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Chinese Anti-Monopoly Law: a Pretext for Local Protection or an Aspiration to Comply with the International Norm?

By Zhuoyao Hui

Chinese anti-monopoly law (?AML?) was enacted on August 30, 2007, which is the first comprehensive competition law in China?s history. [1] The Chinese AML was drafted within the context of three principal competition concerns: regional monopolies (local protection); sectoral monopolies by Chinese firms, including state-owned enterprises (administrative monopoly); and a perception of alleged abuses of dominant positions by some multinationals.[2] Even though the EU and US commended the final enactment of the AML, there is still a concern among foreign enterprise that the AML is aimed at foreign investors and really acts a pretext for the protection of local economy and state-owned enterprise.

This concern is definitely not groundless. Indeed, a close examination of the short history prior to the enactment of the AML reveals that China had been more concerned with foreign enterprise?s anti-competitive behavior than other types of competition concerns. In 2003, China enacted merger regulations, entitled Interim Provision for Foreign Investors to Merge Domestic Enterprises, which applies exclusively to foreign investment enterprise.[3] According to the rules, a foreign investor ?must seek approval from the relevant government bureau prior to conducting a merger when (1) one party?s annual sales in China are above RMB 1.5 billion (about U.S. $ 180 million), (2) the foreign firm has acquired more than ten Chinese firms in the same industry in a single year, (3) either party has a domestic market share greater than twenty percent, or (4) the post-merger domestic share is over twenty-five percent. The rules also specify under what conditions foreign investors must report offshore mergers to the Ministry of Commerce and the State Administration of Industry and Commerce.? [4]

In addition, the State Administration for Industry and Commerce (SAIC) Report on the law, named three foreign entities, namely Microsoft, Tetra Pak, and Kodak, as examples of entities against which the AML might be enforced.[5] For example, the Report regards Microsoft?s position in the operating system market and Tetra Pak?s position in the sterilized packaging market as examples of multinationals that have a monopoly in the Chinese market. [6]

Since there have been no reported cases coming under the newly-enacted AML, this article will focus on the text of the statute and the change of language between the drafts and the final version of the AML to argue that by issuing the law, the Chinese government has taken an important step to comply with the international norm in anti-competition.

Article 1 identifies the purpose of the AML as ?preventing and curbing monopolistic behaviors, protecting fair market competition, enhancing economic efficiency, maintaining the consumer interests and the public interests, and promoting the healthy development of a socialist market economy.?[7] The statutory language provides no explanation as to what that goal of ?protecting the public interest and promoting the healthy development of a socialist market economy? really means. 

The Chinese AML is built up upon the EC anti-competition law, Japanese AML and U.S. Antitrust Law. [8] However, none of these countries? competition laws include some abstract aspirational goals. There is concern that by including this abstract language in the law, the Chinese government will probably use it as grounds for invalidating foreign enterprise?s business conduct. 

However, for people who are familiar with Chinese legal statutes, this type of aspirational language appears in a variety of laws. It is arguable that the language would have concrete meaning other than identifying the nation?s socialistic character. Moreover, the tremendous improvement in the final version of the statute substantially outweighs the slight ambiguity in this article.

The Chinese AML underwent several drafts. In the 2004 Draft AML, Article 11 authorizes anti-monopoly authority to approve exemption if certain agreements among the operators are beneficial to ?the development of the national economy and the social and public interest.? As the ABA Joint Submission noted, these proposed exemptions appear ?extremely broad in scope,? relying on the undefined concepts, such as public interests? and ?economic distress.?[9] Looking at the statutory language of the enacted statute, all exemptions are wiped off, which signals that the Chinese government does have a good faith commitment complying with the international norm. 

Similar improvement is also reflected under Chapter IV with reference to mergers and acquisitions. In the 2004 draft, Article 35 mandates that a merger application must be denied if a consolidation may ?eliminate or restrict market competition, obstruct the development of a certain industry or regional economy . . . ? The second phrase ?obstructing the development of a certain industry or regional economy? is very disturbing because it raises a concern about the possible use of the law to protect ?local champions? from competition.[10] However, in the final version of the statute, the disturbing language has been deleted as well. 

As addressed above, there are two types of competition concerns, and one is ?administrative monopolies? which refers to state-owned or state-run holding companies that gain market power through legitimate legislative or administrative means.[11] In China, a typical form of administrative monopoly occurs when state-owned enterprises have direct affiliation with a regulatory administrative agency and receives preferential treatment.[12] Another form of administrative monopoly occurs when administrative regions or localities enact local protectionist measures by creating barriers for the entrance of goods, services, and raw materials into their regions.[13] These administrative monopolies often damage the economy through welfare-reducing practices such as boycotting, discriminatory pricing, compulsory purchasing, and price collusion.[14] However, the Chapter V of the Chinese AML is completely devoted to prohibiting the abuse of administrative power to eliminate or restrict competition.[15]

 

Therefore, even though some ambiguities still exist in the language of the AML, China has taken great steps to comply with the international law. To further examine the AML, it is important to keep a close eye on cases that will come under the AML to analyze the enforcement condition.

Full post as published by The Journal of the Business Law Society on November 19, 2007 (boomark / email).