International firms catch flak in China

Targeting profitable foreign firms operating in China at a time of slowing economic growth seems counterproductive and is a reversal from the past.

It has been a rough few years for multinationals in China, with some of the world’s most recognisable brands pilloried by state media, probed by regulators and prosecuted in the nation’s courts. A spate of anti-trust cases last year caused a good deal of consternation among foreign executives on the mainland. The market, they say, still struggles with the concept of a level playing field.

Foreign companies are vulnerable to open-ended investigations by ministries and watchdogs due to regulatory ambiguities. The enforcement of regulations is spread across several government bodies, with “multiple agencies with overlapping functions pulling in different directions,” according to China 2030, a collection of policy recommendations by the World Bank and China’s State Council.

State-owned enterprises have been targeted in government anti-trust probes, but foreign policy think tanks and trade organisations say a disproportionate number of cases have been brought against foreign players.

Xi Said, Li Said
Multinational chief executives in China have told FinanceAsia the campaigns against firms appear to be a form of corporate profiling. They had hoped the market would further liberalise under the leadership of Chinese President Xi Jinping and Li Keqiang, the country’s market-oriented prime minister, but that has not been the case.

A flurry of corruption and anti-trust investigations – including the 14-month long probe of Qualcomm that ended early this year with the US chipmaker agreeing to pay a $975 million fine for anti-competitive practices – began shortly after Xi and Li came to power in 2012.

Xi’s campaign to root out official graft and Li’s pro-market posturing have been used as cover for some of the prosecutions according to several current and former diplomats in the region, who also suggest the targeting may be the result of intra-party jousting between pro-market factions and those who want the state to retain control of economic levers.

China’s 2008 Anti-Monopoly Law has been used to the detriment of foreign-invested enterprises, a view shared by each of the China experts FinanceAsia spoke with for this article.

China’s anti-trust investigations, including probes last summer into the pricing of automotive components made by BMW, Mercedes-Benz, Chrysler Group, Audi, and around a dozen Japanese car parts manufacturers, are occurring at a time when the very nature of China’s regulatory regime is changing from a licensing role to a supervisory function, as China ends the deferential treatment formerly extended to foreign firms to attract their investment into the country.

Latitude of ingratitude
The international community has played a part in helping China become the world’s second-largest economy. Charles Freeman, a senior foreign policy fellow at Brookings Institute, estimates that foreign-invested enterprises have been responsible for between 20% and 35% of Chinese industrial output each year for the past decade.

Yet foreign businesses in China “feel less welcome now than at any time since China’s entry into the World Trade Organisation,” said Malcolm Lee, another senior fellow at the conservative Washington think tank, citing a rising tide of national security and regulatory barriers that restrict market access.
China’s antagonism is difficult to reconcile given its ongoing need for international markets as the slowdown at home continues.

Bitter Medicine
China’s healthcare industry was a likely target as Xi’s anti-corruption campaign went into high gear. Beijing went after several domestic players, but its probe of GlaxoSmithKline, the British pharmaceutical giant, monopolised the headlines.

While Beijing has for years vowed to tackle rampant corruption in the sector, specifically looking at issues surrounding the pricing and distribution of drugs, the fine imposed on GSK was without domestic precedent; last year a Chinese court fined GSK $490 million for bribery.

The firm has since gone to great lengths to restore its image, entering into a tie-up in July this year with Shanghai-headquartered Desano Pharmaceuticals to increase the availability of an HIV treatment in China.

The interdependency of China’s economy with developed markets and the degree to which these countries have contributed to China’s rise makes Beijing’s profiling of foreign companies all the more confounding. One hopes the reactionary display is but a phase as the nation transitions to a responsible stakeholder in the international community.

¬ Haymarket Media Limited. All rights reserved.
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