Foreign Investment in China: Will the Anti-Monopoly Law Be a Barrier or a Facilitator?*

I. Introduction Just over thirty years ago, under the leadership of Deng Xiao Ping, the Chinese Communist Party (CCP) made the fateful decision to reorient China's economic policy.1 One of the major pillars of China's economic reform has been the reemergence of foreign direct investment (FDI) in China as a major force driving the modernization of industry.2 This paper will sketch the various ways in which foreign capital has become an essential part of China's strategy to update its domestic economy and, equally importantly, to create the world's greatest export-processing machine. Foreign capital (which, for these purposes, includes investment from Hong Kong, Taiwan, and other overseas Chinese investors) has been vitally important in upgrading the technological level of domestic firms as well as creating a very large number of joint venture and wholly foreign-owned enterprises (WFOEs), which have all contributed to the transformation of the Chinese economy over the last thirty years. This paper will then consider the impact of change in the regulatory environment over time, with a focus on the impact of China's new Anti-Monopoly Law (AML) and its merger and acquisition (M&A) control regime.3 Many commentators have been concerned that the new AML will be used as a protectionist device to shield domestic enterprises from foreign acquisitions,4 which in turn would also inhibit the growth of foreign-owned enterprises in significant sectors of the Chinese domestic economy. It is also widely thought that various provisions of the law may unduly favor domestic state-owned enterprises (SOEs), which still account for a very large share of China's gross domestic product (GDP).5 The new antitrust system and the merger control regime are still far from complete, as is the new law's regulatory infrastructure. Consequently, the conclusions reached in this paper are tentative. This paper will suggest a range of possible outcomes and assess the impact of the enforcement regime on foreign investors. II. OUTLINE OF CHINA'S ECONOMIC REFORM PROCESS The initial decision to reform the agricultural system in 1978 was the key policy that allowed an agricultural surplus to be created, which kick-started an enterprise culture in the countryside.6 The "responsibility system" allowed farmers to privately retain and sell agricultural products that they produced in excess of the commodity levy demanded by the state. At a basic level, this reignited the capitalistic impulses of Chinese peasants after thirty years of an entirely state-controlled economy.7 Huang has argued that the true genesis of modern private capitalism in China was the creation of thousands of township and village enterprises in the countryside in the 1980s.8 Most of these were officially designated as co-operative entities while, in reality, most of them were family-owned businesses.9 Huang goes on to argue that, in the 1990s, the Chinese state took resources away from the agricultural sector in order to invest in urban areas and to modernize and strengthen SOEs.1" Only in the last few years has this trend been reversed, with more priority now being given to rural areas." The second major economic reform made in 1978 was the establishment of special economic zones (SEZs) at China's periphery in the south and east of the country, the most important of which was Shenzhen, a rural district immediately adjacent to the then British Colony of Hong Kong.12 The express purpose of these zones was to allow an entry point into mainland China whereby foreign investors could establish joint venture enterprises with mainland state firms.13 (At this stage, wholly foreign-owned businesses were not allowed to operate in China.)'4 The joint venture enterprises established in the SEZs were subject to a number of requirements,15 including the importation of capital, a quota on the use of local raw materials and components, the employment of local labor, and an export requirement of 50-100 percent of the goods produced. …