March 31, 2023

China Fines Milk Powder Suppliers Over Pricing

Five of the companies subject to the $109 million in fines are foreign, and one is based in Hong Kong. They are Abbott Laboratories of the United States; Biostime International of Hong Kong; Dumex Baby Food, a subsidiary of Danone of France; Fonterra Cooperative Group of New Zealand; Mead Johnson Nutrition of the United States; and Royal FrieslandCampina of the Netherlands, according to a statement from the Chinese planning agency, the National Development and Reform Commission.

The statement said three makers of infant formula — Meiji of Japan; Wyeth Nutrition, a subsidiary of Nestlé of Switzerland; and Zhejiang Beingmate Technology Industry Trade of China — were exempted from the punishment because they “cooperated with the government investigation, provided important evidence and actively took self-rectification measures.”

The decision concluded an investigation into the infant formula industry for what the commission said was price fixing of baby formula in the Chinese market.

The statement said that the evidence gathered during the course of the investigation showed that the companies used various methods to ensure that distributors raised prices, including signing contractual agreements, imposing fines, cutting rebates and restricting the supply of goods. People’s Daily, the Communist Party newspaper, and at least one analyst of the China market for baby products have said that prices of foreign-branded infant milk powder had risen at least 30 percent since 2008, when Chinese began buying such brands in droves because of a wide scandal involving tainted, and in some cases fatal, Chinese-made milk powder.

The government statement said fines were levied according to what Chinese officials perceived was the degree to which the companies complied with and responded to the investigation. After the inquiry began, at least three foreign companies — Dumex, Mead Johnson and Nestlé — cut prices of their products in the China market by around 20 percent.

Mead Johnson was fined 203.8 million renminbi, or four percent of its 2012 revenue in China. In its announcement, the commission said the company did not actively cooperate with the investigation but was quick to take corrective measures. Though Mead Johnson said it did not intend to contest the agency’s decision, a company spokeswoman said in an e-mail Wednesday that “we believe our business practices were consistent with prevailing interpretations of regulatory requirements applicable to our industry.”

Biostime, which was fined 162.9 million renminbi, or six percent of its revenue from last year, was dealt the harshest punishment of the six companies for its “serious violations” of the anti-monopoly law and its failure to actively change. A statement by the company released Tuesday said it intended to pay the fine and would continue to work to ensure that its “various business decisions comply with the applicable P.R.C. laws and regulations,” referring to the People’s Republic of China.

Dumex, Abbott, FrieslandCampina and Fonterra were each fined three percent of their revenue from last year. The National Development and Reform Commission said they had cooperated with the investigation and had been quick to change. The fines were 172 million, 77.3 million, 48.3 million and 4.5 million renminbi, respectively.

While a statement from Fonterra pointed out that its fine was “in the lowest range,” the company has been mired in a separate food safety scandal in China related to potentially tainted ingredients used in baby formula products made by other companies. This week, a top Fonterra executive flew to China to issue an apology at a news conference. Chinese officials have banned imports of New Zealand milk products, and several foreign companies have said they would take precautionary measures and recall products with the Fonterra ingredients. The Chinese state-run news media have covered the story extensively, including running front-page stories and harsh editorials.

The Chinese milk industry has suffered severe losses since the 2008 scandal, when six babies died and more than 300,000 children fell ill after drinking milk products tainted with melamine, a toxic chemical. When Chinese officials announced the price-fixing investigation, they also said they would ensure stricter standards within the domestic industry. Chinese state-run newspapers ran editorials saying they hoped that the new standards would bolster the competitive ability of the domestic companies versus foreign rivals.

For various reasons, including aggressive marketing by the formula makers, many Chinese mothers prefer to give their babies formula rather than breast milk, though breast-feeding has grown in popularity since the 2008 scandal. The market for infant formula in China is enormous and growing fast — estimated to be worth about $12.7 billion in 2012, and projected to grow to $15.4 billion this year and $18.4 billion in 2014, according to data from Euromonitor, a research organization.

Chinese parents have gone to great lengths to buy foreign-made infant milk powder, and that has led to shortages in at least a half-dozen countries around the world. Some large retail chains have imposed a limit of two to four cans of milk powder per customer, and Hong Kong has made it a criminal offense to bring more than two cans of milk powder out of the territory. The law was imposed in March to crack down on smuggling of milk powder to the mainland.

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DealBook: Japan Widens Inquiry Into Insider Trading

Tsutomu Okubo, head of the Democratic Party’s financial affairs committee, said regulators were scrutinizing suspicious trading.Robert Gilhooly/Bloomberg NewsTsutomu Okubo, head of the Democratic Party’s financial affairs committee, said regulators were scrutinizing suspicious trading.

TOKYO — A government investigation into insider trading in Japan has extended onto the trading floors of some of the largest Wall Street companies, including Goldman Sachs, UBS and Deutsche Bank.

