The Slow Boat to Antitrust Law in China: An Examination of New Regulations on Monopoly Pricing

The Tentative Provisions are the latest instalment in the long, drawn out saga of China's efforts to enact antitrust legislation without having a coherent antitrust law. A summary of China's efforts to address antitrust and related concerns over the past 14 years will provide a useful context for assessing the significance of the Tentative Provisions.

Although the term "antitrust" (反垄断, fan longduan) seldom appears in PRC laws and regulations, China began to address the need to safeguard market competition at an early stage of the reform period. On October 17 1980, the State Council published the Development and Protection of Socialist Competition Tentative Provisions.¹ According to Article 3 of these regulations, there should be no monopolies for any goods except in the case of goods designated by the state to be handled only by particular authorities or units.

In August 1987, the Legislative Bureau of the State Council formed an Antitrust Law working group.

On March 4 1989, the State Council issued the Key Points of Economic System Reform in 1989 Circular. Article 20 of the Circular calls for "establish[ment] and improve[ment of] the market supervisory system made up of relevant government agencies, propaganda units and non-governmental institutions . . . rapid enact[ment] of Antitrust Law, Anti-unfair Competition Law, etc.". And again in 1994, the Antitrust Law was officially listed in the legislative plan of the Eighth Standing Committee of the National People's Congress.

Ten years have passed since the Antitrust Law was first listed in the legislative plan of the Standing Committee of the NPC. The status of state-sanctioned monopolies (e.g., the tobacco trade) is among the chief reasons for the delay. Another key reason is disagreement over which governmental agency will enforce the Antitrust Law. The implementation and enforcement body will need to have substantial powers in order to be effective, and existing agencies will likely compete to gain this power and the resulting increased budgets and influence.

Three main government bodies will want to be involved. The State Economic and Trade Commission (the SETC, now integrated into the Ministry of Commerce (MOC)) and the State Administration for Industry and Commerce have been in charge of drafting the Antitrust Law. The SAIC is in charge of the overall regulation of business and issued the PRC Anti-unfair Competition Law(中华人民共和国反不正当竞争法), while the SETC is the regulator of domestic and foreign trade and inbound investment. In addition, the Tentative Provisions were enacted by the SDRC, which is the administrative enforcement authority for the PRC Pricing Law(中华人民共和国价格法).

According to some news reports, there are over 10 draft versions of the Antitrust Law, but it is still undergoing revision and has not yet been submitted to the State Council for review. Consequently, it is reasonable to believe that the Antitrust Law is far from being promulgated. In the meantime, there have been various legislative and regulatory efforts to address rampant anti-competitive practices.

Emerging Chinese Competition Law and Antitrust Rules

Since 1989, there has been marked, if inconsistent, progress toward a legal framework governing competitive practices.

Regional Protectionism

On November 10 1990, the State Council released the Breaking Inter-regional Market Blockades and Further Vitalizing Commodity Circulation Circular.

Unfair Competition

On September 2 1993, the Standing Committee of the National People's Congress enacted the PRC Anti-unfair Competition Law(中华人民共和国反不正当竞争法). Among the 10 categories of acts of unfair competition are several that address harm to the public that is often associated with monopolistic behaviour. Examples given are public utilities' or government agencies' acts of forcing customers to buy products or services from designated operators (Articles 6 and 7), dumping products at prices lower than product cost (Article 11), tie-in sales or attaching unreasonable conditions (Article 12) and collusive tendering practices intended to force closing prices in a particular direction (Article 15). Administrations for industry and commerce (AICs) above the county level are the enforcement authorities of the Anti-unfair Competition Law(反不正当竞争法)(Article 3).

Pricing Practices

On December 29 1997, the National People's Congress issued the PRC Pricing Law, which is the legal basis for promulgation of the Suppression of Acts of Price Monopoly Tentative Provisions. The enforcement authorities for the Pricing Law are price administrative authorities above the county level (the SDRC and its local counterparts, Article 5). Several related administrative regulations are also discussed below in connection with the Tentative Provisions.

