China Promulgates Anti-monopoly Law to Establish Economic System to
Foster Fair Competition 

By Susan Ning and Ding Liang *

China's economy and trade have expanded remarkably in the 6 years since China 's WTO accession. To keep up with the evolving economic and trade environment and after 13 years of drafting and deliberation, China enacted the Anti-monopoly Law of China (“the AML”) on August 30, 2007. The AML is not only an attempt to codify the existing rules, but is a milestone in the development of China's legal system which establishes a basic legal framework to build a fair, uniform, and national competition-based economic system. The AML deal s with monopoly agreements， abuse of dominant market position, and concentration of business operators through 8 chapters and 5 7 articles and will come into effect on August 1, 2008.

On one hand, the AML bears some unique Chinese characteristics. For instance, Article 4 of the AML provides, “the State shall make and implement competition rules suitable for the socialist market economy, perfect the macro control, and improve a united, open, competitive and well-ordered market system.” In addition, the AML establishes corresponding rules based on the actual situation of China , such as the rules prohibiting abuse of administrative powers to exclude, restrict competition, and the presumption rule of market dominance, etc.

On the other hand, EC and U.S. law had a considerable influence on the formation of the AML. For instance, Article 9 of Regulation (EC) No 1/2003 provides for formal settlements of investigations by the EC into suspected infringements of Articles 81 or 82 of the EC Treaty. The AML adopts a similar investigation suspension rule in Article 45, which provides,” as for a suspicious monopolistic conduct that the Anti-monopoly Law Enforcement Agency is investigating, if the business operators under investigation promise to eliminate the effects of the conduct through the use of concrete measures within the time limit prescribed by the Anti-monopoly Law Enforcement Agency, the Anti-monopoly Law Enforcement Agency may decide to suspend the investigation”.

Since the AML itself leaves room for further interpretation, we have to wait for more detailed guidelines and implementation provisions to clarify how the AML will be applied in practice.

I.  Objectives of the AML

The AML has multiple objectives that are set forth in Article 1 of the AML: (1) preventing and curbing monopolistic conduct; (2) protecting fair market competition; (3) enhancing economic efficiency; (4) maintaining the consumer interests and the public interests; and (5) promoting the healthy development of socialist market economy. These are the fundamental objectives that will govern the enforcement and implementation of the AML. (1)

It is important to note, however, that the objective of “enhancing economic efficiency” in Article 1 appears to recognize that “largeness” of an enterprise will not by itself be anti-competitive but, in some circumstances and in some market sectors, may be an economically efficient outcome (i.e. a “natural monopoly”). This is confirmed in Article 5, which provides, “business operators may … expand the scale of business operations and enhance market competitiveness”.

II.  The Scope of the AML's Application

A. Extraterritorial Application

T he Anti-monopoly Law Enforcement Agency may consider extraterritorial conduct that has the effect of eliminating or restricting competition within the domestic market of China . The extraterritorial application is in line with international norms. As to the potential conflict of interest and law, China may explore a solution through strengthening bilateral or multilateral cooperation.

B.  Monopolistic Industry

There are two groups of lawful monopolistic industries that are permitted by the AML: (1) the industries controlled by the State-owned economy and concern the lifeline of the national economy and national security, such as telecommunications, power industries; and (2) the industries implementing exclusive operation and sales according to law, such as petroleum, tobacco.

According to Article 7 of the AML, the State “shall protect the lawful business operations conducted by the business operators in those industries”. However, the business operators in those industries “shall not harm the consumer interests by taking advantage of their controlling or exclusive dealing position”. The AML implies that there will be corresponding legal liability. However, it remains silent on which government agency will take charge of such enforcement.

III. Monopoly Agreements

The term “monopoly agreements” under the AML refers to agreements, decisions, or other concerted behaviors between firms that eliminate or restrict competition (2). However, The AML does not apply to the alliance or other concerted actions of agricultural producers and rural economic organizations in certain economic activities such as production, processing, sales, transportation, and storage of agricultural products (3).

