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China's top legislature, the Standing Committee of the National People's Congress (NPC), on Sunday went through the second reading of the country's first anti-monopoly law which, if passed, would impose security checks on any foreign enterprises buying Chinese companies.

 

The draft read that "foreign mergers and acquisitions of domestic companies or foreign capital investing in domestic companies' operation in other forms should be examined according to relevant laws and regulations if the cases are related to national security."

 

According to official statistics, foreign merger and acquisition cases only made up 5 percent of China's total foreign direct investment annually before 2004. However, the law's purpose is outlined from this percentage's rise to 11 percent in 2004 and close to 20 percent in 2005.

 

Furthermore, major state-owned enterprises and famous Chinese brands are now coming under foreign control, sparking mounting concerns about national economic security.

 

This law would not be the country's only method of verification since China already has a basic national security check system for foreign mergers and acquisitions.

 

Under the new rules, foreign investors would apply directly to the Ministry of Commerce (MOC) to verify their purchases of domestic companies do not affect national economic security, are not involving in key sectors and do not represent a transfer of the operating rights of famous domestic brands, according to a multi-departmental government regulation issued last year.

 

Prior to this move, only those mergers and acquisitions which were worth over US$100 million were submitted to MOC checks and approvals.

 

The National Development and Reform Commission (NDRC) has announced that by 2010 China will have strengthened examination and supervision of foreign merger operations affecting major enterprises in sensitive sectors.

 

Zhang Yansheng, director of the NDRC's International Economic Research Institute, has pointed out that security and anti-monopoly checks are crucial supervision tools in overseeing foreign purchases of domestic firms. Nevertheless, the regulations must shed light on obscure aspects such as which kinds of mergers are related to national security.

 

The draft anti-monopoly law will act to protect fair competition, prevent risks of monopolistic behavior and help a well-regulated market place. Its first review took place in June 2006.

 

The anti-monopoly law forms a basis to a market economy, with over 80 countries to drafting similar legislation to date.

 

China first mulled over such a law back in 1994, with experts pointing out that with the maturing of China's socialist market economy, the introduction of an anti-monopoly law is imperative.

 

(Xinhua News Agency June 25, 2007)