China’s Antimonopoly Law 2008 Professor Allan Fels AO Dean, Australia and New Zealand School of Government CUTS International Conference Reviewing the Global Experience with Economic Regulations 19 April 2011 New Delhi 2

Overview Background and History Outline of nature of Antimonopoly Law 2008 and related laws Administrative and enforcement arrangements Administrative Monopoly Conclusions 3

Background Prior to 1949: – Some market economy elements 1949 – 1978: – Central planning largely suppressed competition and role of law 1978 – present: – Transformation of the economy and economic policy 4

Transformation of Chinese Economy From central planning towards a market economy – It is still a Socialist Market Economy From economically backward, agricultural base to modern economy: – Higher average income – Strong industrial base – Exposure to world economy Trend to strengthening of the role of the law as instrument for resolving commercial matters Slower progress on adoption of rule of law Economic reform and modernisation and its interaction with a non democratic, party-led socialist economy 5

Other Background Issues Ambivalent attitudes to foreign participation in economy Debates about the role of competition law and policy – of similar nature to debates in developed economies, but also desire to take account of China’s circumstances 6

Historical Background 1978 – 1993: – Departure from central planning and significant pro- market reform 1993 – present: – More substantial move towards institutional reform China a WTO member since December 2001 Reform of major state owned enterprises (SOEs) – “keep the large, release the small” – National champions and security 7

Development of Competition Laws prior to 2008 Some laws with competition elements enacted since about 1980: were piecemeal by Western standards The drafting process from 1994 until 2007 – Adopt world best practice – Take account of China’s circumstances – Drafting reflected some conflicts within China over role of competition policy 8

Particular Features of the Antimonopoly Law Simple, general drafting – allows flexibility, “discretion” Best practice competition law, with European/German flavour The “Chinese” character of the Law “Administrative monopoly” Challenges of enforcing and administering the Law in China Early application Pre-existing laws still apply 9

Antimonopoly Law 2008 The Law applies to: – Anticompetitive agreements – Abuse of dominance – Mergers – Abuse of administrative monopoly 10

General Principles and Policy Goals Article 1: – Preventing and restraining monopolistic conduct – Protecting fair competition in the market – Enhancing economic efficiency – Safeguarding the interests of consumers and social public interest – Promoting the healthy development of a socialist market economy Article 4 refers to “orderly” market system Articles 1 and 4 reflect some conflicting tensions 11

Application of AML and Exclusions Applies to Undertakings – which are broadly defined Industry Associations explicitly covered Extraterritorial reach Exports probably exempt Farmers exempt Monopoly agreements exempted in “other circumstances as stipulated by law and the State Council” AML does not apply to legitimate protection of intellectual property rights (but does apply to anticompetitive conduct in relation to those rights) 12

Application of AML to SOEs SOEs include: – Industries vital to the national economy – Industries vital to national security – Industries subject to exclusive operations and sales under the law (State owned and operated monopolies) e.g. petroleum, tobacco and other monopolies subject to specific regulation Article 7: Such undertakings must operate in good faith in accordance with the law in a self disciplined manner etc. State Owned Enterprises (SOEs) in strategic industries – Article 7 may partly exclude application of AML to SOEs in “strategic” industries – Treatment of SOEs not fully resolved yet 13

Monopoly Agreements “Monopoly agreements” refers to agreements, decisions or other concerted actions which eliminate or restrict competition The AML prohibition on horizontal agreements (Article 13): – Fixing or changing prices – Limiting output or sales – Dividing the sales market or the raw material procurement market – Restricting the development of new technology on new products – Making boycott transactions – Other monopoly agreements determined by the Antimonopoly Enforcement Agency (AMEA) Not clear if per se prohibition 14

Vertical Arrangements The AML prohibition on vertical arrangements (Article 14): – Prohibition on resale price maintenance (inc. fixing resale price and setting minimum resale price) 15

Exemptions for horizontal or vertical monopoly agreements Article 15 exempts monopoly agreements if the business operators can prove their agreements fall within any of the seven circumstances: 1.Improving technology, researching and developing new products 2.Upgrading product quality, reducing costs, improving efficiency, standards, professional labour 3.Enhancing efficiency of small sized business operators 4.Public interests e.g. conserving energy, protecting environment, relieving victims of a disaster 5.To mitigate serious decrease in sales volume or obviously excessive production during economic recessions 6.To safeguard legitimate interests in foreign trade or foreign economic cooperation 7.Other circumstances stipulated by laws and state council To gain exemption for agreements falling within the circumstances 1-5, the business operators must prove the agreement can enable consumers to share the interests and will not severely restrict competition Pre-existing laws re bid-rigging etc. still apply Price law still applies 16

Abuse of Dominance Article 17: – Firms with a dominant market position prohibited from: Selling products at unfairly high prices or buying products at unfairly low prices Selling products below cost without justifications Refusing to deal without justifications Exclusive dealing without justifications Tie in obligations or other unreasonable trading conditions without justifications Discrimination without justifications Other abuses of dominant market position as determined by AMEA – Dominance – means can control the price, volume, other trading conditions or can block or affect the entry of others 17

Abuse of Dominance (cont.) Article 18 – Factors in assessing dominance Market share and competitive circumstances Ability to control sales or purchase market Financial and technological position Extent to which other undertakings rely on it in their transactions Entry barriers Any other factors 18