The Chinese government has adopted some concepts from Section 1 of the Sherman Act of the United States and Section 81 of the EC Treaty in which the AML divides monopoly agreements into two categories: horizontal monopoly agreements (regulated under Article 13) and vertical monopoly agreements (regulated under Article 14).

Article 13 prohibits the following horizontal monopoly agreements among competing business operators: (1) fixing or changing the price of commodities; (2) restricting the production quantity or sales volume of commodities; (3) dividing the sales market or the raw material procurement market; (4) restricting the purchase of new technology or new facilities or the development of new technology or new products; (5) conducting boycott transactions; or (6) other monopoly agreements as determined by the Anti-monopoly Law Enforcement Agency under the State Council.

Using U.S. antitrust terminology, a vertical monopoly agreement is subject to “the rule of reason”, while a horizontal monopoly agreement is subject to a stricter rule approaching a “per se” prohibition. It is widely accepted that vertical agreements do not present the same types of competitive risk as horizontal agreements. The vast majority of vertical agreements are competitively neutral or beneficial, since they align the interests of manufacturers and distributors, reduce transaction costs, and stimulate intra-brand competition.

Article 14 of the AML prohibits the following vertical monopoly agreements between operators and trading partners: (1) fixing the resale prices of commodities to third persons; (2) restricting the minimum resale prices of commodities to third persons; or (3) other monopoly agreements determined by the Anti-monopoly Law Enforcement Authority under the State Council.

Article 15 provides exemption rules that apply to all monopoly agreements. Since both horizontal monopoly agreements and vertical monopoly agreements can be exempted under Article 15, the AML does not, strictly speaking, have a per se rule. For example, if the operators can prove that the concluded agreement's aim was for the purpose improving technologies or researching and developing new products and the agreement will not substantially restrict competition in the relevant market and can enable consumers to share the benefits from the agreement, the monopoly agreement shall be exempt from Article 13 and Article 14.

IV. Abuse of Dominant Market Position

To determine the dominant market position, the term “market” must first be defined. According to Article 12 of the AML, the term “relevant market” refers to the commodity scope or territorial scope within which the business operators compete against each other during a certain period of time for specific commodities or services. There are three main criteria for determining markets: (1) commodities/services; (2) locality; and (3) time. Additionally, there are at least two types of markets: commodity markets and geographic markets. The geographic market is not limited to within the territory of China thus making it possible that a market could be defined to be significantly larger.

Once the market has been defined, the next step is to decide whether a competitor has sufficient market power to manipulate or control the market in an anti-competitive manner. The competent authority is to consider six factors listed in Article 18 to determine dominance: (1) the market share of a business operator and its competitive situation in the relevant market; (2) the ability of the business operator to control the sales market or the raw material procurement market; (3) the financial and technical conditions of the business operator; (4) the extent of reliance on the business operator by other business operators in their transactions; (5) the degree of difficulty for other business operators to enter the relevant market; and (6) other factors relevant to the determination of an alleged dominant market position by the said business operator. All factors shall be considered as a whole in a totality of the circumstances test and no one or several of these factors will necessarily be decisive on its own.

Market share is the starting point for analysis. Article 19 of the AML allows a presumption of dominant market position based on the market share. A dominant market position exists if the market share of one business operator accounts for 1/2 or more in the relevant market. A joint dominant market position exists where two operators jointly account for 2/3 of the market, or three operators jointly account for 3/4 of the market. Thus, two or more operators may be found to be in a joint dominant market position even if there is no coordination of their conduct. However, if any of the business operators has a market share of less than 1/10, that business operator shall not be assumed to have a dominant market position. The purpose of this provision is to simplify the competent authority's assessment and ease its workload.

A presumption of market dominance is rebuttable. Thus, a business operator that has been presumed to have a dominant market position may provide evidence to the contrary. In addition, a dominant market position itself is not prohibited and the AML only punishes “abuse” of such a dominant market position. Therefore, even if a company is presumed to have dominant market position, its market position is not necessarily prohibited.