Tendering and Auctions

On August 30 1999, the Standing Committee of the National People's Congress issued the Invitation and Submission of Bids Law(招标投标法), which among other things, prohibits collusive tendering practices (Article 32). Related administrative regulations are also noted below.

Mergers & Acquisitions _ Anti-monopoly Provisions

While recent regulations include provisions to safeguard against M&A activities that may result in monopolies, they lack detailed procedural rules and an authoritative legal basis in the form of an Antitrust Law. On November 8 2002, the SETC, the SAIC and two other central government agencies jointly published the Using Foreign Investment to Reorganize State-owned Enterprises Tentative Provisions. Article 9.1 of these regulations provides that in the case of restructurings that result in monopolies or otherwise hinder fair competition, hearings shall be conducted before examination and approval. Later, on March 7 2003, MOFTEC (now MOC), the SAIC and two other authorities issued the Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions(外国投资者并购境内企业暂行规定), which go significantly further in establishing specific conditions under which foreign investors are required to report proposed M&A transactions to the MOC and SAIC, as well as conditions and timing for hearings and exemptions from antitrust review (Articles 19 to 22). However, doubts have been raised as to whether these provisions will be enforced in their current form.

Further Legislative Impetus from WTO Accession

On March 4 2000 the Supreme People's Court (SPC) issued the Fully Exerting Judicial Functions to Provide Judicial Safeguards and Legal Services for Economic Development Opinion. Article 6.2 of the Opinion calls for, among other things, acceleration of judicial interpretative work in respect of anti-dumping and antitrust disputes, intellectual property protection and consumer protection. This is particularly important because such "judicial interpretations" provide important, reasonably fact-specific guidance to lower courts faced with issues that would otherwise be governed by general legal principles only.

Article 65 of the Working Party Report on the Accession of China (dated November 10 2001) stated that China was committed to promoting fair competition and combating all types of monopolistic market practices. The report cited the Anti-unfair Competition Law(反不正当竞争法) as the primary law dealing with monopolies, and the Pricing Law'(价格法), the Invitation and Submission of Bids Law(招标投标法) and the Criminal Law as all also containing anti-unfair competition clauses. In addition, the report anticipated the pending Antitrust Law.

The Tentative Provisions may in fact be a belated and stopgap response to China's WTO _ related legislative push.

Basic Shortcomings of the Efforts to Date

Despite the legislative progress to date, there remain some fundamental problems that limit the effectiveness of the existing legal framework for antitrust and competitive practices in China. Among these are:

• The dominant role of administrative agencies in interpretation and enforcement. In an economy with significant state ownership and opaque practices at many levels of government administration, the question of fundamental conflicts of interest is raised. At the same time, the fact that different agencies have jurisdiction over inter-related aspects of anti-competitive practices invites confusion in the enforcement process.

• A limited role for the courts. Although the quality, independence and sophistication of China's judiciary has improved significantly in recent years, with the exception of appeals of administrative decisions and possibly criminal actions, Chinese courts have only very limited authority to resolve disputes involving competitive practices and antitrust matters.

• A lack of private causes of action. This relates closely to the issues noted above. Administrative authorities remain the gatekeepers for complaints by private parties about anti-competitive behaviour. In this respect general competition law still lags far behind intellectual property law and practice, for example.

A side effect of the limited role for courts is that they will continue to lack experience with complex questions of antitrust law and the sophisticated economic and business relationships that underlie antitrust practice in other jurisdictions.

Not surprisingly, the Suppression of Acts of Price Monopoly Tentative Provisions make no progress on these basic systemic issues.

Particulars of the Tentative Provisions

The Tentative Provisions are fairly short, consisting of only 16 articles. Further, many parts of the Tentative Provisions closely track similar provisions in related laws and regulations referred to above.

