Beijing's investigation of drug and baby formula firms a good start

Last week, Beijing launched two high-profile investigations into possible price-fixing and anti-competitive behaviour by pharmaceutical companies and the makers of baby milk formula on the mainland.

As multinationals dominate China's lucrative high-end prescription drugs and milk powder sectors, the investigations have triggered concern that Beijing is targeting foreign companies in order to protect the interests of domestic manufacturers.

While that concern appears to be understandable, it is only one part of the story.

Until a few years ago, it would have been almost inconceivable to see multinationals in the crosshairs of a government investigation, as both the central government and local authorities were trying hard to woo them for their investment, technical know-how, high-quality products and best-management practices.

However, as those multinationals have become the dominant market players, mainland sentiment towards them and their products has started to change dramatically.

More interestingly, the latest probes initiated by the National Development and Reform Commission (NDRC), China's top economic planner, appear to have been driven by rising concerns over social stability.

Since 2008, when melamine-spiked baby milk formula killed at least six children and made about 300,000 infants sick, Chinese mothers have turned to imports or foreign-brand formula manufactured on the mainland. This has enabled foreign diary companies to enjoy roaring business and to increase prices by double digits annually over the past few years, while dealing a devastating blow to domestic manufacturers.