Clear takeover rules are in China's interest too
Beijing's veto on competition grounds of Coca-Cola's bid to take over China Huiyuan Juice Group has caused understandable concerns abroad. China Huiyuan Juice was a willing seller at a price that represented a massive premium. There were no national security considerations, nor did a need to protect a key national industry arise. People close to the HK$19.65 billion deal - which would have been the biggest foreign takeover of a mainland company - had expected it to pass official scrutiny, even if with strings attached. But they did not reckon on new foreign-investment rules or swelling public sentiment against takeovers of homegrown national brands.
The proposed takeover was the first big test of the mainland's anti-monopoly law. The rejection - for poorly explained reasons - has fanned fears among investors and bankers that protectionism and nationalism will curb deals on the mainland. The perception of double standards also does nothing for Beijing's quest for asset acquisitions abroad.
China Huiyuan Juice is the country's biggest juice maker. The Ministry of Commerce said the deal would limit consumers' choice. But Coca-Cola and Huiyuan together would not have breached the threshold of a 50 per cent market share which defines market-sector dominance. The ministry said its concern was that Coca-Cola might use its wider market power to compel retailers to stock Huiyuan's juices instead of those of rivals. The new law does give regulators broad power to block takeover deals if they might restrict competition, but the use of it needs to be clearly justified. And the ministry could have stipulated reasonable conditions for approval of the deal that would have allayed such concerns.
The Coca-Cola deal was seen as a key test of China's openness to foreign investment. Nationalist sentiment has been a factor in opposition to the sale of equity stakes in state-owned businesses in sensitive sectors such as steel and machinery. In the case of Huiyuan, however, there were no national-interest considerations. So there had to be compelling reasons for derailing the deal. But the ministry's explanation falls short. As a result, there is speculation the ruling reflected the strong public opposition - revealed in comments on the internet - to the sale of Huiyuan to foreigners.
The mainland is far from alone in being protective of national brands. However, a competition law was a condition of membership of the World Trade Organisation. The mainland should therefore be seen to have an anti-monopoly regime that is transparent and clearly defined. Otherwise it could easily be seen as a selective tool to foil foreign acquisitions for political reasons. Indeed, that is how the rebuff to Coca-Cola is being interpreted by many analysts.
The people cheering the ruling loudest are nationalist opponents of China's attempts to acquire assets abroad, who hold it up as evidence of double standards. This has strengthened the opposition in Australia to state-owned company Chinalco's planned US$19.5 billion investment in Rio Tinto Group. There is no question that the Anglo-Australian company's mineral resource assets in Australia are of strategic national importance. Yet Chinese officials have been at pains to reassure the Australian government it need have no fears about allowing China to take a significant stake.
Where protectionism is perceived, it can be contagious. That would not be in China's best interests. For its own sake as well as that of the free flow of trade and investment, Beijing needs to make the rules clearer and dispel perceptions of double standards.