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China passes anti-monopoly law, with provision for security check on foreign firms

China passes anti-monopoly law, with provision for security check on foreign firms

China will require foreign purchases of Chinese companies in sensitive sectors to pass national security reviews under an anti-monopoly law passed Thursday.
The anti-monopoly law seeks to make effective use of foreign investment while protecting core industries and maintaining economic security, Huang Jianchu, head of the national legislature's economic law section, told reporters.
"In addition to an anti-monopoly review, foreign investments that could affect national security must undergo a state security review," Huang said.
"I believe this is in keeping with practices among other countries," he added.
Thirteen years in the making, the law broadly seeks to promote fair competition and further open up the economy. It will come into effect on Aug. 1, 2008.
With eight chapters and 57 provisions, the new law bans monopolistic agreements and practices such as cartels and price-fixing but allows for monopolies that promote innovation and technological advance. Details were hazy and the full text of the law has not yet been released.
China began drafting the law in 1994 and a first draft was completed in 2003.
But progress was stymied by controversy over how to carry out enforcement, given the prevalence of state-owned monopolies or semi-monopolies in many industries.
Analysts have said the law could help China protect its fledgling domestic industries from multinational competition, while others said it would curtail the power of state-owned enterprises.
State-run companies have retained control over sectors that Beijing deems crucial for economic security, such as telecommunications, energy, and railways.
Beijing officials have said the legislation would not discriminate between domestic and foreign companies. Huang said a committee under the State Council, China's Cabinet, would carry out anti-monopoly reviews, but didn't say who would be responsible for national security checks.
The American Chamber of Commerce in Beijing, which China repeatedly consulted in drafting the law, issued a statement calling the legislation "a positive step in China's ongoing development of a market-based economy."
The law is a "defining moment in the development of China's legal system, which establishes a basic framework to build a fair, uniform, and national competition law system that benefits consumers by recognizing and preserving the incentives to compete," chamber chairman James Zimmerman said in the statement.
Security checks for foreign investments are not new, Huang said, citing rules and guidelines dating back to 2002.
"When it comes to this issue, the anti-monopoly law's requirements don't really in fact constitute any new regulation," Huang said.
However, the latest step marks the first time such a requirement for a national security review has been enshrined in law.
Beijing stepped up scrutiny of foreign takeovers after an uproar in 2005 over U.S. investment fund Carlyle Group's offer to buy a Chinese maker of construction equipment. Critics complained that such deals might threaten China's economic security, prompting the government to require makers of construction equipment to consult Beijing before selling large stakes to foreigners.
China received more than US$60 billion in foreign investment last year, but foreign takeovers of existing companies are still unusual.
Chinese regulators also have held up a bid by European steel-maker Arcelor-Mittal to buy a mid-size Chinese competitor, Laiwu Steel. A Laiwu spokesman said in March that Chinese officials wanted more money and unspecified conditions to protect China's domestic steel industry.
Chinese purchases of U.S. and other foreign assets have also come under scrutiny for national security reasons by foreign governments.
Criticism from Congress in 2005 forced China's state-controlled CNOOC Ltd. to give up an $18.5 billion takeover bid for the U.S. oil company Unocal Corp. Lawmakers said the deal could jeopardize U.S. security.