Presumption of Dominance Presumption of dominance – One undertaking accounts for 50 % or more market share – Two undertakings account for 2/3 or more or market – Three undertakings account for 3/4 or more of market. – This is a rebuttable presumption 19

Concentration of Undertakings (Mergers and Acquisitions) Article 20 defines “concentrations” as: – Mergers – Acquisitions of control over other undertakings through acquiring shares or assets – Acquisitions of control or ability of imposing decisive influence over other undertakings through contracts or other means Mergers and acquisitions prohibited if they reduce competition A premerger notification requirement Special issues re some foreign acquisitions affecting “national security” 20

The Substantive Test (Article 28): – If a concentration eliminates or restricts competition it is prohibited unless business operators can prove the positive impact outweighs the negative impact on competition or the concentration is in the public interest Concentration of Undertakings (cont.) 21

Merger Criteria Factors to be Considered (Article 27): Market share Degree of market concentration Market access and technological progress Impact on consumers and other business operators Impact on national economic development Other elements which have effects on market competition 22

Foreign Acquisitions Foreign mergers also face a second test if national security is involved (Article 31) Examination then in accordance with relevant State provisions – the newly issued National Security Mechanism Transactions outside China appear to be covered by law 23

Mergers and Acquisition Notification Worldwide business volume ten billion Yuan – Business volume in China of at least two operators each exceeds 400 million Yuan – USD$1.00 = CNY6.54 OR Business volume in China – If all business operators involved exceeds two billion Yuan; and – Business volume in China of at least two operators each exceeds 400 million Yuan MOFCOM “catch all” provision Early application Coca-Cola/ Huiyuan Juice merger Administration of Merger Law has been sensible 24

Administrative Monopoly “... The misuse by government, at all levels, of administrative powers, both legal and extra legal, to promote, manipulate, impede or prevent economic activities.” 1 Refers especially to interregional restrictions 1. Mark Williams, “Competition Law and Policy in China, Hong Kong and Taiwan” 25

Interregional Restrictions Major issue in China Handled in other countries by “meta” laws, constitutional and treaty provisions, backed by major political support (nation building) and strong enforcement Internal market policies also relevant Complications of government involvement in regional restrictions in China 26

Government restrictions on competition generally Governments restrict competition in many ways especially through laws and regulations The provisions of the Antimonopoly Law represent a compromise 27

The Concept of National Competition Policy A systematic approach to addressing government restrictions on competition Neither US nor EU has a systematic competition policy: Australia does OECD Competition Toolkit China’s approach: competition law prohibits abuse of administrative monopoly. Sanctions are administrative 28

AML: Administrative Monopoly Provisions Administrative agencies shall not abuse their powers to eliminate or restrict competition (Article 8) Shall not: – Mandate persons to buy or use products supplied by particular entities (Article 32) – Impede the free flow of products among different regions (Article 33) 29

AML: Administrative Monopoly Provisions (cont.) Shall not: – Reject or restrict participation by undertakings from other regions or discriminate (Article 34) – Compel undertakings to engage in monopolistic conduct (Article 36) – Promulgate rules containing provisions eliminating or restricting competition (Article 37) 30

Implementation of Administrative Monopoly Provisions AMEA has no authority to enforce but only to point out the problem to the superior agency of the perpetrator and make proposals No follow up, no specific penalty although “discipline” mentioned Delegation of tasks by AMEA (SAIC & NDRC) to provincial AICs and price bureaus Fear of lack of uniformity and dilution of message 31

Issues re administrative monopoly: No overarching law of high status to assist in eliminating interstate restrictions on competition No detailed systemic approach to anticompetitive laws and regulations (like most countries) Uncertain role of AML in overriding activities of government Place of regulated industries against background of socialist market economy 32

Lack of specific sanctions re administrative monopoly: what does this mean? Serious provisions with serious action? Standard sanctions and processes are inappropriate? Law is a compromise and is deliberately ambiguous? Provisions symbolic but not serious? 33

General conclusions on Administrative Monopoly A competition law should be supplemented by a competition policy China has little support from an overarching constitution on regional issues: it is a political issue China has no comprehensive process to control the enactment and operation of other anticompetitive laws. This is not different from most countries The AML on administrative monopoly is comprehensive but provisions on enforcement appear to be weak with enforcement diluted 34

Regulation The relationship between the AML and the regulated sector is uncertain, but specific regulations appear to override the AML 35

Administrative Organs and Enforcement Antimonopoly Commission (under State Council) Antimonopoly Enforcement Agency (AMEA) – MOFCOM – NDRC – SAIC Divisions of Functions Issues of coordination and of competition High level of delegation Courts Private enforcement possible 36

Administrative Organs and Enforcement (cont.) Role of guidelines Issues about relative treatment of foreign and domestic corporations 37

Sanctions Cease and desist orders Confiscation of illegal gains orders Fines for monopolistic agreements up to 10% of total sales volume Fines for abuse of dominance up to 10% of total sales Fines for breaches of merger provisions of up to 500,000 Yuan and order and conditions Severity of conduct Leniency Civil liability for damages 38

Conclusions AML is based on international best practice Issues re “Chinese” character of law Issues re conflicting goals Enforcement is crucial – There are major challenges Administrative monopoly treatment appears to be a compromise on a difficult, important issue It is too early to draw many conclusions 39