Article 17 of the AML prohibits 7 activities of operators that are considered abuses of a dominant market position: (1) selling products at unfairly high prices or buying products at unfairly low prices; (2) without valid reasons, selling products at prices below cost; (3) without valid reasons, refusing to trade with a trading partner; (4) without valid reasons, restricting their trading partners so that they may conduct deals exclusively with the operator or with other designated business operators; (5) without valid reasons, implementing tie-in sales or imposing other unreasonable trading conditions at the time of trading; (6) without valid reasons, applying discriminatory treatment on trading prices or imposing other trading conditions to their trading parties with equal standing; or (7) other forms of abusing the dominant market position as determined by the Anti-monopoly Law Enforcement Agency under the State Council.

The AML prohibits dominant operators from abusing their dominant market positions to sell products at an unfairly high price or buy products at an unfairly low price. Since the AML does not provide any standard on how to determine what an unfair price is, this leaves considerable room for the Anti-monopoly Law Enforcement Agencies to interpret this provision. Moreover, the term “without valid reasons” also gives the Anti-monopoly Law Enforcement Agencies discretion to interpret these provisions.

V. Concentrations of Business Operators

Article 20 of the AML defines the term “concentration of business operators” as: (1) merger of business operators; (2) a business operator acquires control over other business operators by acquiring their equities or assets; or (3) a business operator acquires control over other business operators or is able to exert a decisive influence on other business operators by contract or any other means.

Business operators shall notify in advance the Anti-Monopoly Law Enforcement Authority where the concentration of operators reaches the standard of notification prescribed by the State Council. Otherwise, they shall not proceed with the proposed concentration. The AML requires not only foreign business operators to notify in advance, but also domestic business operators if certain thresholds are met (4).

There is no explicit threshold for notification set forth in the AML because business operators vary from sector to sector. A single threshold would not suitable for all circumstances. Thus, the AML assigns the State Council to prescribe the threshold of notification (5).

The substantive standard used in the examination of the proposed concentration of business operators is to see whether that concentration of business operators actually eliminates or restricts competition or may eliminate or restrict competition. If the business operators concerned can prove either that the favorable impact of the concentration on competition obviously exceeds the adverse impact, or that the concentration is in harmony with the public interests, the Anti-monopoly Law Enforcement Agency under the State Council may decide not to prohibit the concentration.

While Chapter II “Monopoly Agreement” and Chapter III “Abuse of Dominant Market Position” focus only on substantive issues, Chapter IV “Concentration of Business Operators” covers the procedures and timeline for the actual investigation. Article 25 provides, “the Anti-monopoly Law Enforcement Agency under the State Council shall, within 30 days upon receipt of the documents and materials submitted by the business operators… conduct a preliminary examination of the declared concentration of business operators, make a decision on whether to conduct further examination or not...” The maximum period of examination will not exceed 180 days. As a general principle, the Law requires the authorities to inform the operators of their decisions in writing, including the decision to conduct further review or the decision to extend the time period for the examination, if any.

Moreover, National security review is mentioned in the Chapter IV. Article 31 provides, “where a foreign investor participates in the concentration of business operators by merging or acquiring a domestic enterprise or by any other means, and national security is involved … the examination on national security shall also be conducted according to the relevant provisions of the State”. It is clear that (1) national security review and the examination on the concentration of business operators are two separate tiers of review; (2) the national security review is not regulated in the AML.

VI.  Abuse of Administrative Powers to Exclude, Restrict Competition

There is no term “administrative monopoly” in the AML, because (1) the administrative organ or organization is not an operator defined in Article 12 of the AML, i.e. is not “a natural person, legal person, other organization that engages in commodity production, operation or providing services”, and (2) only the act of the operator can constitute monopolistic conduct set forth in Article 3 of AML.

The general rule set forth in the “General Provisions” of the AML is that no administrative organ or organization empowered by a law or administrative regulation to administer public affairs may abuse its administrative powers to eliminate or restrict competition.

