Competition Law in China

The Anti-monopoly Law of China (the AML) was promulgated in 2007 and came into force in August 2008. The AML has incorporated both economic and non-economic goals, and industrial policy concerns are considered to be predominant. The role of State-owned enterprises and the issue of administrative monopolies has to be understood in the context of market reform and the developments of national industrial policy. The AML followed clear bureaucratic enforcement, and since August 2018, the State Administration for Market Regulation (SAMR) has become the enforcement agency of the AML. The AML is composed of 57 articles in 8 chapters. Chapter 1 provides general provisions, and Chap. 2 (Articles 13–16) deals with monopoly agreements. Chapter 3 (Articles 17–19) covers the abuse of dominant position, and Chap. 4 (Articles 20–31) focuses on concentrations. Chapter 5 (Articles 32–37) deals with administrative monopolies. Chapter 6 is about investigative procedure (Articles 38–45). Chapter 7 (Articles 46–54) is on legal liabilities and the last chapter is supplementary provisions. In addition, provisions issued by the SAIC, NDRC, MOFCOM and SAMR are relevant to understand the procedural rules of the AML.

The AML incorporates five goals in Article 1: preventing and restraining monopolistic conduct, protecting fair competition in the market, enhancing economic efficiency, safeguarding the interests of consumers and social public interest, and promoting the healthy development of a socialist market economy. The revised AML adds one more goal: to promote innovation. The academic debate focuses on whether consumer welfare, efficiency or protecting fair competition should serve as a functional goal or the ultimate goal. It is believed that a more balanced approach should be adopted. The goal of promoting a socialist market economy is mentioned in Article 4. Industrial policy concerns on SOEs are reflected in Article 7 of the AML. The exemptions mentioned in Article 15 refer to the broad definition of public interest. A fair competition system has been implemented since 2017 to coordinate competition and industrial policy.

Monopolistic agreements in Chap. 2 of the AML are divided into horizontal and vertical agreements. Article 13 of Chap. 2 prohibits horizontal monopoly agreement and Article 14 prohibits vertical restrictions. By summarizing the openly published administrative decisions on horizontal agreements by SAIC, NDRC, SAMR and their local branches in China from 2010 till 2018, the average number of participating firms is 12.65. Among the total of 91 cartel cases, 31 of them were led by industrial associations. The most represented industries of cartels include auto dealing, insurance, concrete and bricks, pharmaceutical, food industry, tourism and transportation. Cartel fines in China range from 1 up to 10% of the sales revenue in the previous year. In accordance with the leniency guidelines, the first operator who actively reports evidence and fully cooperates with investigation may receive exemption from punishment, while others may receive a reduced penalty in appropriate circumstances.

Manufacturers and retailers are observed as a principal agent relationship. When a product is produced and to be sold at a downstream distribution level, the manufacturer may choose either vertically integrate with the dealer (vertical integration), or choose an independent distributor from the market (market transaction). Vertical restrictive contracts are largely used to reduce the coordination problem in the principal-agent relationship, to prevent free-riding and locked-in, and thus to maximize the joint benefits. While restrictive provisions such as resale price maintenance (RPM), and restrictions on sales quantity and territory (exclusive dealing), restrictions on the type of purchased goods (tying) could reduce coordination problems and promote efficiency, they may have anti-competitive effects that harm inter-brand and intra-brand competition. Since the late 1960s, the per se illegal rules for vertical restraints have been challenged by Chicago school scholars and modern industrial organization economists, who provided economic arguments to prove the pro-competitive efficiency gains of vertical agreements. In 1977, efficiency considerations were taken into account by the Supreme Court in Continental T.V., Inc. versus GTE Sylvania, Inc. In June 2007, the Leegin case reversed the per se rule by rule of reason. Article 14 of the AML in China deals with vertical restrains and the first two provisions refer to RPM and the third provision refers to other types of non-price restrictions. In case decisions, both administrative agencies and courts tend to put emphasis on the anti-competitive effects of RPM and the pro-competitive effects were considered to be ‘irrelevant’ and cannot be taken to exempt the party from monetary penalties. The Ruibang/Johnson & Johnson case ruled by the Shanghai Higher People’s Court provided the most detailed analysis on the economic effects of RPM.

Before the establishment of the SAMR, MOFCOM was the enforcement agency of merger control policy. Merger control policy adopted a mandatory pre-merger notification system. The State Council Provisions on Thresholds for Prior Notification of Concentrations of Undertakings specify the thresholds for notifications and Article 27 of the AML lists the factors that are to be taken into account when assessing the anti-competitive effects of the concentration. Merger policy has been frequently enforced after the AML came into force, and since 2014, MOFCOM has adopted the simplified procedure. Compared with the practice in the US and EU, MOFCOM is particularly in favour of behaviour remedies. The number of filings and reviews increased fivefold from 2008 to 2018 and most conditionally approved mergers were imposed with behavioural remedies. The anti-competitive effects of the mergers are reviewed by taking various factors into account and business enterprises are often required to submit remedies when the merger raises anti-competitive concerns.

