Foreign firms scapegoats in China probes: analysts

A host of foreign pharmaceutical and baby formula firms have been investigated by Chinese regulators in recent weeks, but analysts say they have become convenient scapegoats for consumer anger over high prices and safety scares.

The domestic companies that are the main culprits behind a string of scandals surrounding the giant and lucrative markets are either state-owned or too well connected to take on, they say.

"They go after high-profile foreign companies because it's easier to target them," Shaun Rein, managing director of China Market Research Group in Shanghai, told AFP.

The most widely publicised inquiry is a bribery probe into British firm GlaxoSmithKline (GSK) that has seen at least 20 people arrested since the beginning of July.

France's Sanofi is also being investigated over reports it bribed more than 500 doctors, according to state media, while the list of foreign firms involved in a pricing probe -- of both domestic and foreign companies -- reads like a global who's who of Big Pharma.

They include units or joint ventures of Germany's Merck and Boehringer Ingelheim, Novartis of Switzerland, and Baxter of the US.

Denmark's Novo Nordisk, the world's biggest insulin maker, has also been visited by officials following the GSK corruption inquiry, it said last week.

Last week China fined six manufacturers of baby formula more than $100 million for price-fixing, among them New Zealand's Fonterra -- the world's biggest dairy company and the subject of a botulism health scare earlier this month.

Others hit with penalties were Mead Johnson and Abbott from the US; Dumex, a subsidiary of France's Danone; a China arm of Royal FrieslandCampina of the Netherlands; and China's Biostime.

The clampdowns are partly a response to public frustration over high prices for foreign goods, which Chinese consumers flock to as they often distrust local produce, Rein said.

"First of all, they target sectors," he said. "In the pharmaceutical sector and baby formula sector, prices have been too high for many years."

But the authorities have shown themselves reluctant to take on domestic companies, whose reputations have been savaged by repeated scandals such as the melamine milk powder contamination of 2008, which killed six babies and sickened 300,000.

The demand for foreign formula in particular is so high that a vast network of informal importers has emerged, whose purchases have stripped shop shelves bare from Britain to Australia and sometimes forced retailers to impose restrictions on sales.

Despite the market reforms of recent decades, which have propelled its huge economic growth, the government still owns many major Chinese companies, or significant stakes in them.

Even in the private sector, firms often have close links with government officials at both national and local levels.

"It's much riskier to go after a Chinese company -- especially if it is a state-owned company, it could have significant power and it is well-connected," said Patrick Chovanec, chief strategist with Silvercrest Asset Management.

But he said that by targeting foreign firms for price-fixing, authorities are chasing the wrong culprit and failing to address the safety scandals that are the core problem driving consumer concerns.

"The Chinese expression is 'you kill the chicken to scare the monkey', but the problem is that monkeys are not chickens, and here it's not sure the monkeys are scared," he said.

"If you're a Chinese company and you see this, you know there are reasons why it's harder to go after Chinese companies, and you could also actually benefit from the crackdown on foreign companies."

In the case of the accusations GSK faces -- making illicit payments to doctors, hospitals and managers to boost sales -- he added: "The worst offenders are certainly Chinese companies."

Criticisms of the price of imported baby milk, which sometimes costs twice as much as in its home market, are not without justification, said John Gong, associate professor at the University of International Business and Economics in Beijing.

But he questioned whether the six formula firms fined by the National Development and Reform Commission (NDRC) had the capacity to manipulate a diverse and competitive market.

The NDRC stretched the interpretation of competition law to set an example and "cater to popular sentiment", he wrote in an opinion piece in the South China Morning Post.

"My own calculation indicates it to be a marginal case at best," he said.

Chinese authorities staunchly deny accusations of bias, with the commerce ministry insisting Beijing is not specifically targeting foreign firms. Such a view was "absolutely ungrounded", it said in a statement.

But analysts said it is unlikely domestic pharmaceutical and food manufacturing firms will face the kind of regulatory challenges imposed on their foreign competitors any time soon.