China Raises Scrutiny on Foreign Firms

August 14, 2013, 2:09 p.m. ET

China Raises Scrutiny on Foreign Firms

Regulators Expand Inquiry Into Drug Sector and Seek Data on Car Pricing

LAURIE BURKITT

BEIJING—China’s regulators are increasing their scrutiny of foreign companies in industries from drugs to cars to baby formula as part of a drive to push down prices for consumers. The intensifying effort could help China’s new leaders win favor at home and give Beijing a greater say in global commerce. The latest move came Wednesday, when officials at China’s State Administration for Industry and Commerce said they would open a three-month probe into possible bribery in the pharmaceutical and medical-device industries, citing public dissatisfaction with high prices.The disclosure followed visits in recent weeks by officials from the agency seeking information from the China offices of foreign drug companies including France’s Sanofi SA,SAN.FR -0.32% Belgium’s UCB SAUCB.BT -0.31% and Denmark’s Novo Nordisk NOVO-B.KO -0.20% A/S. The companies said they haven’t been accused of wrongdoing. The announcement also followed a criminal probe into whether GlaxoSmithKlineGSK.LN -0.62% PLC executives in China used bribes to get doctors and hospitals to sell its drugs, driving up prices. London-based Glaxo has said it is cooperating with the investigation and that some of its China executives may have violated company policy and Chinese law.

Officials also are looking at prices offoreign-branded cars. Luo Lei, a deputy secretary-general for the China Automobile Dealers Association, said Wednesday that officials at the National Development and Reform Commission have asked the association to collect data on the prices of foreign cars.

“The NDRC is checking price information in a variety of industries, and the auto sector is just one of the industries,” Mr. Luo said. It wasn’t clear if the commission’s inquiry would result in a full probe.

The State Administration for Industry and Commerce on Wednesday also said it would look at auto dealers.

Volkswagen AG, VOW3.XE -0.70% General Motors Co. GM -0.75% and Nissan MotorCo., 7201.TO -1.52% which are among the more popular foreign auto makers in China, declined to comment. China is the world’s largest auto market.

Last week the NDRC levied 669 million yuan ($109 million) in fines on foreign infant-formula makers, concluding that they had violated competition laws in the country. Price cuts by companies such as Mead Johnson Nutrition Co. MJN -0.60% andAbbott Laboratories ABT -0.92% of U.S. will save Chinese consumers 2.4 billion yuan a year, according to state media.

The regulators’ moves, which have received heavy coverage in state-controlled news outlets, are winning support from people like 29-year-old lawyer Shao Peixun. Though overall inflation has been tame in China, many consumers complain about the high prices of some goods, such as infant formula and medication.

Pricing Pressures

Chinese regulators are investigating several industries in an effort to keep consumer prices in check.

Autos: Regulators are looking at prices for foreign-branded cars.

Dairy: A probe begun in July resulted in $109 million in fines on foreign makers of infant formula for anticompetitive practices.

Pharmaceuticals: Regulators will start a probe into possible bribery in the industry. Officials already had announced an investigation of Sanofi and GlaxoSmithKline.

“Drugs and other products are way too expensive here for most people’s average salary,” said Mr. Shao, of Henan province. “If you don’t have full coverage from the insurance company for the medicines you take, you have a problem.”

The drives aren’t targeting just foreign companies. Regulators in Shanghai on Monday fined five local jewelry retailers a combined 10.6 million yuan for price manipulation. And legal experts say domestic companies in other industries also face regulatory pressure regarding prices in a country where inflation has a tendency to surge.

But legal experts say foreign companies make high-profile targets and have less political protection than China’s well-connected state-controlled companies.

“Many of the important consumer industries are dominated by foreign players,” said Rocky Lee, head of the Asia corporate practice at law firm Cadwalader Wickersham & Taft. “They also just get more publicity,” he said.

The regulatory push is part of a multiyear effort by Beijing to have a greater say in regulating the global marketplace. Since 2008, when Beijing established antitrust laws similar to those in the West, officials used them to break up cartels in businesses such as rice and noodles to bring down prices.

Since 2009, when Beijing quashed Coca-Cola Co.’s KO -0.30% $2.4 billion deal to acquire a Chinese juice maker, the government has shown greater willingness to use its laws to keep a lid on prices—even if neither company in a merger is from China. Chinese officials this year ordered commodities company Glencore InternationalGLNCY +1.36% PLC to sell a $5.2 billion Peruvian copper mine to complete an acquisition of Anglo-Swiss miner Xstrata PLC. Switzerland-based Glencore also had to agree to supply China at “fair and reasonable” prices. In January, Beijing imposed $56 million in sanctions on six Taiwanese and South Korean makers of liquid-crystal displays, including Samsung Electronics Co. 005930.SE +0.78% and LG ElectronicsInc. 066570.SE 0.00%

Also Wednesday, China’s Ministry of Commerce said Baxter International Inc.BAX -0.49% must sell a renal-replacement therapy business as a condition for approving the U.S.-based company’s $4 billion bid for Sweden’s Gambro AB.

With more Chinese companies expanding abroad, Beijing also is eager to gain leverage as a legitimate force in the global marketplace, said Brian Burke, counsel at law firm Shearman & Sterling LLP. “By flexing regulatory muscle at home [against foreign companies], they’re aiming to make sure their companies will be taken care of overseas,” Mr. Burke said. Chinese regulators want to prevent overseas court rulings and trade decisions that aren’t in China’s favor, he said.

In March a U.S. court found Chinese manufacturers of vitamin C liable for price fixing. Beijing lashed out in response, urging the court to reverse its decision and saying that the ruling was unfair to the Chinese companies.

It is unclear if Beijing’s increased regulatory enforcement will smooth roads for Chinese companies overseas. Chinese meat producer Shuanghui International Holdings Ltd. in May said it planned to acquire U.S.-based Smithfield Foods Inc.SFD -0.33% for $4.7 billion. A U.S. foreign investment panel is reviewing the proposal and has extended a 30-day review to 45 days, delaying the deal.