BEIJING - China's parliament on Thursday passed an anti-monopoly law placing new restrictions on foreign purchases of Chinese companies and sparking expressions of concern by US and EU business groups.

China's first anti-monopoly law will require a national security investigation as well as monopoly checks when foreign companies seek to merge with or take over Chinese enterprises in certain sectors.

It was passed on Thursday by the Standing Committee of the National People's Congress, and will take effect on August 1 next year.

Analysts have said the new measures were prompted by fears that growing foreign investment could lead to too much outside control of Chinese industry.

China also is likely concerned that continued massive inflows of foreign investment exacerbates a liquidity-fuelled asset bubble that has propelled stock, real estate and other asset values sharply higher, raising concerns about a coming crash, they said.

The law appears to mark a shift in strategy away from policies that have long favoured foreign enterprises to attract the outside investment that has fuelled China's economic expansion.

"Preferential treatment for foreigners and aggressively bringing in foreign investment will decrease gradually and finally domestic and foreign companies will receive almost equal treatment," Shen Minggao, an economist with Citigroup
in Beijing, said of the law's effect, while adding that he doesn't expect a sharp impact on foreign investment.

But he also said an anti-monopoly law was necessary now as China seeks to reduce the size of the state-owned industries that once monopolised the entire national economy.

"We can't simply take it as being against foreign investors. It's being done now mainly because the authorities have been thinking over how to deal with monopolies by state-owned companies," he said.

Both the American and EU chambers of commerce in China issued statements Thursday welcoming the goal of preventing anti-competitive practices.

"The European Chamber welcomes a more open economy and a level playing field for business in China. We hope the anti-monopoly law will contribute to this," the EU statement said.

But both also expressed misgivings about potentially unfair application of the requirements.

"The European Chamber's members are concerned about the national security review to which foreign investors may be subjected if they acquire domestic enterprises," its statement said.

"It is not clear how such a national security review will be applied."

The American Chamber's statement urged the government to provide more details on what constitutes anti-competitive conduct and the procedures for reviewing proposed acquisitions.

State media have said the national security checks would apply to foreign acquisitions in "sensitive sectors", without elaborating.

In 2006, China issued a list of sectors where the state will retain control, including military manufacturing, power production and grids, petroleum, gas and petrochemicals, telecom manufacturing, coal, civil aviation and shipping.

Citigroup's Shen said he expects China will use the law to retain tight state control over key sectors but added, "if the government opens up a few sectors, that would be good news for (foreign investors)."

Experts also believe the laws reflects the fact that an increasingly prosperous China no longer needs foreign investment as badly as before.

Besides fuelling the asset bubble, surging foreign fund inflows drive up the value of the Chinese yuan currency, hurting the competitiveness of China's vital export sector. - AFP/ir