certain amount," China's anti-monopoly law would apply. The law requires government approval before consolidation if the new venture's global revenue exceeds Rmb10 billion ($1.47 billion) and its revenue in China is more than Rmb2 billion. In the year ended June 30, BHP Billiton's revenue in China was $11.7 billion, while Rio Tinto reported a top-line income of $10.8 billion.

Meanwhile, Rio Tinto turned down a planned $19.5 billion investment by Aluminum Corp of China (Chinalco) on June 5, in favour of a proposal by BHP Billiton to pay Rio Tinto $5.8 billion to set up a joint venture to run the iron ore resources of both companies in Australia. Australian public opinion had been hostile to the deal.

However, it is important to distinguish between intervention by rule-bound regulators and public noise. For instance, 11 out of 12 Australian government bodies approved the Chinalco-Rio Tinto deal -- and a positive verdict was expected from the final one, the Foreign Investment Review Board. Yet, political and media rhetoric took attention away from this. In the end, Rio Tinto's rejection of Chinalco's investment plan was not a protectionist move; instead, shareholders simply chose a different option.  

Nevertheless, governments often face a dichotomy during times of economic hardship; on the one hand they need foreign investment, and on the other hand they want social peace. But countries tend to be less enamoured by free-trade ideology when jobs at home are at risk and China has been taking a lot of flak for what its trade competitors see as blatant protectionist measures.

China has stopped the renminbi's appreciation against the dollar this year, and introduced various measures to help exporters. Among other things, it has increased export-tax rebates seven times since last August, provided generous loans to finance trade, and even subsidised more government-paid travel to promote their wares at world trade shows.

Claims and counter-claims

Coincidently or not, China's announcement of a "Buy Chinese" policy on June 4 for its Rmb4 trillion ($585 billion) economic stimulus package was followed by complaints by its trade partners into other allegedly dubious trade practices. However, the ban on government agencies from buying imported goods is legitimate in the sense that China hasn't yet signed a global agreement preventing protectionism in government procurement.

Also, some analysts reckon that the sub-contracting structure of the Chinese manufacturing system means that the "Buy China" policy will have little effect.

But the US and the European Union (EU) went on the offensive in a different direction, complaining that export quotas and tariffs on raw materials used in the chemical and metals industries favour domestic producers at the expense of themselves, and asked for the issue to be sorted out by the World Trade Organisation (WTO). Separately, Australia launched an investigation into "dumping" by Chinese aluminium producers at below market prices.

At the end of June, China not only rejected allegations of protectionism and illegal trade subsides, but it went on the counter-attack. It asked the WTO to examine US restrictions on imports of Chinese poultry products (the US and China banned imports of each other's poultry in 2004 after outbreaks of bird flu, but China subsequently lifted its ban), and launched its own anti-dumping investigation into methanol imported from Saudi Arabia, Malaysia, Indonesia and New ­Zealand. 

Together with other emerging countries, China also complained at the beginning of July against US plans for a carbon tax on imports from countries without their own emission caps. Yao Jian, a spokesman for China's ministry of commerce, said that "the proposal of some developed countries to slap a carbon tariff on some imported products violates the WTO's basic principles and is trade protectionism in the disguise of environmental protection."

It might seem strange to watch China present itself as a victim. But if the West's response to the Rio Tinto arrests is to block Chinese outbound investment, then this is likely to become an increasingly familiar posture.

¬ Haymarket Media Limited. All rights reserved.
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