China enforces fair competition through administrative reviews

The PRC Anti-monopoly Law (AML) already empowers the State Administration for Industry and Commerce (SAIC) and the National Development and Reform Commission (NDRC) to investigate these practices, but they cannot directly compel remediation or discipline responsible personnel. As with early central government guidance targeting local protectionism, enforcement ultimately relies on effective “competition advocacy” within a balkanized policymaking process.

The Opinions take a new tack by mandating that all government bodies conduct—and document—a “fair competition review” of regulations and other measures impacting commercial activities. Examples include market entry standards, industrial development policies, investment promotion, public tenders, government procurement, and business operations. Measures that eliminate or restrict market competition without sufficient justification must be modified or rescinded.

NDRC officials have commented the drafting of the new Opinions was influenced by European rules governing “state aid” and other policies impairing the development of the common market.

The Opinions feature a basic checklist for assessing potential anti-competitive elements of proposed measures. Barred practices include: “unfair and discriminatory” market access standards; requiring government concessions to conduct business but then failing to grant concessions through open bidding; requirements to source products or services from designated providers; discrimination against “non-local” Chinese or imported products in pricing and subsidy rules, market entry, or tendering practices; requiring or prohibiting the establishment of a local office by suppliers of non-local or imported products; preferential tax policies favoring certain businesses; unauthorized exemptions from social insurance payments; government policies causing disclosure of sensitive business information that facilitates anti-competitive conduct; and intervening in the pricing of products intended for market-based pricing.

However, exceptions may be made for measures aimed at national, economic, or cultural security, disaster relief or alleviation of poverty, energy conservation or environmental protection, or other goals prescribed by laws and regulations. These exemptions might readily excuse a wide range of exclusionary and inefficient measures.

What distinguishes the new fair competition review system is the emphasis on procedural transparency both within the administration and to the public. Policymakers are required to prepare written internal competition reviews, articulating their grounds for concluding why new measures will not eliminate or restrict competition or why restrictive elements are nevertheless essential to achieve other policy goals. Supervisors are directed to withhold approval from new rules not accompanied by the required competitive impact assessment. By requiring policymakers to demonstrate the necessity of anti-competitive measures to achieve higher policy goals, the new Opinions create an implicit presumption against discriminatory and preferential rulemaking. Policymakers are directed to consider public feedback, and new policies are to be publicized pursuant to the regulations on disclosure of government information. Requiring written rationales for routine administrative decisions is not common in Chinese bureaucracy (outside enforcement settings).

Unlike prior initiatives targeting administrative monopoly and local protectionism, the Opinions emanate from the State Council amid renewed market-oriented reforms targeting inefficiencies in the state-owned sector. Perhaps more importantly, the fair competition review system reinforces ongoing campaigns against corruption and breaches of party discipline. They warn that non-compliant local governments and departments may be “sanctioned” and officials in violation may “face disciplinary action.” The threat that China's top antigraft watchdog, the Central Commission for Discipline Inspection (CCDI), might scrutinize missing or flimsy competitive assessments could help deter favoritism.

Although some provincial governments, such as Liaoning and Jiangsu, have published procedures to implement the Opinions, it will take time for the entire administration to implement the new competitive review process. The State Council and NDRC have acknowledged the need for flexibility in gradually dismantling existing anti-competitive and exclusionary measures.

Implementation of the fair competition review system may impact China's posture in pending trade negotiations, and in brewing disputes with other World Trade Organization (WTO) members regarding the permissibility of continuing to treat China as a non-market economy (NME) in anti-dumping proceedings despite provisions in China's WTO Accession protocol suggesting the end of such treatment in December 2016. The ultimate impact of the new mechanism could be gauged by the incidence of domestic and foreign complaints about exclusionary policies, and the rigor of the public justifications for such measures.

Nate Bush & Shan Lining

[email protected] and [email protected]

Among the obstacles to economic reform in China are “administrative monopoly”—the anti-competitive misuse of government powers to promote or protect favored firms—and “local protectionism”—efforts by local governments to exclude firms from other Chinese regions and abroad. These practices flourished with the decentralization of power to provincial and local authorities early in China's “reform and opening up” era, the discretionary and opaque decision-making within the bureaucracy, and powerful incentives (both lawful and illicit) for career cadres to favor state-owned enterprises (SOEs) and local businesses.

With the June 14, 2016 release of the State Council's Opinions on the Establishment of a Fair Competition Review System in the Course of the Creation of the Market System (Opinions), China's central leadership brought a new approach and resolve to combatting administrative monopoly and local protectionism.