Monopolistic Pricing Acts

In a prelude to the pending Antitrust Law, the Tentative Provisions introduce the term "monopolistic pricing acts" into the Chinese legal system for the first time (价格垄断行为, jiage longduan xingwei).

Such conduct is defined as business operators working in collusion with other operators, or abusing their dominant market positions to manipulate market prices and disrupt the normal order of production and operations, thereby harming the lawful interests of other operators, consumers or the public interest (Article 2). "Dominant market position" should be determined according to market share of the subject operator, the degree of "interchangeability" of the subject products (i.e., an evaluation of how unique the products in a market are), and the difficulty of market entry for new competitors (Article 3). The primary _ and potentially ultimate _ determination of whether monopolistic pricing acts have been committed (and implicitly whether a dominant market position exists) is under the jurisdiction of the "governmental authorities in charge of pricing" (Article 9).

The Tentative Provisions mainly address five categories of monopoly pricing acts, which are described below. These concepts are generally not new, in that they have something in common or overlap with the 11 categories of unfair competitive conduct proscribed by the Anti-unfair Competition Law (at Articles 5 to 15) and the seven categories of illegal pricing practices identified in the Pricing Law(价格法) (at Article 14).

Price Manipulation and Cartels

The Tentative Provisions forbid the following acts of price manipulation through collusive methods of agreement, resolution or coordination: (i) uniformly setting, maintaining or changing prices; (ii) manipulating prices by limiting production or supply; (iii) manipulating prices in tender invitation and bidding activities and auction activities; and (iv) other acts of price manipulation (Article 4). Items (i) and (ii) are similar to the general statement contained in Article 14.1 of the Pricing Law that prohibits operators from "manipulating market prices in collusion with one another to harm the legitimate rights and interests of other operators and consumers". Likewise, the substance of item (iii) has previously been addressed in Article 15.1 of the Anti-unfair Competition Law, and in laws and administrative regulations specifically addressing tendering and auction practices.²

A related provision is the general requirement that trade associations strengthen self-discipline with respect to pricing and refrain from committing violations of the Tentative Provisions (Article 14).

Compulsory Fixing of Resale Prices

According to the Tentative Provisions, operators shall not exploit their dominant market positions to mandate the reselling prices of goods when they provide such goods to their distributors (Article 5). This important provision appears to be the only truly novel _ within the PRC legal system _ pricing and competition rule contained in the Tentative Provisions, apart from linking the general concept of dominant market position to pricing practices.

Illegally Seeking Exorbitant Profits

An operator shall not exploit its dominant market position to seek exorbitant profits in violation of laws and regulations (Article 6). A similar provision is found at Article 14.7 of the Pricing Law, and earlier administrative regulations also address this subject.³ Previously, however, "exorbitant profits" were addressed primarily from the standpoint of obtaining profits through illegal activities, while the Tentative Provisions, in effect, identify a connection between dominant market position and profits gained from monopolistic practices. The Prohibition of Seeking Exorbitant Profits Tentative Provisions only forbid the collusion of operators or industry institutions in forcing up prices (Article 8.4), but do not address a case of a single dominant player doing this.

Dumping / Predatory Pricing

The Tentative Provisions also prohibit operators from exploiting dominant market positions to dump products at prices below their cost for the purpose of excluding or harming competitors, or otherwise lowering prices by such disguised means as kickbacks, subsidies or gifts, so as to make the actual selling prices of products lower than their cost (Article 7). Although predatory pricing had already been addressed in earlier laws and regulations,⁴ the Tentative Provisions establish for the first time the exploitation of a dominant market position as an element of the violation. The Tentative Provisions fail, however, to provide any further guidance on the frequently daunting task of proving actual production costs.

Discriminatory Pricing

Operators may not, by exploiting a dominant market position, discriminate among parties with respect to transaction prices when providing the same goods or services on the same conditions (Article 8). Article 14.5 of the Pricing Law also identifies such discriminatory pricing as an act of illegal unfair pricing.

