China’s anti-monopoly law

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By Stefanie Knirsh/Dezan Shira & Associates

BEIJING, Oct. 23 – Set to take effect August 1, 2008, China’s new anti-monopoly law aims to protect market competition by regulating price-fixing and other forms of collusion, and providing for investigation and prosecution of such practices.

The new law, passed on August 30, 2007 by the National People’s Congress, took nearly 13 years to draft and bans monopolistic agreements, such as price-fixing and other forms of collusion, and provides for investigation and prosecution of monopolistic practices. Its aim is to protect fair competition by prohibiting three kinds of monopoly acts: reaching monopolizing agreements; abusing a dominant market position; and concentration of business operations that which may exclude or restrict competition. Conduct subject to an anti-monopoly inspection includes mergers and acquisitions, JVs, as well as licensing and technology transfer.

The anti-monopoly law also prohibits agreements between competitors to fix, maintain or change prices, allocate markets, limit output or sales, or restrict the acquisition or development of new technology. Western observers have raised concerns about some provisions that could be enforced in a discriminatory fashion against foreign companies in China. Acquisitions of major state-owned enterprises or companies with famous brands in recent years have aroused concerns about China’s economic security.

While the most of the provisions of the anti-monopoly law apply to both domestic and foreign-funded companies, there is a mandatory security inspection provision on mergers and acquisitions by foreign investors on any merger or acquisition that may have an impact of state security. The foreign investor must go through a state security inspection before they are allowed to proceed with the merger or acquisition.

Before 2004 mergers and acquisitions between foreign and domestic businesses accounted for only five percent of foreign direct investment, by 2005 the figure had risen to almost twenty percent. The regulative review will consider a company’s market share and market power, market structure and concentration, effect on consumers and other relevant business operators, as well as the effect on the development of the national economy and public interest.

The Chinese government even attaches the consideration of IP related issues to the review. This could lead to excessive regulatory discretion and favoritism towards domestic Chinese companies. The Chinese government could restrict the ability of intellectual property owners to license their IP rights on terms that seem reasonable to them but not to potential Chinese licensees or the Chinese authorities. They would be legally allowed to consider foreign owned exclusive or superior technologies to be technical barriers in relevant markets.

The structure of the Anti-monopoly Enforcement Authority (AMEA) is not yet clear, nor is the relationship between them and industry specific regulators. The AMEA has broad powers to inspect and investigate business and non-business premises in order to obtain relevant evidence. It can seize files and records, including documents, accounting records and electronic data. It may even access bank account records without a court order.

The law reads that the State Council shall set up the Anti-Monopoly Commission (AMC), which functions will mainly involve the formulation of competition policies and guidelines, coordination of enforcement activities and evaluation of competition conditions, rather than having substantive enforcement powers. Most of the new law’s provisions are intentionally broad which allows ample room for discretionary enforcement and the implementation of further regulations. In a civil law system which does not rely on case law precedents this might lead to a high unpredictability.

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