Towards an Anti-monopoly Law: China Vows to Upgrade its Competition Safeguards

The SAIC Report: A Warning to Multinationals

The SAIC spent one year researching its report, and it is the first of its kind. Research was conducted in Beijing, Shanghai and Guangdong province, and focused on an examination of local and multinational enterprises involved in more than six industries. Although it seems a matter of course to associate industry giants such as Kodak, Microsoft and Tetra Pak with market dominance, especially when their indigenous counterparts pale in comparison, governments still bear the responsibility of policing their practices and prohibiting them from abusing their market position to hinder the competition. The SAIC report provides a few snap shots of current practices of such multinationals that raise concern and threaten to curtail competition.

The report notes certain dealings between supermarkets and suppliers in which various unreasonable terms were imposed on the suppliers. Some supermarkets obligated suppliers to remit entrance fees, new-product fees, poster fees and other such payments as preconditions for a supply agreement. The developer of the WPS 97 software was named for selling the product at extremely low prices in an effort to beat competitors. Another hi-tech giant was mentioned as refusing to licence its patents and trade secrets, which resulted in the formation of technology and market barriers. Kodak was accused of monopoly practices for its horizontal acquisition of almost all Chinese factories for photo-printing materials and equipment.

In addition to uncovering current monopoly practices, the SAIC report proposes that relevant authorities: (1) make the best use of the existing laws and regulations to restrain and sanction such practices; (2) introduce, as soon as possible, new regulations specifically targeted at monopolistic practices by multinationals; and (3) accelerate the promulgation of the Anti-monopoly Law.

The Legal System: Many Monopoly Practices Banned but Rarely Prosecuted

A common misconception about China is that since there is not an integrated anti-monopoly law, there is no legal basis to prevent monopolies. While the Anti-monopoly Law has yet to be promulgated, existing laws and regulations, issued on a piecemeal basis, do restrict and sanction operators for certain anti-competitive practices. Instances of such banned practices are agreements or concerted actions to restrain competition, abuse of market position, and other practices as indicated in the chart attached to the end of this article.

Although some of the relevant laws and regulations were promulgated as early as 1993, their impact on market practices has been fairly limited. This is in part due to the ambiguity of the enforcement authority; the Ministry of Commerce (MOFCOM) and the SAIC have overlapping jurisdiction in cases of monopoly practices. Moreover, some of the legal sanctions for certain monopoly practices are unclear, thus rendering the regulations difficult to implement. Also, in order to attract and secure foreign investment, local governments tend to turn a blind eye to monopolistic practices by FIEs.

In light of such encumbrances and a growing need to regulate monopoly practices, MOFCOM submitted the draft PRC Anti-monopoly Law(中华人民共和国反垄断法) to the State Council in February 2004 in an effort to accelerate the promulgation of a more complete piece of legislation.

The Anti-monopoly Law: Its Extended Coverage and Applicability

While subject to review by the State Council and adoption by the National People's Congress, the draft Anti-monopoly Law is more integrated and more widely applicable to various monopoly practices than are the various measures currently in effect. The draft law is applicable to monopoly practices in the PRC as well as offshore practices that affect PRC markets. Importantly, however, it is not intended to restrict intellectual property rights protected by law unless there is an abuse of such rights. Operators, trade associations, public institutions and other non-commercial entities may all be sanctioned under the draft law.

Agreements to Restrain Competition

The draft law prohibits competition-restraining practices in the form of implicit or explicit agreements. Prohibited agreements include those intended for price or output fixing, market allocation, collusive tendering/bidding, boycotting, or restricting the purchase or R&D of new technology or equipment.

Notwithstanding the long list of prohibited practices, the draft law provides that exemption from such prohibitions may be granted in certain cases upon approval. Such exemptions may be granted to otherwise prohibited arrangements that result in improved product quality, competitiveness, efficiency and reduced cost, or in other beneficial effects on the national economy. The provision of such exemptions demonstrates that the principle intent of the draft law is not necessarily to safeguard fair competition at all costs, but rather to check and regulate conspicuously disruptive practices.

Abuse of Market Position

Subsequent to their entry into the Chinese market, multinational giants have rapidly obtained considerable market power in their respective industries. Operators should be aware that, if they enjoy a dominant market position, the draft law explicitly prohibits certain practices and violators may be subject to legal sanctions.

The draft law gives specific thresholds that define market dominance. According to the draft law, market dominance is obtained when one or more operators are capable of controlling prices or restraining or eliminating competition in a specific market. Specifically, operator(s) will be considered to have such power if one operator enjoys more than 50% market share, if two operators control more than 60% of a market, or if three operators have a market share of more than 75%.

Operators with a dominant market position shall not sell products at unreasonably high or predatory prices, impose discriminatory treatment on similarly situated trading partners, refuse or coerce buyers or sellers, conduct deals on unreasonable transaction terms (e.g., tie-in sales), or require exclusive dealings from trading partners.

Mergers and Acquisitions

Under the draft law, both onshore and offshore M&As, upon satisfying certain threshold requirements, will be subject to reporting to the Chinese authorities, who will determine whether such transaction need special government approval. Whereas under existing regulations, only M&As of foreign investors are subject to such reports/approvals, the draft law applies to domestic operators as well.

Whether a proposed M&A deal requires reporting/approval depends in part on the business scale of the parties. Reporting is required if a party to the transaction has an annual turnover exceeding Rmb1.5 billion, the aggregate global assets or turnover of the operators involved exceed Rmb3 billion, and the value of the M&A exceeds Rmb50 million. Similarly, reporting is required if a party holds a 20% market share in the PRC prior to the M&A deal, or will hold 25% market share thereafter. Otherwise, the merger value would have to exceed Rmb200 million in order to become subject to reporting to the government authorities. Exemptions may be granted to M&As that satisfy the threshold requirements but are particularly favourable to the national economy or the public interest.

Manipulation of Administrative Power

The draft law regulates another type of monopoly practice that is particularly relevant to the Chinese economy