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Economy

A New Bureaucratic Wall Against Foreigners Buying Chinese Firms

A New Bureaucratic Wall Against Foreigners Buying Chinese Firms

Beijing's new rules approach "economic security" akin to national security.

Great Wall of China (Robin Zebrowski)

BEIJING - China has finally unveiled its "national security" procedure that sets standards for takeovers of Chinese companies by foreigners. Promised by the government since 2008, the new system will be effective in March.

As often is the case with documents produced by Beijing, the new rules are vague and may offer scant help to businesses trying to decipher the government's intentions, creating anxiety inside foreign companies as well. As one Beijing-based businessman puts it: "Companies that have acquisition projects in China are working extra hard to try to complete the procedures before the month of March."

It is a subject in China that has caused heated debate in recent years. Irritated in particular by the American decision to block the attempted 2005 takeover of U.S. oil firm Unocal by the Chinese energy giant CNOOC, China has used legal means to block virtually any proposed foreign takeover that might displease the regime.

Sebastien Evrard, a partner at law firm Jones Day in Beijing, says the issue goes beyond business: "Chinese authorities have expanded the concept of national security to economic security."

Beyond the defense sector, activities as diverse as agriculture, energy, infrastructure and technology are now addressed by the new document. Any proposed foreign takeover in these areas shall be submitted to a panel headed by the National Commission for Reform and Development. If blocked, a business can seek the ruling of the State Council, that is, the government.

This structure allows for deals to be easily blocked, to the extent that they cannot have an impact on domestic production, nor have any effect on the economic and social stability of the country as a whole. Ultimately, political power will have "tremendous discretion," says Evrard.

Still, it is not certain that the new formula will profoundly change the status quo. For certain cases, it will merely formalize what is already practiced. Coca-Cola knows this routine well: the US company was unable in the end to acquire Huiyuan, the leading manufacturer of fruit juice in China, because the new entity would have harmed competition in the country. This ruling was made even though it would have totaled only a fifth of the national market.

Aware of the concerns of foreign companies, Beijing has sought to offer reassurances. The National Commission that would rule on the cases has issued a statement that says it is very open to proposals from foreign companies. The new text also presents the advantage of forcing the authorities to decide within a fixed timetable. "Diplmotically," notes Evrard "it would not look good if the Chinese authorities were to become more protectionist just when companies from China are looking to make acquisitions abroad."

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