This rule is detailed in Article 33, which provides that no administrative organ or organization empowered by a law or administrative regulation to administer public affairs may abuse its administrative power to block the free circulation of commodities among different regions by: (1) setting discriminatory charge items, implementing discriminatory charge rates, or fixing discriminatory prices for non-local commodities; (2) imposing technical requirements or inspection standards on non-local commodities that are different from those of their local counterpart, or taking discriminatory technical measures, such as repeated inspections or repeated certification requirements on non-local commodities so as to restrict their entry into the local market; (3) adopting administrative licensing aimed solely at non-local commodities, so as to restrict the entry of non-local commodities into the local market; (4) setting up barriers or adopting any other means to block either the entry or exit of non-local commodities; or (5) blocking the otherwise free circulation of commodities among different regions.

VII. The Enforcement Agencies of the AML

According to the AML, enforcement of the AML involves three levels of government agencies (1) on the State Council level, the establishment of an Anti-monopoly Committee; (2) on the ministry level, the State Council will designate the Anti-monopoly Law Enforcement Agency; (3) on the local level, the Anti-monopoly Law Enforcement Agency may empower corresponding agencies in the governments of the provinces, autonomous regions, and municipalities directly under the Central Government to be responsible for the anti-monopoly law enforcement work.

The Anti-monopoly Commi ttee will be responsible for organizing, coordinating, and guiding the anti-monopoly work. The composition and working rules of the Anti-monopoly Committee is not stated in the AML. The AML authorizes the State Council to promulgate these regulations.

The Anti-monopoly Law Enforcement Agency “shall be responsible for the anti-monopoly law enforcement work”. Again however, the AML remains silent on mentioning which government agency is the Anti-monopoly Law Enforcement Agency. At present , monopoly agreement is subject to the regulation of the National Development and Reform Commission (“NDRC”); monopolistic behaviors of public utilities are subject to the regulation of the State Administration of Industry and Commerce (“SAIC”); and, mergers and acquisitions are subject to the regulation of the Ministry of Commerce (“MOFCOM”). We have to wait for the State Council's designation to clarify this issue.

The corresponding local level agencies are indispensable because the relevant market for a specific anti-monopoly case could be a region within a province, autonomous region, or municipality. To effectively and efficiently handle this case, it will be more proper to empower the corresponding agencies in the local government to carry out the investigation.

It is noteworthy that, on one hand, the AML empowers the Anti-monopoly Law Enforcement Agency with quasi-judicial power , such as seizing and detaining relevant evidence, inquiring about the bank accounts of business operators under investigation. (6)On the other hand, where any agent in the Anti-monopoly Law Enforcement Agency abuses his authority, neglects his duty, makes falsehood for personal gains, or discloses known trade secrets during the process of law enforcement, and a crime is constituted, he shall be subject to the criminal liability; and if no crime is constituted, he shall subject to a disciplinary sanction. (7)

VIII. Penalties and Remedies

A.  The administrative penalties

The AML mainly prescribes the administrative penalties. For business operators the administrative penalties include: (1) an order to stop the violations; (2) confiscation of the illegal gains and imposition of a fine between 1% to 10% of the sales revenue in the previous year; or (3) a fine of less than 500,000 yuan. (8)

The Anti-monopoly Law Enforcement Agency shall consider such factors as nature, extent, and duration of the violations in determining the specific amount of fines. In addition, there is a leniency provision in which the business operators concerned voluntarily report the conditions on reaching the monopoly agreement and provide important evidence to the Anti-monopoly Law Enforcement Agency. They may be given a mitigated punishment or be exempt from punishment at the discretion of the Anti-monopoly Law Enforcement Agency.

To restrict abuse of administrative power to eliminate or restrict competition, the AML empowers Anti-monopoly Law Enforcement Agency to submit recommendations on the legal handling of a case to the relevant superior authority. (9) Whether this mechanism will function well or be ignored remains to be seen.

B.  Civil liability

According to Article 50 of the AML, the business operators that implement the monopolistic conduct and cause damages to others shall bear civil liability according to law. This provision opens the door for the civil litigation against monopolistic conduct. But many issues have yet to be clarified, such as which level of the People's Court has the jurisdiction over anti-monopoly litigation and who has standing to sue.

