China's Anti-trust Regime

Price Fixing

Price fixing is one of the most strictly viewed infringements of EU competition law and regulators take a tough and active approach to the enforcement of laws relating to price fixing.

In China, price fixing is also one of the main themes of the anti-trust regime and the most important pieces of legislation are those prohibiting price fixing, in particular thePRC Anti-unfair Competition Law(中华人民共和国反不正当竞争法), the PRC Pricing Law and the Suppression of Acts of Price Monopoly Tentative Provisions (the Price Monopoly Provisions).⁴ For example, regulations prohibit "acts of price monopoly" by operators through the manipulation of market-regulated prices or disruption of production by collusion or abuse of market control status. In terms of enforcement in China, based on our anecdotal impression of reported cases, price fixing behaviour also appears to be more strictly penalized in comparison with other types of anti-competitive behaviour.

The following types of pricing behaviour are regulated by China's anti-trust rules and are considered in more detail below:

• pricing below cost;

• price monopoly through collusion;

• using dominant market status to engage in price discrimination; and

• using dominant market status to seek excessive profits.

Pricing below Cost

Companies are prohibited from using their dominant market status to dump products at a price below cost in order to drive out or harm competitors (which includes indirect price reductions through refunds, subsidies or gifts). Certain products are exempt from this prohibition, including fresh produce, seasonal products and overstocked goods.

Price Monopoly through Collusion

Companies are prohibited from conducting price monopoly activities through collusion (which includes by agreement, resolution or coordination):

• through unified fixing, maintenance or adjustment of prices;

• by manipulating prices through limiting production or supply;

• by manipulating prices in the invitation for and submission of bids; or

• other acts of price manipulation.

Price Discrimination

Companies are prohibited from using their dominant market status to discriminate between different entities in terms of pricing policy if those entities are offering the same transaction conditions.

Excessively High Prices

Companies are prohibited from using their dominant market status to seek excessive profits in violation of PRC laws.

A Case Study

The following case gives a flavour of the types of pricing practices that the authorities have considered illegal and the nature of the penalties imposed.⁵ In May 2000, 31 liquefied petroleum gas proprietors in Zhejiang province signed a unified operation agreement under which they agreed to implement a "pricing alliance" between themselves in order to agree on a unified sales price, payment collection method and dividend sharing. Between May 2000 and August 2001, the 31 proprietors had a collective income of some Rmb3.3 million (about US$412,500). The relevant authorities declared the "pricing alliance" illegal and fined each proprietor between Rmb10,000 and Rmb18,000 (US$1,250 to US$2,250).

Under EU competition laws, a company found guilty of price fixing can be fined up to a maximum of 10% of its group's global annual turnover.⁶ In China, however, the maximum fine is five times the illegally obtained income in addition to the confiscation of the illegally obtained income. The business licence of the company may also be suspended in serious cases while the illegal practices are being rectified.⁷

Market Sharing

While EU competition laws are also as strict on market sharing as they are on price fixing, there is no current national PRC legislation that explicitly prohibits market sharing. However, collusion and other activities that result in price fixing or an abuse of a monopolistic position are prohibited.

There are also cases suggesting that when the authorities do enforce competition law regulations, in practice, they will interpret the alleged anti-competitive activities more broadly to include market sharing. An example is a reported case in Zhejiang province in August 1999, where three liquefied petroleum gas producers entered into an agreement under which they each agreed to sell fixed volumes of liquefied petroleum gas at the maximum amount permitted by the Bureau of Commodity Prices and to fix their wholesale and retail prices. They also agreed to split up the market between them.⁸ The relevant authority declared both the price fixing activities and the market sharing to be anti-competitive activities. The liquefied petroleum gas producers were ordered to stop their illegal activities and were fined Rmb25,000 each.

The draft Anti-monopoly Law specifically prohibits the dividing up of sales markets or raw material procurement markets. This echoes EU competition law, which prohibits any form of market partitioning.

Exchange of Information

EU competition law can prohibit the exchange of confidential information in and of itself, but actions against exchange of information have most commonly been linked to other infringements.⁹ In China, current legislation does not deal specifically with the exchange of information. However, where the act of information sharing results in price fixing or an abuse of a company's monopolistic position, such act is prohibited.