Enforcement and Penalties

The right to bring private civil causes of action, as well as the SPC judicial interpretations necessary to implement such procedural rights, remain conspicuously absent from China's competition laws. Nor do the Tentative Provisions break new ground in terms of administrative powers, penalties and enforcement actions. Instead, they defer to the relevant penalties prescribed by Article 40 of the Pricing Law and Article 4 of the Provisions for the Procedure for Administrative Penalties in Connection with Pricing (see Article 10 of the Tentative Provisions). According to Article 4 of the Provisions for the Procedure for Administrative Penalties in Connection with Pricing, if operators commit collusive acts of price manipulation, dump products at prices lower than cost or practice discriminatory pricing, they shall be ordered to cease and desist, their illegal gains shall be forfeited and they may also be subject to fines. If the specific facts are sufficiently serious, they may be ordered to suspend business and rectify their business practices, and industrial and commercial authorities may as a last resort suspend the violating party's business licence. Penalties for illegally seeking exorbitant profits and for predatory pricing are also given in other regulations, although existing regulations do not address specific penalties for illegally fixing resale prices.

An Expanded Role for Whistleblowers?

Unfortunately, the Tentative Provisions present further potential for abuse by indiscriminate informants, who are sanctioned by an already opaque administrative enforcement process. Article 13 provides that government agencies shall encourage, support (and protect) any institutions or individuals in watching for monopolistic pricing acts, and pricing supervisory authorities may reward informers and should keep their identities confidential.

Conclusion

To an optimist, the Tentative Provisions may represent an incremental legislative step toward the enactment of formal antitrust legislation. The introduction of the concept of abuse of a dominant market position and prohibition on fixing resale prices represent noteworthy additions to the body of Chinese competition law.

Still, the broader question remains of whether the Tentative Provisions are in the end little more than a symbolic effort. If they are to be implemented in a meaningful and uniform manner, China's regulators and _ one would hope _ China's courts will need to come to terms with the same types of issues that have emerged in the wake of the Sherman Act and the Robinson-Patman Act in the United States. There is little to suggest that they are up to the task.

In addition, the fact remains that the Tentative Provisions do nothing to expand the procedural legal rights of aggrieved market participants. In the last analysis they are temporary and transitional rules that pass the time until a meaningful antitrust law sails into port.

Endnotes

1 These rules were invalidated by the State Council's Decision on Abolishment of a Portion of Administrative Regulations Issued before 2000, promulgated on October 6 2001.

2 Article 15 of the Anti-unfair Competition Law stipulates that "tendering parties shall not submit tenders in collusion with one another to force the tender price up or down". This prohibition can also be found under Article 32 of the Invitation and Submission of Bids Law. Further detailed rules about prohibiting collusive tendering can be found in the Forbidding Collusive Tendering Acts Tentative Provisions issued by the SAIC on January 16 1998, which were issued per the Anti-unfair Competition Law(反不正当竞争法). Although the Anti-unfair Competition Law(反不正当竞争法) and the Pricing Law(价格法) do not set down any prohibition on manipulating prices in auctions, such rules can also be found under Article 37 of the PRC Auction Law (issued July 5 1996), which states that "bidders and the auctioneer shall not collude with each other maliciously to harm others' interests".

3 See the Prohibition of Seeking Exorbitant Profits Tentative Provisions issued by the former State Planning Commission on January 25 1995, well before the enactment of the Pricing Law in December 1997.

4 The Anti-unfair Competition Law(反不正当竞争法)states that "operators shall not sell products at prices lower than cost for the purpose of excluding competitors" (Article11), while Article 14.2 of the Pricing Law contains a similar provision. Further, the State Development and Planning Commission on August 3 1999 issued the Prevention of Acts of Dumping at Low Prices Regulations, which lists nine situations of dumping products at prices lower than cost (Article 7).