December 23, 2003

The Slow Boat to Antitrust Law in China

An Examination of the New PRC "Interim Regulations on Prohibition of Monopolistic Pricing Practices"

On June 18, 2003, the newly established PRC State Development and Reform Commission (SDRC) issued the Interim Regulations on Prohibition of Monopolistic Pricing Acts (Interim Regulations), which take effect November 1, 2003. According an official press release dated June 30 posted on the official SDRC website, the Interim Regulations are declared to be both a "preliminary exploration of antitrust legislation" and a "legal safeguard to promote market price competition." While the former is probably a fair statement, as discussed below, the Interim Regulations are unlikely to improve significantly the competitive landscape in China.

The Interim Regulations break little new ground in terms of rule making, leave interpretive and enforcement powers with pricing regulators, fail to create private causes of action and grounds for civil compensation, and generally leave the courts on the sidelines, waiting for an occasional challenge to an administrative decision. What they do accomplish, however, is establishment of a clear tie between dominant market position and abusive and predatory pricing practices, and tacitly acknowledge the potential of industry associations in China to become de facto cartels. Although a symbolic statement, they also reinforce the principle that the government and its agencies should not interfere with market pricing (Art. 15).

The Progress of Antitrust Legislation and Related Efforts

The Interim Regulations are the latest installment in the long, drawn out saga of China's efforts to enact antitrust legislation in the absence of a coherent antitrust law. A summary of China's efforts to address antitrust and related concerns over the past 14 years provides a useful context for assessing the significance of the Interim Regulations.

Although the term "antitrust" seldom appears in China's laws and regulations, China began to address the need to safeguard market competition at an early stage of China's reform efforts following the Cultural Revolution. On October 17, 1980, the State Council published the Interim Regulations on Development and Protection of Socialist Competition. According to Article 3 of these Regulations, except for those goods designated by the State to be handled only by particular authorities or units, there should be no monopolies with respect to other goods.

In August 1987, the Legislative Bureau of the State Council formed an Antitrust Law working group.

On March 4, 1989, the State Council issued the Circular on Key Points of Economic System Reform in 1989. Article 20 of the Circular calls for "establish[ment] and improve[ment of] the market supervisory system made up of relevant government agencies, propaganda units and non-governmental institutions . . . rapid enact[ment] of Antitrust Law, Anti-unfair Competition Law, etc." And again in 1994, the Antitrust Law was officially listed in the legislative plan of the Eighth Standing Committee of National People's Congress. The State Economic and Trade Commission (SETC, now integrated into the Ministry of Commerce (MOC)) and the State Administration for Industry and Commerce are in charge of the drafting of the Antitrust Law.

Since the Antitrust Law was first listed in the legislative plan of the Standing Committee of the NPC, ten years have passed. Among the reasons for this delay are the problem of State-sanctioned monopolies (e.g. the tobacco trade). Another key reason is disagreement over the governmental agency that will enforce the Antitrust Law. The implementation and enforcement body will need to have very substantial powers in order to be effective, and existing agencies are likely in competition to garner this power and the increased budgets and influence it would entail. The draft of the Antitrust Law is in the charge of the SAIC and SETC (now MOC); the former is general regulator of business and the Law Against Unfair Competition, while the latter is the regulator of domestic and foreign trade and inbound investment. At the same time, the Interim Regulations were enacted by the SDRC, which is the administrative enforcement authority of the Price Law. According to some news reports, there are over ten draft versions of the Antitrust Law, but it is still undergoing revision and has not yet been submitted to the State Council for review. Consequently, it is reasonable to believe that the PRC Antitrust Law is far from being promulgated. In the meantime, there have been various legislative and regulatory efforts to address rampant anti-competitive practices.

Emerging Chinese Competition Law and Antitrust Rules

Since 1989, there has been marked, if inconsistent, progress toward a legal framework governing competitive practices:

  • Regional Protectionism

    On November 10, 1990, the State Council released the Circular on Breaking Inter-regional Market Blockades and Further Vitalizing Commodity Circulation.

  • Unfair Competition

    On September 2, 1993, the Standing Committee of National People's Congress enacted the Law Against Unfair Competition. Among the ten categories of acts of unfair competition are several which address social and public harm often associated with monopolistic behavior. For example: public utilities' or governmental agencies' acts of forcing customers to buy products or services from their designated operators (Arts 6-7), dumping products at prices lower than product cost (Art.11), tie-in sales or attaching unreasonable conditions (Art.12) and collusive tendering practices intended to force closing prices up or down (Art.15). The enforcement authorities of the Law Against Unfair Competition are industrial and commercial authorities (AICs) above the county level (Art.3).

  • Pricing Practices

    On December 29, 1997, the National People's Congress issued the Price Law, which is the legal basis for promulgation of the Interim Regulations on Prohibition of Monopolistic Pricing Practices. The enforcement authorities for the Price Law are price administrative authorities above the county level (SDRC and its local counterparts).(Art.5). Several related administrative regulations are also discussed below in connection with the Interim Regulations.