C.  Criminal liability

There is no criminal liability for monopolistic conduct under the AML. However, Article 52 provides, “a s for the examination and investigation implemented by the Anti-monopoly Law Enforcement Agency, if business operators refuse to submit related materials and information, submit fraudulent materials or information, conceal, destroy or remove evidence, or refuse or obstruct investigation in other ways … where a crime is constituted, the relevant business operators shall be subject to the criminal liabilities ” . The scope of such criminal liability needs to be further defined.

IX. Intellectual Property Rights

Article 55 of the AML provides, “this law shall not apply to the conduct of business operators to exercise their intellectual property rights in accordance with the laws and relevant administrative regulations on intellectual property rights; however, this Law shall apply to the conduct of business operators to eliminate or restrict market competition by abusing their intellectual property rights.” What activities can be characterized as abusing IPRs is not defined in the AML and again requires further interpretation through guidelines or practice.

Competition laws are increasingly regarded as a hallmark of a modern economy. The adoption of the AML is a milestone for China 's socialist market economy. It appears that the Chinese government will strengthen examination and supervision of monopolistic conduct. After the establishment of the Anti-monopoly Committee and the issuance of relevant guidelines or implementation regulations in the near future, the situation in China will be clearer for foreign and domestic enterprises to estimate the anti-monopoly issues before making business decisions. However, without a tradition of anti-monopoly culture and practice, the implementation of the AML will present Chinese authorities and domestic and foreign enterprises with many challenges.

* Ding Liang is a senior associate at International Trade Group, King & Wood's Beijing office.

Note:

(1) See Article 1 of the AML, which provides, “This Law is enacted for the purpose of preventing and curbing monopolistic conduct, protecting fair market competition, enhancing economic efficiency, maintaining the consumer interests and the public interests, and promoting the healthy development of socialist market economy.”

(2) See paragraph 2 under Article 13 of the AML, which provides, “[t]he term ‘monopoly agreements' as mentioned in this Law refers to agreements, decisions or other concerted behaviors that eliminate or restrict competition.”

(3) See Article 56, which provides, “[t]his law shall not apply to the alliance or concerted actions of agricultural producers and rural economic organizations in the economic activities such as production, processing, sales, transportation and storage of agricultural products.”

(4) See Article 21 of the AML, which provides, “[b]usiness operators shall declare in advance the concentration reaching the threshold of declaration prescribed by the State Council to the Anti-monopoly Law Enforcement Agency, and otherwise, they shall not implement the concentration.” The broader term “business operators” used in Article 21 of the AML indicates that the application of such requirement is not limited to the foreign investors.

(5) See Article 21 of the AML.

(6) See Article 39 of the AML, which provides,

[w]hen investigating a suspicious monopolistic conduct, the Anti-monopoly Law Enforcement Agency may take the following measures:

1. conducting inspections by entering the business premises of business operators under investigation or by entering any other relevant place;

2. conducting inquiries of the business operators under investigation, interested parties, or other relevant entities or individuals, and requiring them to explain the relevant conditions;

3. consulting and duplicating the relevant documents, agreements, account books, business correspondences and electronic data, etc. of the business operators under investigation, interested parties and other relevant entities or individuals;

4. seizing and detaining relevant evidence; and

5. inquiring about the bank accounts of business operators under investigation.

(7) See Article 54 of the AML, which provides,

[w]here any functionary in the Anti-monopoly Law Enforcement Agency abuses his authority, neglects his duty, makes falsehood for personal gains, or discloses trade secrets known in the process of law enforcement, and a crime is constituted, he shall be subject to criminal liability; and if no crime is constituted, he shall be given a disciplinary sanction.

(8) See Article 46 to 48 of the AML.

(9) See Article 51 of the AML, which provides,

[w]here an administrative organ or organization empowered by a law or administrative regulation to administer public affairs abuses its administrative power to eliminate or restrict competition, the superior authority thereof shall order it to make correction and impose punishments on the directly responsible persons in charge and other directly liable persons. The Anti-monopoly Law Enforcement Agency may offer suggestions on legal handling to the relevant superior authority.

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