The draft Anti-monopoly Law similarly does not address this issue specifically but the prohibition of monopoly agreements in Article 8 prohibits conspiracy by contract or any other means where it restricts competition. Such acts of conspiracy are likely to include the exchange of information either orally or in writing where the exchange results in anti-competitive behaviour.

Cooperation Arrangements: Joint Buying, Joint Selling and Joint Production (Joint Ventures)

While there is no specific prohibition on joint buying, selling or production under PRC law, where any of these arrangements result in price fixing or an abuse of one or more company's monopolistic position, they are prohibited.

The draft Anti-monopoly Law does not refer to these types of cooperation agreements specifically but mentions in the list of prohibited monopoly agreements in Article 8 "other agreements that restrict competition", which would obviously include joint buying, selling or production where the arrangements have an anti-competitive effect. Article 9 of the draft Anti-monopoly Law also provides for certain situations where operators may apply to the authorities for pre-clearance of a potentially anti-competitive agreement where the arrangement is beneficial to the development of the national economy and the social and public interest. Situations where an exemption may be granted include:

• joint activities to upgrade technologies, improve product quality, enhance efficiency, reduce cost, unify commodity specifications or models or jointly research and develop products or markets;

• joint activities by small and medium-sized enterprises to enhance operational efficiency and competitiveness;

• joint activities by operators to prevent significant decline of sales or obvious overproduction in order to adapt themselves to market changes; and

• joint activities by operators such as dividing work and coordinating development in order to promote rationalization or specialization of production and operations.

The many potential situations where clearance may be granted indicate that the authorities may still be unwilling to clamp down on cooperative arrangements where such arrangements are believed to nevertheless provide some tangible benefit to China. It also suggests that the authorities will retain substantial discretion in determining whether an agreement will be cleared.

Looking at recent cases brought by the authorities, it does appear that some types of cooperation arrangement will be investigated where they have an anti-competitive effect. In April 2004, eight brick companies jointly established a distribution company, Yunyang Yu River Shale Distribution Company, which then entered into separate distribution contracts with 12 brick companies in Yunyang district, Sichuan province and its eight shareholder brick companies. These distribution contracts provided that the distribution company had the exclusive right to sell the products of these 20 brick companies. The 20 brick companies together controlled 80% of the brick market in Yunyang district. The real estate developers in Yunyang district filed a complaint with the Yunyang Administration of Industry and Commerce (Yunyang SAIC) against the distribution company and the brick companies for the distribution arrangement, which in fact amounted to a means of joint selling. Yunyang SAIC then conducted an investigation and concluded that these arrangements were anti-competitive and in violation of municipal regulations. Yunyang SAIC ruled that the distribution company and the brick companies had to cease the distribution arrangements between them and imposed a fine of Rmb60,000 on the distribution company.¹⁰

Distribution Arrangements

EU competition law actively governs restrictions on the commercial activities of independent distributors imposed by a manufacturer and prohibited clauses include resale price maintenance and market partitioning. Other restrictions, such as non-compete clauses, or restrictions based around the granting of geographic or customer group exclusivity can also be limited in time and scope by EU law. These limits on the contractual freedom of the manufacturer apply below the level of dominance in a market.¹¹

The anti-trust provisions on distribution arrangements in China are less restrictive. The only explicit restriction is contained in Article 5 of the Price Monopoly Provisions, which prohibits companies from using their dominant market status to "enforce a set price for the resale of products" when supplying products to their distributors.

Article 3 of the Provisions states that "dominant market status" will be determined on the basis of market share in the relevant market, the extent to which the product can be substituted by another product and the ease of entry by competitors into the market. However, there are no fixed guidelines as to how market share, substitutability and ease of entry should be decided. Therefore, the ultimate decision as to whether an entity has dominant market status is left to the relevant authority's discretion.

