Balancing Market Competition and Economic Efficiency
- The Newly Effective Chinese Anti-Monopoly Law
Mark Ho and Tracy Wang
The Chinese Anti-Monopoly Law, promulgated by the People’s Congress on August 30, 2007, came
into effect on August 1, 2008. The legislation is viewed as a major milestone in the development of
the Chinese legal system and is aimed at regulating and fostering China’s robustly growing market
economy. The law generally bans the following types of business activities: monopolistic agreements,
abuse of a dominant market position, and business concentrations excluding or restricting
competition. Summarized below are those major rules under the law.
Monopolistic Agreements The term “monopolistic agreement” is defined as any agreement,
decision or consorted action between businesses, which will exclude or restrict competition by
specifically fixing prices, dividing markets, limiting production and/or restricting the use of new
technology. Monopolistic agreements can be either vertical or horizontal. For competing business
entities, the following agreements
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-The Newly Effective Chinese Anti-Monopoly Law
generally be banned under
Article 13 of the law, namely those that: (i) fix or change prices, (ii) limit
production or sales volumes, (iii) divide distribution markets or raw material and supplies markets, (iv)
restrict adoption or development of new technology, new equipment or new product, or (v) make
coordinated efforts to boycott transactions with other business entities. Generally, vertical business
entities are prohibited from reaching any agreement to (i) fix prices for a product to be sold to a third
party, and/or (ii) set a minimum price at which a product will be sold to a third party.
Nevertheless, not all monopolistic agreements are prohibited by the law. Article 15 of the law allows
the following agreements to be exempt from the monopoly prohibition, namely where: (i) the purpose
of an agreement is to improve technology or otherwise develop new products, (ii) the purpose of an
agreement is to increase product quality, reduce product cost, increase efficiency, unify product
specification and standard, and/or achieve business specialization, (iii) the purpose of an agreement
is to increase business efficiency and competitiveness of small or medium sized enterprises, (iv) the
purpose of an agreement is to save energy, protect the environment, help disaster relief or otherwise
for the benefit of public interest, (v) the purpose of an agreement is to alleviate sharply decreasing
sales or a problem of production overcapacity, and (vi) the purpose of an agreement is to protect the
legitimate interest of foreign trade and economic cooperation.
Mark Ho is a Jade & Fountain partner. Tracy Wang is an associate who conducted research on this topic.
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This Article effectively grants the Chinese authorities a very broad power to exempt business entities
from the restriction or prohibition of the law. Under this Article, therefore, Chinese economic policies
will play a large role in the enforcement of the law against monopolistic agreements.
Abuse of Dominant Market Position The dominant market position of a business is defined by the
law as the ability to control prices, quantities or other transactional conditions of a particular product
market, or the ability to prevent or affect others from entering the market. In deciding whether a
business or several businesses combined have a dominant position, it is necessary to consider the
following factors, in accordance with Article 18 of the law: (i) market share and market competition
situation, (ii) ability to control sales and supplies, (iii) financial conditions and technological
conditions, (iv) transactional reliance by other businesses on the dominant business, or (v) other
factors that will lead the authorities to believe that the business dominates the market under the
statutory definition. Under Article 19 of the law, however, a dominant market status will generally be
deemed to exist if: (i) a business has a 50% market share, (ii) two businesses combined have two
thirds of the market share, or (iii) three businesses combined have three quarters of the market share.
However, if one of the two or three businesses combined has only a 10% market share before
entering into a transaction with the other businesses, the combination of such two or three
businesses will not be deemed to have the dominant position. In addition, the business(es) that
would otherwise be deemed to have the dominant market position will not be considered to hold such
a position, if they have evidence to prove that they do not, in fact, dominate the market.
A company with a dominant market position is specifically prohibited from conducting the following
activities: (i) purchase or sell products at an unfairly lower or higher price, (ii) sell a product at a price
below its costs without any justifiable reason, (iii) refuse to transact with any other party without any
justifiable reason, (iv) force the other party to transact with the dominant business or its designated
business entity without any justifiable reason, (v) tie one product with another product for sales
without any justifiable reason or force the other party to accept any unreasonable sales conditions,
(vi) distinguish between different parties in price and/or other sales conditions without any justifiable
reason, even if these different parties share the same conditions, or (vii) other activities that the
Chinese competition authorities may deem to fall under the definition of “abuse of dominant market
position”.
