Commentary: Face to Face With the New China

I attended a law conference last week and saw for myself what some CFOs and China specialists have been telling me: that the quality of regulations in China and the capabilities of those tasked with writing them have vastly improved and are continuing to improve.   

One of the speakers was Dr. Zhao Hong, the young and articulate deputy director of the General Bureau of Anti-Monopoly at China’s Ministry of Commerce. Holder of a Ph.D. in law, she is a specialist on China’s competition policies and is the official in charge of drafting supplementary rules and guidelines on China’s Anti-Monopoly Law. 
That law, which came into force on August 1 last year, is of particular importance to CFOs because it determines whether an M&A transaction will be blocked on anti-trust grounds. Exhibit A here is Coca-Cola’s proposed acquisition of juice maker Huiyian. The deal failed to win regulatory approval because it would have transferred what regulators regard as an iconic Chinese brand to non-Chinese control, and would also result in Coke getting a 60.6% share of the Chinese market.
The problem is that Coke did not really have much inkling that these issues would be obstacles to approval because not all the supplementary rules had been issued when the deal was structured. “We apologise for the delay, but they are now in the final stages of consultations,” said Dr. Zhao in response to a question about when the procedural rules on mergers control would be released. “There will be some differences between the final documents compared with the draft [that has been circulated for public consultation] . . . but I don’t think it will surprise you too much.”
Rules on some other aspects of China’s competition regime have been issued, including those on mandatory notification of turnover thresholds, the required content of such notifications, and guidelines for Ministry of Commerce reviews. Dr. Zhao focused on the recently issued guidelines on how regulators will determine the 'relevant market' in anti-trust issues, a crucial undertaking because it could determine whether or not a company's proposed M&A transaction will be judged to be in breach of the Anti-Monopoly Law.
As she explained the process and the thinking behind the 'relevant market' rules, it became clear that the drafters had been meticulous and thorough in studying theory and practice in the U.S., Europe and elsewhere. For example, the Chinese guidelines recognise the use of SSNIP, the hypothetical method adopted in most jurisdictions to determine what the relevant market is, but Dr. Zhao stressed that other methodologies will also be considered. Companies are encouraged to submit actual current and historical data and analyses to prove they are not a monopoly or that a proposed acquisition will not make them one.
All that said, drafting and issuing rules are only one part of the equation. The interpretation and implementation of those guidelines are equally important, if not more so. In this, China is still lagging. One expert in intellectual property rights protection, who was at the same conference, praised the improving quality of jurisprudence on IPR cases in Beijing, Shanghai and other big cities. But he said the work of judges in second-tier cities and the interior provinces leaves a lot to be desired.
It remains to be seen how fairly and effectively the rules and guidelines implementing the Anti-Monopoly Law will be interpreted and executed at the regulatory level and by the courts, if the government initiates legal action against a company (such as the European Union's suit against Microsoft) or if an M&A transaction disapproved by regulators is appealed. With luck, the big leaps being made in China in rule-making will extend to its enforcement as well.
About the Author
Cesar Bacani is Senior Consulting Editor at CFO Innovation.



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