Interestingly, the draft Anti-monopoly Law does attempt to address some of these uncertainties by creating an inference of dominant market status if a company has a market share of 50% or more in the relevant product market (or, where companies are acting together, where two companies have a market share of two thirds or more, or three companies have a market share of three quarters or more). The draft Anti-monopoly Law also introduces a new prohibition against exclusivity provisions in distribution agreements (i.e., where the provision restricts the distributor from selling the products of the supplier's competitors). This prohibition is not explicitly stated in existing laws.

In practice, the authorities appear to be less strict in their enforcement of the restrictions governing these types of illegal practice. According to informal enquiries we have made with officials at one local enforcement agency in Shanghai, the authorities do not commonly investigate such vertical restraint arrangements at present and have seldom imposed administrative punishments on enterprises for vertical restraint agreements. This approach may well change once the draft Anti-monopoly Law is finally promulgated.

Mergers and Acquisitions

One final area of anti-competitive behaviour covered by China's developing anti-trust regime is mergers and acquisitions.

In China, there were no anti-trust rules governing mergers and acquisitions (other than on a statutory merger between foreign-invested companies) until 2003 when the Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions were issued (the M&A Provisions¹²).

The M&A Provisions set out the thresholds where an acquisition must be reported to MOFCOM and the SAIC for anti-trust clearance in order for the transaction to proceed. The M&A Provisions apply to onshore acquisitions (Article 19) (where the equity or assets of a Chinese enterprise are being acquired by a foreign buyer) and offshore acquisitions (Article 20) (which is generally interpreted to mean where the equity or asset acquisition is conducted outside China but either the buyer or the target has operations or subsidiaries in China). The thresholds are set out in the chart on the next page.

Even if an onshore transaction does not meet the trigger thresholds, the M&A Provisions state that the foreign buyer may still be required to file a report if domestic competitors, industry regulators or industry associations so request and MOFCOM or the SAIC determine that the acquisition may have anti-competitive effects. This does not apply to offshore acquisitions.

While the substantive triggers for both onshore and offshore acquisitions have been set out in the M&A Provisions, many issues are not covered. For example, although the M&A Provisions set one trigger threshold as the holding by either party of a 20% share of the Chinese market, no guidance has been given as to how to define the relevant product market in these circumstances nor how to calculate market share (for example, by revenues or sales volume or other means). As EU and US experience suggests, market definition and market concentration need careful consideration and detailed assessment. The Chinese authorities, however, have not yet decided on whether a detailed system similar to that applicable in the EU or the US will be implemented.

The M&A Provisions are also silent on the procedures and enforcement mechanisms that MOFCOM or the SAIC should apply. Under the M&A Provisions, foreign buyers in an offshore acquisition are only required to report to MOFCOM and the SAIC before they publicly announce their plan or at the same time as they submit the same to the authority in charge in the country where they are located. By way of comparison, in relation to onshore transactions, if MOFCOM or the SAIC consider that an acquisition may cause over-concentration, harm legitimate competition or damage consumer interests, then they will jointly or individually through consultation call for the relevant departments, enterprises and other interested parties to attend a hearing within 90 days of the date of receipt of all relevant documents, and will decide whether or not to approve the acquisition. No further information is given, for example, on the maximum time period within which the authorities must make their decision, whether the transaction should be suspended until clearance is granted, or what the consequences are of any failure to comply.

Despite early promises to issue implementing rules for the M&A Provisions, none have been forthcoming. Unlike in the EU, there are no standard forms for the filings.

In our previous dealings with MOFCOM, we have been told that MOFCOM currently adopts a 30-day waiting period approach for all anti-trust filings. That is, upon receiving the anti-trust submission, MOFCOM will review the documents submitted within a 30-day period and, if at the end of such period no opinion is issued by MOFCOM, then for practical purposes the parties can proceed with the transaction.

In practice, if a transaction clearly meets one or more of the thresholds, our experience has been that a formal anti-trust filing is not usually made. Instead a courtesy letter with an explanation of the transaction, and/or a meeting with MOFCOM, is arranged beforehand. If the company does not receive any response from MOFCOM or the SAIC within 30 days of the meeting and/or submission of the courtesy letter, the company usually assumes that the authorities' approval has been granted.