  • Tendering and Auctions

    On August 30, 1999, the Standing Committee of the National People's Congress issued the Tender Invitation and Bid Law, which among other things, prohibits collusive tendering practices. (Art. 32). Related administrative regulations are also noted below.

  • Mergers & Acquisitions -- Anti Monopoly Provisions

    While recent regulations include provisions to safeguard against M&A activities that may result in monopolies, they still lack detailed procedural rules and an authoritative legal basis in the form of an Antitrust Law. On November 8, 2002, the SETC, the SAIC and two other central government agencies jointly published the Interim Regulations for Restructuring of State Owned Enterprises Utilizing Foreign Investment. Article 9.1 of these Regulations provides that in the case of restructurings that result in monopolies or otherwise hinder fair competition, hearings shall be conducted before examination and approval. Later, on March 7, 2003, MOFTEC (now MOC), the SAIC and two other authorities issued the Interim Regulations for Merger and Acquisition of Domestic Enterprises by Foreign Investors, which go significantly further to establish specific conditions under which foreign investors are required to report to the MOC and SAIC with respect to proposed M&A transactions, conditions and timing for hearings and exemptions from antitrust review (Art.19-22). However, doubts have been raised as to whether these provisions will be enforced in their current form.

Further Impetus from WTO Accession

On March 4, 2000, when China's WTO accession was imminent, the Supreme People's Court (SPC) issued the SPC Opinions on Fully Exerting Judicial Functions to Provide Judicial Safeguards and Legal Services for Economic Development. Article 6.2 of the Opinions calls for, among other things, acceleration of judicial interpretative work in respect of anti-dumping and antitrust disputes, intellectual property, consumer protection, etc. This is particularly important because such "judicial interpretations" provide important, relatively fact-specific guidance to lower courts faced with issues which would otherwise be governed by general legal principals only.

Article 65 of the Report of the Working Party on the Accession of China (dated November 10, 2001) provides, "the representative of China noted that the Government of China encouraged fair competition and was against acts of unfair competition of all kinds. The Law of the People's Republic of China on Combating Unfair Competition, promulgated on 2 September 1993 and implemented on 1 December 1993, was the basic law to maintain the order of competition in the market. In addition, the Price Law, the Law on Tendering and Bidding, the Criminal Law and other relevant laws also contained provisions on anti-monopoly and unfair competition. China was now formulating the law on Anti-Monopoly."

The Interim Regulations may in fact be a belated and stopgap response to China's WTO-related legislative push.

Basic Shortcomings

Despite the legislative progress to date, there remain some fundamental problems which intrinsically limit the effectiveness of the existing legal framework for antitrust and competitive practices in China. Among these are:

  • Dominant role of administrative agencies in interpretation and enforcement. On the one hand, in an economy with significant State ownership and opacity at many levels of government, this raises the question of fundamental conflicts of interest. On the other hand, the fact that different agencies have jurisdiction over related and often intertwined aspects of anti-competitive practices invites confusion in the enforcement process.
  • Limited role for courts. Although the quality, independence and sophistication of China's judiciary has improved significantly in recent years, with the exception of appeals of administrative decisions and possibly criminal actions, Chinese courts have only very limited authority to resolve disputes involving competitive practices and antitrust matters.
  • Lack of private causes of action. This relates closely to the issues noted immediately above. Administrative authorities remain the gatekeepers for complaints by private parties about anti-competitive behavior. In this respect general competition law still lags far behind intellectual property law and practice in China.

A side effect of the limited role for courts is that they will continue to lack experience with complex and even intractable questions of antitrust law and the sophisticated economics that underlie antitrust practice in the West.

Not surprisingly, Interim Regulations on Prohibition of Monopolistic Pricing Practices make no progress on these basic systemic issues.

The Interim Regulations on Prohibition of Monopolistic Pricing Practices

The Interim Regulations are fairly short, consisting of only 16 articles, a number of which closely track similar provisions of related laws and regulations, such as the Anti Unfair Competition Law, Tender Invitation and Bid Law, etc.

Monopolistic Pricing Acts

In a prelude to the pending Antitrust Law, the Interim Regulations introduce the term "monopolistic pricing acts" into the Chinese legal system for the first time. Such conduct is defined as acts of business operators, in collusion with other operators, or by abusing their dominant market position, to manipulate market prices and disrupt the normal order of production and operations, thereby harming the lawful interests of other operators, consumers or the public interests (Art.2). "Dominant market position" should be determined according to market share of the subject operator, the degree of interchangeability of the subject products, and the difficulty of market entry for new competitors (Art.3). The primary -- and potentially ultimate -- determination of whether monopolistic pricing acts have been committed (and implicitly whether dominant market position exists) is within the jurisdiction of the "governmental authorities in charge of pricing." (Art. 9)

The Interim Regulations mainly address five categories of monopoly pricing acts, described below. These concepts are generally not new, in that they have something in common or overlap with the eleven categories of unfair competitive conduct proscribed by Law Against Unfair Competition (at Arts.5-15) and the seven categories of illegal pricing practices identified in the Price Law (at Art.14).

