China has blocked Coca-Cola's $2.4bn (£1.7bn) purchase of local juice maker Huiyuan, which would have been the largest acquisition of a Chinese company by a foreign buyer.
The rejection was the first made under China's new anti-monopoly laws, and immediately stoked fears that it could add to protectionist pressure around the globe, particularly where Chinese companies have been seeking to acquire foreign rivals abroad.
Foreign trade bodies demanded more information on the reasons for blocking the deal, amid suspicion that concern about competition was actually a cover for a decision made on narrow natural interest grounds.
The deal had attracted considerable nationalist opposition in China but the government insisted yesterday that its decision was meant only to protect consumers and promote competition in the domestic drinks business.
Coca-Cola has promised to dramatically expand its presence in China, where it already has more than half the fizzy drinks market. It has little more than 10 per cent of the fruit and vegetable juices market, however, and alighted on Huiyuan, which is the country's largest pure juice maker, as a quick way of growing its presence in this part of China's soft drinks sector.
With its new dominance, the American drinks giant could engage in anti-competitive distribution deals, squeeze out smaller rivals and raise prices, the Ministry of Commerce said.
The ministry rejected Coca-Cola's proposal to sell off some small Huiyuan businesses as a way of mitigating some of its competition concerns. The gov-ernment was also unmoved by the company's pledge this month to invest a further $2bn in its Chinese drinks business over the next three years. That investment, separate to the Huiyuan purchase, will still go ahead, Coca-Cola said.
Muhtar Kent, Coca-Cola chief executive, said he was disappointed but respected the decision and would concentrate on organic growth. "We will now focus all of our energies and expertise on growing our existing brands and continuing to innovate with new brands, including in the juice segment," he said.
Trade bodies, company executives and competition lawyers outside China had expressed concern that the country's new anti-monopoly laws, enacted last year, were open to wide interpretation, and many expressed scepticism that the process for reviewing Coca-Cola's acquisition of Huiyuan was untainted by nationalist considerations. For now, however, many critics have reserved judgement, in the hope that China will offer further information on the basis on which the decision was made.
The European Chamber of Commerce in China said it was closely watching the case and hoped the government would give a detailed explanation of reasons for the rejection. A competitive market "can best be achieved by welcoming more international investors into the Chinese market," it said.
Lester Ross, managing partner with the WilmerHale law firm in Beijing, said the rejection of the deal could spark tit-for-tat actions that could increase protectionism across the world, just as the global economy and trade is already contracting.
China has been on something of a shopping spree in recent years – particularly targeting natural resources companies in other countries – but the dispute might prompt other countries to be more sceptical about its moves. "This indicates that foreign acquisitions of Chinese companies, particularly those with prominent brands, will not be regarded favourably by the Ministry of Commerce," Mr Ross said. "And that, conversely, indicates that Chin-ese companies seeking to make acquisitions overseas may encounter an adverse reaction in those markets, if foreign companies are essentially frozen out of the Chinese market in terms of expansion through ac- quisition."
The Communist regime in China has only slowly been opening up its markets to foreign investment, and has traditionally preferred outside investors to hold only minority stakes in Chinese companies.
However, while Beijing issued rules in 2006 that explicitly bar foreign ownership of companies in power generation, weapons and other sensitive industries, fruit juice manufacturers were not included in the list of trades prohibited to foreign buyers.