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China's New Anti-Monopoly Law is Anti-Competitive

China's government passed its own version of competition policy (anti-trust law) to take effect on 1 August 2008.1 Anti-monopoly laws are, on the surface, designed to protect consumers from producers that attempt to gain monopoly power in a market, and then leverage this power at the cost of consumers. China's…

China’s government passed its own version of competition policy (anti-trust law) to take effect on 1 August 2008.1  Anti-monopoly laws are, on the surface, designed to protect consumers from producers that attempt to gain monopoly power in a market, and then leverage this power at the cost of consumers.  China’s new law, however, limits competition in one of the most important markets in any industrialized economy: the management market or market for corporate control.

In the market for corporate control, the managers of corporations are the producers, and the stockholders are the consumers.  If a corporation is owned by stockholders, but controlled by hired managers, the managers have an opportunity to divert corporate resources for the managers’ purposes rather than serving the interests of the stockholders and maximizing profits.  However, if a team of managers diverts stockholder resources, the price of the stock will fall.  When the price falls, an opportunity is created for other management teams to purchase the company for less than its assets are potentially worth, and make a profit by managing the resources better.  The potential corporate raiders thus discipline the managers and prevent them from misallocating resources.2

A perfectly competitive market for corporate control prevents <i>any</i> misallocation of resources.  However, as this market becomes less competitive, opportunities arise for managers to steal from owners.  China’s new law makes this market much less competitive.  Of course, all anti-monopoly laws make the market for corporate control less competitive, because they limit mergers from the managers that have the most expertise to run a company in a particular industry: the company’s competitors in that industry.  Whether or not this is offset by increased competitiveness in other markets is a debatable issue.  However, China’s nationalistic tinge on their competition policy exacerbates this problem. 

The new law stipulates that, “Foreign acquisitions of Chinese companies will be subject to stringent new checks intended to protect China’s economic security under a new competition law passed on Thursday.”3  This new law will, at the very least, act like an import control law in any market and will make it more expensive for “imported management” to enter the market for corporate control.  It will likely create a small cartel of qualified Chinese managers in each specialized industrial market.  These managers will be able to mismanage the resources of middle-class investors without the fear of “Barbarians at the Gates” glancing at their balance sheets with opportunism in their eyes.

Despite the assurances of Mei Xinyu of the Chinese Academy of International Trade and Economic Cooperation4, foreign direct investment will be affected by the new law, especially in the long run.  While current plans to invest in China may continue, once Chinese managers begin to enjoy the impunity of their new law, they will begin to shirk.  Corporate scandals will inevitably follow.  Based on recent history, the government will likely prosecute individuals instead of examining root problems in the system.  However, even those managers that do not engage in brazenly corrupt activity will still receive higher compensation (in the form of both salary and perks) than they would without the law to protect them.  Some investment that would go to China will go elsewhere.

There may be some good that comes out of this new law however.  If the government of China feels more secure because of the new law, they may be more willing to further privatize its economy.  Despite the new regulations and shirking managers, these newly privatized industries will be more efficient than they ever could be if controlled by the government.

Source: www.asiaecon.org |



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