By Intelligence Research Ltd

Originally published in the China Watch Weekly Briefing of 25 July 2008

The Anti-Monopoly Law goes into effect 1 August. It has the potential to be disastrous for foreign companies. It is almost sure that the law will do little to break monopolies. It contains an exception for all industries controlled by the state, as well as any others that are deemed important to national security, including economic security.

Two years ago, the state-owned Assets Supervision and Administration Commission effectively required every important industry to be controlled by the state. The security clause is vague enough that most any other industry can be included, as well. State monopolies will be entirely untouched by the law.

Multinationals, on the other hand, face multiple daunting threats. There is a provision allowing civil suits to be filed against ostensible monopolies. Not only are state enterprises essentially immune, domestic court rulings are typically dictated by local political imperatives rather than evidence.

Worse, intellectual property rights can be terminated if they are deemed to be abused in connection with a supposed monopoly. These are not just empty words – the PRC has long considered the holding of many patents to be unfair and now has a legal mechanism to treat them accordingly.

The present language makes it conceivable that the anti-monopoly law will be nothing more than a means to attempt to destroy large multinationals. As always, implementation is everything. The law is unlikely to be applied aggressively at the outset but could be trotted out in response to overseas enforcement of IP protection against Chinese firms or protectionist trade barriers.

Related troubles
The anti-monopoly law was shaped in part by an attempted acquisition that died its final death this week. Equipment-maker Xugong reported that no stake whatsoever will be purchased by private investors Carlyle Group of the US. Carlyle had originally sought a majority of Xugong at which time the State Council discovered that construction was vital for economic security

Beijing also clearly displayed its willingness to use commercial tools for political reasons. It threatened ExxonMobil because the company held discussions with PetroVietnam over energy exploration in waters China has a very poor claim to.

This follows a similar action against BP last year. With oil under absolute state control, it’s not clear why the global majors are bothered by the possible loss of market access.

Minor net FDI
East Asian services investors stirred the pot this week. Korea’s Hana Financial will purchase a 19.7% stake in Bank of Jilin for $320m. Japanese leasing company Orix will contribute $40m to an equity fund established by the State Council’s Chinese Academy of Sciences.

Singapore real estate firm Allgreen will pay up to $260m for 25% of a venture to acquire and develop residential sites in Hebei, with two Hong Kong partners. IBM sold $80m more of computer leader’s Lenovo stock in Hong Kong, cutting its stake to 4.7%.

Patrick Lohlein, Business Development Manager (Asia), Intelligence Research LTD