Competition Law in China: A Brief Introduction

1. Competition Law in China: A Brief Introduction ZHANG Xuezhong Assistant Professor of Law zhangxuezhong@ecupl.edu.cn East China University of Politics and Law

2. Overview • Introduction • Economic Structure Before 1978 • Post Reform Economic Structure • Regulatory Structure in China • Attitudes of China’s Policy Maker towards Competition • China’s Current Competition Law and Policies • Features of China’s Draft Anti-Monopoly Law

3. 1. Introduction • Antitrust to support capitalist free economy ; • China’ pragmatic move from an planned economy to a market economy; • The need of means of mitigating ‘market failures’; • Principal source of competitive private entrepreneurial activity; • Efforts to promote the use of competitive market solution to production and allocation of goods and services.

4. 2. Economic Structure before 1978 • Before 1978, a centrally planned economy; • In rural areas, farms were first organized as cooperatives, then starting in 1958, as communes; • Government’s planning agency directed to plant; supplied inputs; collected predetermined quantities of outputs at given prices; • No sufficient info to arrange everything accurately and efficiently; • Farmers had little incentive to work hard; • The system proved to be disastrous, and adjustment were made to allow farmers to work on their for-private-use land, but only to a limited extent, until the current reforms began in 1978.

5. The inefficiency of central planning was repeated in the industrial sector; • All enterprises state-owned before the 1978 reform; • Plans for the production and distribution at all enterprises; Prices for all goods and services; • Worker assigned to enterprises and guaranteed lifetime employment; • Priority given to heavy industry, and terrible waste and inefficiency resulted.

6. Before 1978, China’s economy dominated by the state; Private enterprises’ negligible role; • According to CSSB, In 1978, private enterprises =0.2% industrial output; State- and collectively owned =the rest of the economy; • Competition motivated by profits condemned as a system of corrupt capitalist systems.

7. 3. Post Reform Economic Structure • In 1978, Deng initiated economic reforms; • Started in rural areas; • Household responsibility system; • Township and Village Enterprises grew quickly and started to compete with SOEs;

8. Reform of SOEs • Proved to be more difficult; • SOEs reflected the central planning aspect of the past; and existence of various gov agencies relied on control over SOEs. • SOEs’ complex functioning: Lack of management training; social objective: employment stability, etc. • Contract responsibility system introduced in 1987; • Many SOEs restructured into share-issuing companies in 1997; • Price system decontrolled.

9. In 1992, China significantly accelerated its pace of economic reform after Deng’s inspection tour of the southern region; • In the fall of 1992, the 14th Congress of CCP : “socialist market economy” as the central goal of China’s economic reform; • In the following decade, far-reaching measures to overhaul China’s SOE sector, taxation, banking, and foreign currency system. • Private enterprises grew rapidly, and large amounts of foreign investment flowed in.

10. 99% of the enterprises in China are small or medium in size, with most of them funded by private investment; • According to CSSB (updated in 2004), China’s SMEs =55.6% of the country’s GDP, 74.7% of industrial production value added, 58.9% of retail sales, 46.2% of tax revenues and 62.3% of exports. • But the largest enterprises in China are still SOEs in such industries as electricity, railroads, aviation, telecommunication, and banking, where the state maintains de facto monopolies or dominant firms.

11. 4. China’s Regulatory Structure • Government regulation and competition policy as alternative ways to control the economy; • China’s regulatory being transformed to one more compatible with the requirements of a market economy; • China’s need for government regulation; • Strategic choice to retreat from non-essential industries and other regulatory reforms; • Administrative monopolies in China; • Dealing with the problem of administrative monopolies as one of the major goals of China’s draft anti-monopoly law.

12. 5. Attitudes of China’s Policy Maker towards Competition • Law enforcement depending on prevailing attitude towards competition; • China’s ambivalent attitude toward competition; • Problem created by administrative monopolies and challenges posed the M&A of domestic businesses by MNCs; • Small and medium sized firms concerns.

13. 6. China’s Current Laws and Policies • Law for Countering Unfair Competition 1993; --Tie-in sales; --Price fixing; --Bid rigging; --Commercial bribery; --Deceptive advertising; --Coercive sales; --Appropriation of business secrets. • Too simplistic and largely related to consumer protection.

14. Rules for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors ( 2003, 2006) • Applies only to foreign investors; • Article 51: 4 conditions under which pre-merger notification to MofCOM and SAIC is required: (1) one merging party’s annual sales is above 1.5 billion RMB (approximately $180 million); (2) the foreign party has acquired more than 10 other domestic companies in related industries in the past year; (3)one merging party’s market share in China is above 20%; or (4) post merger market share is above 25%.

15. Article 52 describes how a hearing is conducted when the authority thinks the merger will probably result in undue concentration so as to impede competition or prejudice consumers’ interests. • Article 53: five conditions relating to merging parties’ assets, sales, and market share inside China under which mergers outside China should be reported to China’ MofCOM and SAIC for competition policy review. Allows China to intervene in Mergers outside China. • Allows China to intervene in mergers outside of China.

16. Provisional Rules for Prevention of Monopoly Pricing (by SDRC, effective November 11, 2003) • Prohibits the abuse of ‘market dominance’ and infers it through ‘market share in the relevant market, substitutability of relevant goods, and ease of new entry’. • Not specify how relevant market is defined or how the inference of market dominance can be actually made; • Prohibits also price coordination, supply restriction and bid rigging; • Prohibits government agencies from illegally intervening in price determinations. (What would be legal price intervention is not clear); • Could lead to improper government intervention when there is not a competition issue.

17. 7. Features of China’s Draft Anti-Monopoly Law • Efficiency objective; • Definition of monopoly; • Collusions among enterprises; • Market definition; • Publication of decisions; • Concentration Ratios • Monopoly pricing;

18. Price discrimination; • Mergers; • Administrative monopoly; • Enforcement agencies; • Penalties; • Judicial review; • Intellectual property rights issues;