China
is changing the rule book for business, forcing multinational companies
to figure out how to play a new game or risk losing out on the world’s
second-largest economy.
When
China joined the World Trade Organization 13 years ago, the government
welcomed foreign
With
heads of state and corporate chieftains in Beijing for a major economic
summit this week, China’s increasing economic nationalism is expected
to be heavily debated. The squeeze on multinationals has coincided with
President Xi Jinping’s consolidation of power and his increasingly
nationalistic and sometimes confrontational stance toward China’s
neighbors and the West.
“If
any leader wants to push for economic cooperation,” said Li Cheng, the
director of the John L. Thornton China Center at the Brookings
Institution, “he’s really taking a serious political risk.”
While
China has long presented unique challenges for businesses, the
regulatory and legal environment has been especially perilous in recent
months, with authorities pushing companies to cut prices and punishing
them with large fines. GlaxoSmithKline, Volkswagen, Chrysler, Mead
Johnson, Samsung, Johnson & Johnson and other companies have been
hit with multimillion-dollar fines this year, while Microsoft, Daimler
and Qualcomm are under investigation.
Then
suddenly, in the last five weeks, there has been a lull in what had
been a rapid pace of punishments. The pause has been all the more abrupt
because Chinese officials were putting the finishing touches on what
seemed likely to be their heaviest penalties yet in the continuing
crackdown on monopolistic practices. The target was even identified by
Chinese officials at a news conference in mid-September as Qualcomm,
which invents and licenses mobile technology.
But
Chinese regulators did not end up acting against Qualcomm, as Beijing’s
leaders were distracted by the protests in Hong Kong. China was then
preoccupied with a top-level Communist Party meeting, followed by
preparations for the Asia-Pacific Economic Cooperation summit meeting in
the coming days.
Another
possible factor in the slower pace of investigations may be an
important personnel change. Xu Kunlin, the head of the price supervision
antimonopoly division at the National Development and Reform Commission
and the leading advocate of a tough stance toward multinationals, was
transferred a month ago to run the separate price regulation division,
said two people who know Mr. Xu but insisted on anonymity because of the
sensitivity of personnel moves.
Mr.
Xu’s transfer came right after foreign businesses and governments had
complained bitterly to senior Chinese officials about the antimonopoly
investigations. While his transfer has most likely delayed some
antitrust investigations, it is not necessarily a demotion, and the
timing with the foreign complaints may be a coincidence, said the two
people. The price regulation division has just had a corruption scandal,
and Mr. Xu has now been given broad authority to rebuild it.
While
national and provincial investigators appear to have pressed pause,
township governments have quietly stepped up their activities, raiding
the local offices of multinationals.
The
townships, which do not have the legal authority to enforce antitrust
legislation, are operating under old, vaguely worded laws against price
gouging as well as collusion that are still on the books even as China
has modernized much of its legal code to embrace more market-oriented
principles. The local investigators have been copying large amounts of
memos, tax records and financial documents. The more complex documents
have then been forwarded to more experienced investigators in provincial
capitals.
“We
have clients that are investigated by very, very rudimentary teams who
have no clue what they are doing,” said an adviser to multinationals who
insisted on anonymity because of the legal sensitivity of the cases.
Those teams, the adviser said, nonetheless manage to accumulate large
quantities of confidential corporate data, sending a shudder through the
head offices of the affected multinationals.
Whether the Chinese government is focusing disproportionately on foreign companies is the subject of considerable dispute.
Foreign
business groups calculate that half the recent national and provincial
antitrust and collusion penalties have been aimed at multinationals even
though they represent a very small share of the Chinese economy. But
Chinese officials said in late September that if all collusion penalties
assessed by local governments are included, then multinationals are
only the targets a tenth of the time.
Western
companies have been taken aback by many procedural aspects of the
investigations, which diverge significantly from practices in the United
States and Europe.
Chinese
regulators have been pushing through antitrust cases in a few weeks,
giving companies little chance to respond. In the United States, they
take two years or more.
China
also does not have clear rules on whether investigators need warrants
to search offices or whether executives are entitled to lawyers,
particularly foreign lawyers. So many companies have been raided that
the European Union Chamber of Commerce in China has organized a
conference for executives in Beijing on Nov. 21 titled, “Dawn Raids in
China — How to avoid and answer a sudden knock at your door?”
Antitrust
authorities in China also routinely share evidence with other agencies,
including tax collectors. The information, which generally cannot be
shared among agencies in the United States, has opened up new avenues
for potential cases.
People’s
Daily, the official newspaper of the Communist Party, devoted nearly an
entire page on Oct. 13 to accusing foreign corporations of diverting
large profits out of the country without paying taxes on them — a
complaint sometimes levied against multinationals in the United States
and Europe.
Yuan
Shuhong, the deputy director of the legislative affairs office of
China’s State Council, or cabinet, said at a news conference in Beijing
on Thursday that China planned to enact an administrative procedures law
to require that due process and other legal norms be followed during
government regulatory actions. But the law may take considerable time to
draft and approve, he warned.
Some
lawyers contend that the Chinese government is simply looking to create
a robust regulatory framework and stamp out corruption. Chinese
government agencies “are becoming more and more sophisticated, and
confident in launching investigations against foreign companies,” said
Michael Gu, an antimonopoly specialist at the AnJie Law Firm.
To
others, the legal cases are signs that the government’s growing
nationalism — already evident in state-run media and China’s contentious
relationships with neighboring countries — extends to economic policy
as well. Critics contend China is going beyond the spirit, and possibly
the letter, of the free-trade rules of the World Trade Organization,
even though China, as the world’s largest exporter, has been the biggest
beneficiary of the W.T.O.
“China
should be out there in the front trying to make W.T.O. rules stronger,
not undermining them,” said Susan C. Schwab, who was the United States
trade representative from 2006 to 2009. “But I don’t get the sense there
is anyone in Beijing making that case, because you’ve got a very
self-absorbed focus on industrial policy coming out of parts of the
government.”
China’s
assertive stance has created a dilemma for the United States and other
trading partners. While they are reluctant to defend companies that may
have bribed officials or colluded with competitors, they are also
unsettled by China’s insistence that companies cut prices for products
or otherwise hamper business. The Obama administration has ended up
saying little publicly even as American business leaders have fumed.
“We
have been in regular contact with U.S. companies on a range of issues
that may affect the business climate in China and want to ensure foreign
firms are not singled out for Anti-Monopoly Law investigations and are
treated fairly by Chinese enforcers,” Matt McAlvanah, the chief
spokesman for the Office of the United States Trade Representative, said
in a written reply to questions. “The U.S. has had longstanding
discussions with the Chinese government on antimonopoly law and we will
continue this engagement.”
Advocates
of a more confrontational trade strategy have criticized the
administration for not taking a more public stance. They point to
various potential tools, like threatening to limit China’s access to the
American market.
“Washington
doesn’t appear to have any idea on how to deal with China’s rising
economic nationalism — their default approach is dialogue,” said Michael
R. Wessel, a member of the U.S.-China Economic and Security Review
Commission, a group created by Congress to provide advice on China
policy. “But there’s little evidence that dialogue results in anything
other than delay and ultimately acceptance of China’s plans.”
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