Photo
An FAW-Volkswagen plant in Chengdu, China. VW was among companies fined this year.
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 companies, eager for their factories and technology.
Now China is using its growing economic and financial muscle to dictate new terms, as dozens of American, European and Japanese businesses face scrutiny for corruption, monopolistic practices and, most recently, tax evasion.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 anythingbother than delay and ultimately acceptance of China’s plans.