China's Future Anti-trust Rules

In order for a company to ensure that its business operations in China are compliant with anti-trust rules, it needs to look not just at existing PRC laws, but also at the laws of other jurisdictions that may be impacted by the business arrangements being conducted in China. Of these other jurisdictions, the laws that are most likely to be relevant are US anti-trust laws and EU competition laws as these are among the most sophisticated and wide reaching anti-trust laws currently in place.

Under EU competition law, for example, activities or agreements in China that affect trade between member states in the EU may fall within the scope of the relevant EU prohibition.¹³ Similarly, activities may be in violation of the US Sherman Anti-trust Act of 1890 or other US anti-trust laws. This has been demonstrated by a recent complaint filed in New York for alleged anti-trust violations by six Chinese producers of vitamin C who are alleged to have established a price cartel in China, thereby damaging consumers and producers alike in the US. As shown by the size of the fines that were imposed by the EU authorities on some of the major pharmaceutical companies in 2001 for allegedly establishing a vitamin price cartel (where fines of €855.23 million were imposed), the potential liabilities can be substantial.¹⁴

It is also prudent not only to understand China's currently fragmented rules on anti-trust behaviour but also to consider the direction in which the anti-trust regime is developing (as reflected in the draft Anti-monopoly Law). Many agreements that are being made today between businesses in China are likely still to be in place when the authorities finally promulgate the Anti-monopoly Law, and will have to be revisited at that time.

The current anti-trust regime in China does still have a lot of catching up to do with more sophisticated anti-trust regimes such as in the EU. Much hope is being placed (perhaps over-optimistically) on the long-awaited implementation of the Anti-monopoly Law. Until the Law is implemented and until China makes a concerted effort to train and develop its enforcement agencies, however, it is likely that the authorities will continue to implement the various pieces of scattered anti-trust legislation on an ad hoc basis, and businesses in China will continue to take advantage of existing uncertainties or weaknesses in the system.

Endnotes

1 Adopted on December 29 1997 and effective on the same date.

2 Adopted on September 2 1993 and effective on December 1 1993.

3 The draft Anti-monopoly Law is intended to be China's first integrated law on anti-trust behaviour. It has been through various drafts since the early 1990's. The last widely circulated draft was made available to professionals and academics in 2002. It is reported that the draft Law is now being considered by the State Council and is scheduled to be reviewed by the NPC Standing Committee this year.

4 Promulgated by the National Development and Reform Commission on June 18 2003 with effect from November 1 2003.

5 Huadong News, May 18 2004.

6 Article 23(2) of Council Regulation (EC) No 1/2003 of December 16 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the European Community Treaty. For these purposes, the Commission fines the "undertaking concerned", which may include the entire group of which the company forms part.

7 Article 40 of the PRC Pricing Law, and Article 4 of the Administrative Provisions regarding the Penalties for Illegal Pricing Acts promulgated by the State Development and Planning Commission on August 1 1999 with effect from the same date.

8 Legal Daily, October 16 2002.

9 See UK Agricultural Tractor Registration Exchange OJ [1992] L68/19, [1993] 4 CMLR 358 at paras 37-43 for action against information sharing per se, and for example the Wood Pulp case, OJ [1985] L 85/1, [1985] 3 CMLR 474 for information sharing as evidence of a concerted practice to fix prices.

10 Chongqing Commercial Daily, September 14 2004.

11 See the EU Commission Notice - Guidelines on Vertical Restraints OJ [2000] C 291/1-44 and Commission Regulation (EC) No 2790/1999 of December 22 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices OJ [1999] L 336/21-25.

12 Promulgated by the Ministry of Commerce (MOFCOM), the State Administration of Taxation, the State Administration of Industry and Commerce (SAIC) and the State Administration of Foreign Exchange (SAFE) on March 7 2003 with effect from April 12 2003.

13 The requirement that trade between member states in the EU be affected has been widely interpreted to include agreements concluded with entities outside the EU. See for example Javico v Yves Saint Laurent Case C-306/96 [1998] ECR I-1983, [1998] 5 CMLR 172.

14 See Case COMP/E-1/37.512 - Vitamins OJ [2003] L 6/1.