Business Concentration The purpose of this provision is to regulate M&A transactions between
business entities. Under Article 20 of the law, any transaction resulting in the merger of different
businesses or the control by one business of another will potentially fall under the definition of
“business concentration”, subject to the examination and approval of the Chinese authorities. The
concentration will only be approved once the authorities have determined that such concentration will
not adversely impact market competition.
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The State Council issued the Reporting Standards for Business Concentration Activities on August
3, 2008 and effective upon promulgation to implement Article 21 of the Chinese Anti-Monopoly Law.
This Article 21 requires that a business concentration deal be reported to and approved by the
relevant authorities before its underlying agreement or contract will be able to take effect and be
enforceable under law. Under the Reporting Standards, a deal must be approved under the
following scenarios: (i) if the contracting parties have an aggregate worldwide sale revenue of RMB
10 billion and at least two of those contracting parties have an aggregate sales revenue of RMB 400
million within Chinese markets for the previous accounting year, or (ii) if the contracting parties have
an aggregate sale revenue of RMB 2 billion and at least two of those contracting parties have an
aggregate sales revenue of RMB 400 million within Chinese markets for the previous accounting
year.
Enforcement Agencies and Procedures Article 9 provides that the State Council must set up an
Anti-Monopoly Commission for policy formulation and enforcement coordination purposes. The
following three national government agencies will play major roles: the Ministry of Commerce (under
which an Anti-Monopoly Bureau“反垄断局”is recently established to review mergers), the State
Administration of Industry and Commerce (under which an Anti-Monopoly and Anti-Competition
Bureau“反垄断与不正当竞争执法局”is established to review abuse of market dominance), and the
State Reform and Development Commission (under which a Price Supervision and Inspection
Department “价格监督检查司”is established to review monopolistic agreements). Their respective
roles, however, remain to be clarified in the near future.
For any M&A or business concentration deal, the parties are required to submit the following
documents to the government agencies: (i) application report, (ii) background of the proposed deal,
(iii) M&A or other concentration agreements, (iii) audited financial reports, and (iv) other documents
as might be requested by the authorities. Within 30 days upon receipt of these documents, the
authorities will complete a preliminary review and issue a decision as to whether a further
investigation and review is needed. If no further investigation and review is required, the parties may
go ahead with their transactions. If it is decided that a further investigation and review is necessary,
then the authorities must complete the further review within 90 days upon issuance of the decision.
During such review or further review process, the parties will be unable to complete their
transactions and their agreements will not be permitted to go into effect until or unless they are
approved by the authorities. If a negative decision is issued, the parties may appeal the decision to
a Chinese court for judicial review, which falls under the Chinese administrative litigation procedure.
In judicial review, the government agency issuing the decision will acts as the defendant and the
parties will be named as the plaintiff. There will be the same two instances applicable (i.e., one initial
and one appeal proceedings) to a civil proceeding.
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Article 39 of the law grants the authorities broad powers to investigate a case including, among other
things, initiation of investigation procedures and obtaining evidence, such as accounting records,
electronic data and bank account records, as well as conducting on-premise inspections of the place
of business and other places. There is no need for a court order for search, seizure, and other
enforcement actions in connection with such enforcement action.
Statutory Penalties and Liabilities Violation of the Chinese Anti-Monopoly Law may be subject
to the following penalties and liabilities: (i) issuance of a government order to cease illegal activities,
(ii) fine of up to RMB500,000, (iii) revocation of registration, and (iv) civil liabilities for injuries caused
to other businesses and consumers. It is unclear whether the government agency may initiate a civil
proceeding on behalf of industries or consumers. Any penalty decision issued by the authorities is
also subject to the same judicial review process as discussed above.
Conclusion The Chinese Anti-Monopoly Law sets forth the principles and rules of the Chinese
anti-monopoly regime. Numerous questions, however, remain as to how to interpret those principles
and rules. At this point, therefore, the enforcement authorities have enormous discretion in
interpreting the rules and providing exemption to any specific cases. The rules will need to evolve in
practice in order to be clearer and therefore provide better guidelines for business activities. We
believe it is very likely that the State Counsel or the enforcement agencies will issue implementing
regulations as they gain more practical experience in resolving enforcement issues in the future.
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