Beijing approves ban on some monopolies

The Chinese government Thursday passed legislation that prohibits some monopolies but also could throw new hurdles in front of foreign companies seeking to acquire businesses here.

The final text of the long-anticipated law, the drafting of which began in 1994, was not immediately released. But recent versions have included practices common in U.S. and European antitrust regimes, such as bans on companies colluding to raise prices and abusing dominant market positions. Restrictions on so-called administrative monopolies, or government agencies that have abused their regulatory powers, have also been mentioned in recent drafts.

At one point, the law was seen as having the potential to break up state-run monopolies in China, but it is now thought to have “carve-outs” that would exempt such firms. Last year, the government issued a list of monopolies that would continue to be allowed, including military contractors, oil and gas firms and telecommunications groups.

Beyond the anti-monopoly provisions, the legislation would require foreign acquisitions deemed to affect national security to undergo a special round of approvals. The government did not state what industries were considered essential to national security under the law, raising the prospect that it could be applied to a wide range of companies.

Huang Jianchu, head of economic law for the national legislature, said the state security review was “in keeping with practices among other countries.”

In the U.S., Congress passed legislation this year requiring greater scrutiny of foreign investment in the country. The move came after two controversial business proposals in the U.S. by foreign companies.

In 2005, China’s state-controlled CNOOC Ltd. dropped its takeover bid for Unocal Corp. after U.S. lawmakers said the deal could jeopardize U.S. security.

In 2006, a furor erupted in Congress over an attempt by Dubai Ports World, a state-owned Arab company, to take over operations at some U.S. port facilities, and the plan was abandoned.

The Chinese legislation, which goes into effect next August, has been cautiously welcomed by foreign regulators and corporations that hope it will bring some regularity and transparency to the frequently murky world of Chinese antitrust policy. Beijing has in recent years blocked or delayed several foreign takeover deals, sometimes failing to cite a clear reason for the decision.

Both European and U.S. regulators and corporate representatives were consulted on the law, and James Zimmerman, head of the American Chamber of Commerce in China, said it provided “a basic framework to build a fair, uniform and national competition law system.”

He added that he did not think the government would use the new law as a protectionist measure.

“We don’t anticipate that this will prevent foreign [merger and acquisition] activity, but as the competition law system evolves, foreign investors will need to be sensitive to the review process,” Zimmerman said.

The law will be enforced by a committee under the State Council, the government’s Cabinet, that will review antitrust cases, not unlike the Federal Trade Commission in the U.S. or the European Union’s competition commission.

Legal analysts said the effect of the law would not be known until the government began enforcing it. Foreign companies will closely scrutinize its implementation for signs that it is being used unfairly to prevent foreign takeovers, analysts said.

“That really is the key question at this point,” said John V. Grobowski, a partner in the Shanghai office of law firm Baker & McKenzie who specializes in merger law. “There’s an ongoing question about how nationalistic China is becoming and whether it will start using laws like this to prevent companies from taking over the crown jewels.”

Beijing has shown a tendency toward such protectionist moves in recent months. Carlyle Group, a prominent U.S.-based private equity firm, was blocked from taking an equity stake in a bank in Chongqing in July, and has been delayed in acquiring most of a leading Chinese construction machinery maker for 18 months -- a deal that has raised a considerable nationalist backlash.

The national security provision has raised the most concern among foreign observers. Analysts who have followed the drafting process said it was formally added only in recent days, and had been seen as a response to the failure of the CNOOC deal.

Daniel F. Roules, a lawyer in the Shanghai office of Squire, Sanders & Dempsey, said the worry was that “the national security language might be applied to protect [Chinese] companies from acquisition if the acquisition is perceived to pose risks to China’s national economic security [such as] reducing employment or eliminating a famous Chinese brand.”

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peter.spiegel@latimes.com

Times staff writer Don Lee in Macao contributed to this report.