  • Price Manipulation and Cartels

    The Interim Regulations forbid the following acts of price manipulation through collusive methods of agreement, resolution or coordination: (i) uniformly setting, maintaining or changing prices; (ii) manipulating prices by limiting production or supply; (iii) manipulating prices in tender invitation and bidding activities and auction activities; and (iv) other acts of price manipulation (Art. 4). Items (i) and (ii) are similar to the general statement contained in Article 14.1 of the Price Law prohibiting operators from "manipulating market prices in collusion with one another to harm the legitimate rights and interests of other operators and consumers." Likewise, the substance of item (iii) has previously been addressed at Article 15.1 of the Law Against Unfair Competition, and in laws and administrative regulations specifically addressing tendering and auction practices.

    A related provision is the general requirement that trade associations strengthen self-discipline with respect to pricing and refrain from committing violations of the Interim Regulations (Art.14).

  • Compulsory Fixing of Resale Prices

    According to the Interim Regulations, operators shall not exploit their dominant market positions to mandate the reselling prices of goods when they provide such goods to their distributors, (Art.5). This important provision appears to be the only truly novel (within the PRC legal system) pricing and competition rule contained in the Interim Regulations, apart from linking the general concept of dominant market position to pricing practices.

  • Illegally Seeking Exorbitant Profits

    An operator shall not exploit its dominant market position to seek exorbitant profits in violation laws and regulations (Art.6). A similar provision is found at Article 14.7 of the Price Law, and earlier administrative regulations also address this subject. At that time, however, "exorbitant profits" were addressed primarily from the standpoint of obtaining profits through illegal activities, while the Interim Regulations, in effect, identify a connection between dominant market position and monopolistic profits. The 1995 Interim Regulations on Prohibition of Seeking Exorbitant Profits only forbid the collusion of operators or industry institutions to force up prices (Art.8.4), but do not address the concept of a single dominant player forcing up prices.

  • Dumping / Predatory Pricing

    The Interim Regulations also prohibit operators from exploiting dominant market positions to dump products at prices below their cost for the purpose of excluding or harming competitors, or otherwise lowering prices by such disguised means as kickbacks, subsidies or gifts, so as to make the actual selling prices of products lower than their cost (Art.7). Although predatory pricing had already been addressed in earlier laws and regulations, the Interim Regulations establish for the first time the exploitation of dominant market position as an element of the violation. The Interim Regulations fail, however, to provide any further guidance on the frequently daunting task of proving actual production costs.

  • Discriminatory Pricing

    Operators may not, by exploiting dominant market position, discriminate among parties with respect to transaction prices when providing the same goods or services on the same conditions. (Art.8) Article 14.5 of the Price Law also identifies such discriminatory pricing as an act of illegal unfair pricing.

    Enforcement and Penalties

    The right to bring private civil causes of action, as well as the SPC judicial interpretations necessary to implement such procedural rights remain conspicuously absent from China's competition laws. Nor do the Interim Regulations break new ground in terms of administrative powers, penalties and enforcement actions. Instead, they defer to the relevant penalties prescribed by Article 40 of the Price Law and Article 4 of the Regulations for Administrative Penalties of Pricing Violations (Art.10). According to Article 4 of the Regulations for Administrative Penalties on Pricing Violations, if operators commit collusive acts of price manipulation, dumping products at prices lower than cost or discriminatory pricing, the operators shall be ordered to cease and desist, their illegal gains shall be forfeited and they may also be subject to fines. If the specific facts are sufficiently serious, they may be ordered to suspend business and rectify their business practices, and industrial and commercial authorities may as a last resort suspend the violating party's business license. Penalties for illegally seeking exorbitant profits and predatory pricing are also addressed in other regulations, although existing regulations do not address specific penalties for illegally fixing resale prices.

    An Expanded Role for Whistleblowers?

    The Interim Regulations also present further potential for abuse by indiscriminate informants, who are sanctioned by an already opaque administrative enforcement process. Article 13 provides that government agencies shall encourage, support and protect any institutions or individuals in supervising price monopolistic pricing acts, and price authorities may reward informers and should keep their identities confidential. (Art.13)

    Conclusion

    While the Interim Regulations may represent another incremental legislative step toward formal antitrust legislation, the question remains of whether they are in the end little more than a symbolic effort. If they are to be implemented in a meaningful, and even-handed manner, China's regulators -- and one would hope -- courts will need to struggle with the same sorts of issues that have emerged in the wake of the Sherman Act and the Robinson-Patman Act in the United States. There is little to suggest that they are up to the task. Nonetheless, the introduction by the Interim Regulations of the concept of abuse of dominant market position and prohibition on fixing resale prices represent noteworthy additions to the body of Chinese competition law. But the fact remains that they do nothing to expand the procedural legal rights of aggrieved market participants. In the last analysis they are simply temporary and transitional rules which pass the time until meaningful antitrust law sails into port.

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