American, British and European competition policy scholars and regulators have much to answer for. Brandishing the statute books of their home countries, and fired by the zeal that often overcomes missionaries for some regulatory scheme, they decided to open China to western ideas—require advance notification of mergers, compile evidence on the nature of markets, study same, don’t limit jurisdiction to Chinese companies. All of which hands the Chinese authorities tools with which to impose considerations of the interests of the Chinese state on mergers such as that between Britain’s Aegis Group and Japan’s Dentsu advertising agency—approved by Australia, America, Germany, Russia and others, but held up awaiting a decision from China’s regulators.
Or on Glencore’s £50bn takeover of Xstrata. Here, the late ministrations of Tony Blair soothed some ruffled feathers in Qatar, and the parties obtained the blessing of South Africa’s Competition Tribunal by agreeing to limit layoffs and of the EU authorities by agreeing to terminate a contract to sell zinc. But the Chinese have yet to be heard from, and their price for allowing the deal between these two UK companies to go forward is as yet unknown. They may condition approval on recognition of China’s special needs, as they did when allowing the merger of Russian potash producers Silvinit and Uralkali only after the two companies agreed to provide China with stable supplies of the fertiliser at prices that reflect the Chinese market, and to file semi-annual compliance reports with the ministry of commerce.
None of this should be surprising: we are witnessing another example of the erosion of national sovereignty in a globalised economy, where business deals affect countries not directly party to them. And some of this is good news: it is no bad thing to have the potential impact of a merger on competition reviewed by countries that might otherwise end up reliant on a monopoly provider of services or materials.
China’s appearance on the antitrust scene is not just that of still another country worried about what normally concerns competition enforcers. The merger of Aegis and Dentsu would create the third-largest advertising agency in China: legitimate grist for the regime’s regulatory mill. But there is more to the delayed approval than this. It is widely believed that China is holding up the Aegis-Dentsu deal in order to send a message to Japan that there are lots of ways it can make life difficult for Japanese companies such as Dentsu if Prime Minister Shinzo Abe adopts too tough a line in the recent territorial dispute over some islands on which advertising is not a major industry.
Then there is the not insignificant matter of intellectual property (IP). To many western companies such property is their most important asset; to the Chinese authorities, IP rights allow western companies to maintain monopoly control over important processes and products, to the detriment of Chinese consumers and businesses. Some of the several experts with whom I spoke worry that China’s trust-busters will declare such intellectual rights illegal monopolies, an elegant alternative to merely stealing them.
These experts worry about two other things: delay and lack of transparency. Whereas parties to a merger can get a sense of what concerns the European Commission, that is not possible in China, in part because so many agencies have a say in important decisions that no one agency is prepared to specify its concerns. One observer told me: “It is never clear who made the decision. No one of the players is prepared to say ‘yes’ to a deal if there is any controversy.” That hugely increases the data that must be filed in the hope that some of it will seem relevant to whichever agency has the final say. Which means delayed decision-making.
The second worry is that China’s regulators have followed the lead of Deng Xiaoping, who in 1978 called for “socialism with Chinese characteristics,” a call echoed by the new “paramount leader,” Xi Jinping. China’s competition policy “with Chinese characteristics” follows much of western procedure, with an important exception: there are no written opinions explaining decisions, so there is no growing body of precedent.
Still, there are reasons to believe that China’s competition authorities are moving towards the model familiar to Americans who deal with the Federal Trade Commission and Department of Justice, to British companies having to satisfy the Office of Fair Trading (OFT), and to Europeans dealing with the European Commission. John Fingleton, who recently stood down as OFT head to set up a small, high-powered strategy consultancy, points out that as more Chinese companies build stocks of IP, a constituency is developing to prevent IP theft, either overt or by regulatory rule-making. He says staff at China’s ministry of commerce are “well trained, well read and competent. They are searching for the right thing to do in the competition cases that come before them.” But, he notes, the agencies are more cautious than their western counterparts when dealing with conglomerate mergers; vertical mergers (a joining of firms that do not compete directly but operate at different levels of the supply chain); mergers that threaten the ability of Chinese companies to grow their own brands; and deals that affect commodities that China must import.
As about 15% of the value of the FTSE 100 consists of mining shares, this last comment might send a chill down spines affixed to the comfortable backs of boardroom chairs. As might the memo sent to clients by law firm Davis Polk & Wardwell. It warns them not to forget that the two other antitrust authorities that divide jurisdiction with China’s ministry of commerce “have now demonstrated . . . a willingness to impose unprecedented fines for [anti-monopoly law] violations . . . to sanction international companies.”
Globalisation, it seems, opens vast new markets, not least for lawyers and consultants wise in the ways of international regulation.