China: One Step Closer to Market Economy: China Adopts New Antitrust Law

On August 30, 2007, the Standing Committee of the National People's Congress, China's top legislature, enacted its antitrust law, literally translated "Anti-Monopoly Law (the Law)." The Law, which will take effect on August 1, 2008, is comprehensive in scope. Because some of its key provisions are open to multiple interpretations, it remains to be seen how it will be implemented and interpreted in practice.

Background

Even though China had launched its economic reform program in 1978, it was not until 1992 that China began to accelerate its economic reform. In 1992, the 14th Congress of the Chinese Communist Party declared the main goal of China's economic reform was the establishment of a "socialist market economy." In an effort to reach this goal, China began drafting the law in 1994. Since then, China has gone through a long process to finalize the law involving various experts from all over the world. At last, China has successfully adopted a uniform set of antitrust laws. The reaction from the antitrust bar so far has been fairly positive.

The Anti-Monopoly Law

The Law is designed to prevent monopolistic conduct, to protect fair market competition and improve the efficiency of economic operations, to safeguard consumer and public interests, and to promote a socialist market economy. The Law addresses three main areas of monopolistic conduct that are common in other antitrust law regimes: i) prohibition of certain monopoly agreements, ii) abuse of dominant market position, and iii) mergers and acquisitions. Below is a brief overview of the most relevant provisions.

The Law strongly prohibits certain types of horizontal agreements (price fixing, supply restriction, market allocations, and collusive boycotts) that eliminate or restrict market competition. Prohibited vertical agreements (agreements between undertakings and their trading partners) are limited to resale price maintenance.

The provisions allow for some flexibility in that exemptions may be granted if the agreement encourages technological progress, improves efficiency or quality, serves the public welfare (energy conservation, environmental protection) or addresses oversupply issues in severe recessionary conditions.

Fines for violations may be up to 10% of prior year's sales turnover, and may include orders prohibiting certain types of conduct, as well as disgorgement remedies. The Law also allows for lower fines in less significant cases and mitigation of fines in cases of amnesty where violators report their own conduct to the authorities.

The Law prohibits abuse of dominant market position. The Law defines "dominant market position" as a market position held by undertakings that can control prices and other terms or foreclose entry of other undertakings to the market.

In addition, the Law identifies certain market share thresholds to establish a dominant market position. For instance, one undertaking that has more than 50% market share, two undertakings whose combined market share exceeds 66% and three undertakings whose combined market share exceeds 75% in the relevant market are deemed to be in a dominant market position. It is likely, however, depending on how the relevant market is defined, that there may be opportunity to argue the extent of a dominant position.

Selling or buying products at unfair prices, selling products below cost, unreasonably refusing to trade with trade partners, unreasonably restricting trade partners to only trade with the undertaking, tying products, or discriminating between trading partners are listed as examples of abuse of dominant market position.

Fines for abuse of dominant market position may also be up to 10% of prior year's sales turnover.

Lastly, the Law provides for a pre-merger notification procedure in the event of a concentration of undertakings. The concentration of undertakings refers to a merger, acquisition of control, and an acquisition of indicia of control (arrangement of management positions, ownership, and agreements, among others.)

Such undertakings must file a prior notification, along with explanations regarding the influence of the concentration, agreements, financial reports and any other documents as required by the Law, to the Anti-Monopoly Enforcement Agency (AMEA) for approval.

The Law applies to Chinese as well as foreign acquirers, and the AMEA has express powers to both prohibit and unwind mergers and acquisitions.

Acquisitions of domestic companies by foreign capital further need to go through "National Security Review" to ensure that such undertakings do not pose a threat to China's national security. There is also a general "public interest" standard on which transactions restricting competition may be able to proceed. Aside from the national security and public interest components to the Law, the analysis largely focuses on economics.

Implications

While the world's antitrust authorities are largely applauding China on its enactment of the new Law, there are a few concerns that will only be resolved over time through enforcement decisions and rulemakings.

First, because many provisions in the Law are largely broad, guiding principles, they remain open to various interpretations by the government authorities, which may lead to unpredictable and inconsistent enforcement decisions.

Second, the enforcement scheme under the Law is unclear due to the possibility of decentralized enforcement agencies. The Law seems to designate AMEA, which is to be established, as a key enforcement agency in administering the Law, but at the same time gives AMEA power to delegate enforcement activities to government agencies at the provincial, autonomous region, and municipal levels. Although the Law does not come into effect until August 1, 2008, it is unclear to what extent there will be interaction at the various levels of government.

Third, "National Security Review" in the merger and acquisitions context may be misused to discriminate against foreign investors due to a lack of clear standard. Pundits suggest that this provision was incorporated in response to the failed CNOC/Unocal takeover in 2005. There is no guidance and explanation of how and to what extent this review will be applied. Chinese authorities will provide further guidance on this review before the Law becomes effective.

Despite these issues, it is expected that China's rapidly growing economy with its first uniform antitrust law will continue to attract foreign investment. Nevertheless, clients are advised to stay alert as developments unfold and further guidance is provided by the Chinese government.

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