No Longer Business as Usual in China

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 Fanz Live.

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.
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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.
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Susan Schwab, former United States trade representative, and Yang Yuanqing, Lenovo’s chief, on Sunday at a forum linked to the Asia-Pacific Economic Cooperation meeting in Beijing. Credit Pool photo by Wang Zhao

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?”