A governing party committee has asked regulators to scrutinize suspicious trading activity before at least 12 public offering announcements over the past three years, said Tsutomu Okubo, head of the financial affairs committee of the Democratic Party. The committee has been working with regulators to stiffen insider trading laws in Japan.

Among the trades being investigated are those made by Goldman clients who bet against All Nippon Airways just days before the airline’s stock offering last month. A company’s share price tends to drop when a new share issuance is announced, especially by a struggling company, because it dilutes shares without much prospect of a boost to business from the capital that is raised.

The push for more disclosure came as Japan’s Financial Services Agency metered out a strikingly lenient censure of Nomura for leaking sensitive information to clients ahead of public share offerings.

Nomura has been issued a business improvement order under which it would be required to take measures to bolster its internal compliance, and periodically report to regulators on its progress, the agency said in a statement Friday.

Two top executives of Nomura, the largest investment bank in Japan, have already resigned after acknowledging that in three cases, its sales staff had tipped off its mutual fund customers about stock offerings that the bank was handling for its corporate clients.

Some experts had called for far stricter measures, including temporary termination orders for Nomura’s offending businesses.

The country’s financial services minister, Tadahiro Matsushita, said that while he called on Nomura to ‘‘bear heavy responsibility’’ over its repeated leaks of information, the agency also saw Nomura’s management reshuffle as a sign the firm was prepared to clean up its act.

He strongly hoped Nomura ‘‘will press ahead with reforms to rebuild its company structure fundamentally,’’ Mr. Matsushita told reporters.

The Nomura scandal has further undermined faith in Japanese stock markets, experts say, which remain some of the world’s most depressed after the global financial crisis.

‘‘The reckless pursuit of short-term profits by a handful of actors is destroying the reputation and value of the entire market,’’ said Mr. Okubo, a former managing director at Morgan Stanley.

Governments across the globe are cracking down on insider trading. In Britain, the Financial Services Authority has become far more aggressive, bringing a rising number of insider trading cases, while U.S. government prosecutors in New York City have charged at least 70 people with illegal trading over the past three years.

In Japan, Mr. Okubo said that his committee was interested in trades made by funds, brokerage firms and asset managers before a string of public share offerings, beginning in 2009. The committee obtained data from the Tokyo exchange on short-selling — in other words, betting against stocks — that occurred before a list of public offerings. Mr. Okubo said he had forwarded that list to the Securities and Exchange Surveillance Commission.

Among the offerings on the list is the $2.6 billion issuance announced by All Nippon Airways on July 3. Filings made with the Tokyo exchange show short-sale positions on the stock taken out in the name of Nomura, starting June 25, eight days before the announcement, and in the name of Goldman beginning a day before.

In approximately three years before the All Nippon offering, neither Goldman nor Nomura made filings of short-sale positions on All Nippon shares. The trading volume of those shares jumped before the issuance announcement, reaching a three-month high the day before, according to separate Tokyo Stock Exchange data.

Both Goldman and Nomura, who were underwriters for All Nippon’s issuance, confirmed that the trades had been undertaken on behalf of clients but declined to comment further. They denied that information on the issuance could have leaked from their investment banking divisions to those clients.

Also on Mr. Okubo’s list are short positions taken in the name of Deutsche Bank and UBS on shares of Nippon Sheet Glass before its $500 million stock offering, announced Aug. 24, 2010. Both Deutsche and UBS first filed short positions, most likely on behalf of clients, starting Aug. 6, according to Mr. Okubo and the exchange filings. Neither bank filed short positions on Nippon Sheet Glass in the year before that, the data show. The banks declined to comment. Neither bank was involved in underwriting the offering.

Analysts warn against assuming that all shorting activity made before a public offering is based on insider information. ‘‘It is not rocket science to pick out companies that are in danger of issuing equity,’’ Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets, wrote in a note to clients in May.

‘‘Shorting stocks on credit analysis that indicates that an offering is in the offing is a legitimate — and valuable — part of the pricing mechanism of financial markets,’’ Mr. Smith said. ‘‘What is not legitimate is trading on leaks of nonpublic information.’’

But Mr. Okubo insisted that many of the trading patterns were suspicious. He said it was crucial that regulators learn who was behind the short-selling leading up to recent offerings, much of which remained unaccounted for.

Nomura has not faced any insider trading charges because, unlike the United States, Japan does not punish tipsters, as long as they do not trade on the information. But a string of the bank’s clients have decided to take their business elsewhere since the scandal, prompting the bank to reshuffle its management and promise an overhaul of its internal compliance in a bid to regain the confidence of investors.

Nobutoshi Yamanouchi, a partner at the Tokyo office of the law firm Jones Day, said financial regulators badly needed to convince global investors that the authorities had the power to break into the cushy inner circle of Japanese finance and root out insider trading. The extent of regulators’ actions against Nomura was crucial, and little short of a business termination order could convince investors that Japanese regulators were serious about a crackdown, he said.

‘‘They need to be able to show that they can make Japanese markets attractive for everyone again, not just for a select group of insiders,’’ Mr. Yamanouchi said.

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