Anti-Monopoly Law with a “Chinese Flavor”
March 24 (Tuesday) 2009
Jianmin Jin
Senior Fellow
Summary
- After 13 years of crafting, China’s “Anti-Monopoly Law” was passed on August 30, 2007 and put into effect on August 1, 2008. While there is nothing particularly “foreign” about the antitrust substantive provisions and procedures such as research, examination and penalties, a look at the legislation as a whole reveals content with a distinctive “Chinese flavor.”
- Promulgated on August 1, 2008, China’s “Anti-Monopoly Law” brings together parts of existing antitrust regulation such as the “Law against Unfair Competition”, the “Price Law” and the “Regulation of Foreign Investor M&As of Domestic Companies”, and also adds new content making it a systematic antitrust substantive law. Included is a special chapter 5 on the prohibition of “administrative monopolies”, giving the new law a unique “Chinese flavor.”
- This regulation prohibits “public monopoly” as a result of restrictions on competition from power abuse by administrative bodies, and an element not found in Japan’s anti-monopoly law which applies to private monopolies. It unifies domestic markets by putting an end to power abuse by local governments trying to protect their regions, and at the same time attempts to provide a legal weapon for resolving the “public-private coziness” problem. In fact, two of the three lawsuits (related to the General Administration of Quality Supervision, Inspection and Quarantine; related to a local government tax bureau; and related to a state-run communications company) filed immediately after promulgation of the Anti-Monopoly Law involved cases of competition restriction. The lawsuit concerning a local government tax bureau led to an improvement in administrative activity.
- Article 50 of the Anti-Monopoly Law, however, does not provide legal authority to the Bureau of Anti-Monopoly, the enforcement body of the law. Furthermore, the bureau is only able to submit recommendations on how to deal with high-level administrative agencies guilty of monopolies. It is no mystery, then, that doubt persists concerning the effectiveness of the new law.
Examination of “national security” regarding foreign-capital acquisitions
Article 31 regulates foreign capital and business concentration as follows: “When foreign capital companies acquire Chinese companies or engage in business concentration through some other method, and such activity has national security implications, business concentration will be examined according to this article as well as related regulations concerning national security.” In other words, not limited to maintaining a free and fair competition order, China’s Anti-Monopoly Law also addresses national security issues related to foreign acquisition of domestic companies. This differs from systems in Japan, the US and Europe. In Japan, national security issues related to foreign capital acquisition of domestic businesses are handled by the “Foreign Exchange Law” and individual industry laws.
In addition to the Bureau of Anti-Monopoly, the teeth of the new law, there are plans to establish an expert committee modeled after the Committee on Foreign Investment in the United States (CFIUS) that will examine foreign capital acquisitions with national security implications. The committee will be comprised of the Ministry of Commerce, the National Development and Reform Commission, the Ministry of Information Industry, and other government agencies. Opposition to foreign acquisitions of domestic companies has been intensifying in recent years, and the government has struggled to find a balance between utilizing foreign capital and protecting domestic interests. This is because determining the definition of “national security” as well as the correlation between foreign capital acquisitions and “national security” and the merits and demerits of prohibiting foreign acquisitions in the name of “national security” is difficult in any country. There are concerns that wide-ranging discretion given to authorities would be used to protect domestic businesses instead of addressing real national security issues. Such concern is warranted: the Carlyle Group’s (US investment fund) several year bid to acquire the major Chinese machinery maker Xugong Construction Machinery was not given review and ended unsuccessfully.
Extraterritorial Application
Article 2 stipulates that the law will be applied when market competition in China is affected even in the case of overseas business concentration. Under such regulation, which does not exist in the Japanese Anti-Monopoly Law, Chinese antitrust enforcement bodies would have to be notified of certain cases of overseas M&As.
For example, BHP Billiton (world’s second largest producer of iron-ore) notified Ministry of Commerce antitrust authorities of its proposal to acquire Rio Tinto (third largest producer). Though the case is expected to end with BHP Billiton pulling its proposal, the process of antitrust examination is attracting significant attention. On November 18, 2008, the Ministry of Commerce announced conditional approval of InBev’s (world’s largest beer maker) plan to acquire Anheuser-Busch (third largest maker), marking the first case of extraterritorial application of the law.
Two-layered structure of enforcement bodies
Enforcement bodies of the new antitrust law show a two-layered structure. The State Council establishes the primary antitrust committee, but the real enforcement bodies are comprised of three government agencies. The National Development and Reform Commission heads cartel regulations; the State Administration for Industry and Commerce investigates cases of power abuse; and the Ministry of Commerce monitors business concentration. The State Administration for Industry and Commerce and the Ministry of Commerce have established a monopoly and unfair competition prohibition enforcement body and an antitrust bureau, respectively, while the National Development and Reform Commission has not yet announced its department. All three enforcement bodies have started to develop guidelines for their respective fields. Ten notifications have already been submitted to the Ministry of Commerce, of which eight have received official decision.
These enforcement bodies are not particularly independent from the central government; moreover, they can authorize appropriate regional government institutions to carry out enforcement duties related to the antitrust law. Doubt remains on whether the goals of the new law can be achieved without regional protectionism.
In this way, the Anti-Monopoly Law introduced in China strives to maintain a free and fair competition order and protect economic and industrial security from foreign capital, and also provides unique enforcement systems. The law is expected to have a significant impact on company activity. However, the actual effect will depend greatly on the guidelines and regulations still to be determined as well as the results of pending lawsuits. Future developments bear close attention.