“Administrative monopolies” refers to monopolistic behaviour that is supported by government or regulatory agencies at both central and regional levels. The central government protects specific sectors or departments through exercising administrative authority. Local government exerts administrative power over enterprises within the region and protect the profits of these enterprises by creating market barriers and restricting the flow of products. Administrative monopolies in China developed due to historical reasons and administrative monopolies are defined as sectorial, regional monopolies and public utilities. It has been argued that the enforcement of Chap. 5 of the AML on administrative monopolies is ineffective. After the establishment of the fair competition review system in 2016, more active measures have been taken to investigate administrative cases and to prohibit monopolistic behaviour conducted by public utility enterprises.

The increased focus on an effective enforcement of competition law in both developed and transitional economies has highlighted the debate on enforcement tools and institutions. Designing antitrust institutions became crucial, not only because a desirable substantive outcome of competition issues relies on an appropriate definition of competition policy enforcement organs, but also for the reason that a meaningful reform on the substances of law would be mediated through the reform of how competition institutions investigate and implement the substantive and procedural rules. It is argued that administrative agency policy making is superior to judicial or private systems because agencies are more specialized, while at the same time regulatory agencies may also suffer from insufficient human or financial resources, and being exposed to regulatory pressure and public choice concerns. To design an ideal enforcement agency, the general criteria of structural independence, independence in resourcing, the utility of the agencies should be fulfilled. To build agency capacity, training professional stuff, improving the organization of the agency and improving the leadership of the agency will be the key. Competition agencies in China include SAIC, NDRC, MOFCOM and SAMR. Before the establishment of the SAMR, the division of enforcement power between SAIC, NDRC and MOFCOM had been criticized for inefficiencies and creating overlaps and inconsistencies. It is expected that the institutional reform of establishing SAMR could improve the organizational design, and the agency capacity could be built through training professional staff, preventing regulatory capture and building connections between departments to solve coordination problems.

Socially desirable acts generate benefits whereas socially undesirable acts create substantial costs. Substantial amounts of public resources have been spent on law enforcement to detect, control, and deter socially undesirable acts. Law and economics literature studies how an optimal allocation of enforcement resources could be made by measuring the “social welfare versus costs” of law enforcement. The Becker Model defines the quantitative framework on how rational criminals calculate the expected benefits and costs of the crime. Only when expected private benefits exceeds private costs, which equals the perceived probability of detection (p) multiplies the magnitude of sanctions (S), would the infringer commit the crime. Economists have argued that the cost of committing monopolistic behaviour should be increased as the probability of detection remains low. Thus cartel criminalization has become a global trend. Cartel criminal and individual liabilities have not been introduced in China, and all of the three enforcement agencies strongly rely on administrative fines to deter anticompetitive violations. The level of fines rose dramatically in the second five years during the past decade, after the NDRC took positive actions on competition law in addition to the duty of enforcing Price Law. Studying the 97 monopoly agreement cases which received administrative fines, it seems to be evident that the enforcement competence between SAMR, SAIC, NDRC, Price Bureau and their local branches are not equally divided. NDRC and the Price Bureau imposed the fines most frequently and SAIC seems to be more lenient. The division of labour would be meaningful when the duties had been incorporated into SAMR after the three agencies merged into one in May 2018.

Agency public enforcement and private actions before the courts are the two complementing channels to cure market failure. Most antitrust jurisdictions rely on specialized antitrust agencies because it is believed that generalist courts do not have relevant expertise. When agencies are equipped with personnel having knowledge and expertise in economics, they investigate competition cases by applying such knowledge. At the same time, agencies with a top-down organization hierarchy may also suffer from public choice problems, and when the pressure from interest groups prevails, a court system should be built upon to enforce competition law through a more balanced system. Solely relying on the regulatory agencies to investigate competition cases, neglecting the fact that the goals of regulators may not be aligned with the goals of competition. The advantage for a court, but not agency, to enforce the law is that courts are restrained from regulatory capture, as defined in the public choice theory. The main challenge for courts to deal with complex economic antitrust cases is the lack of specific expertise, and such limitation could be remedied with the help of economic experts. This chapter discusses the economic complexity of the competition cases, the problem of specialization for courts versus agencies, and the role of experts. It will positively review the current development of private enforcement of the AML, and the potential role of expert witnesses.

The choice of enforcement instruments in competition law has become a major debate around the world. In recent years, many competition authorities commentators have argued for a more “mixed” approach in antitrust enforcement, acknowledging that three enforcement instruments—private, administrative and criminal enforcement—are not substitutes to each other, but rather compliments, and should be better coordinated based on the strengths and weaknesses of each mechanism. This chapter address the insights of this issue by incorporating the recent development of behavioral economics and examine to what extent those insights lead to a different optimal mix of enforcement instruments. Behavioral findings can explain the ineffectiveness of some of the existing mechanisms and allow to provide more balanced criteria for determining the optimal mix of instruments in antitrust enforcement. This chapter discusses the optimal mix of enforcement instruments from the perspective of public and private enforcers. The findings of behavioral studies provided a more nuanced criteria when assessing the pros and cons of each instrument, and may be relevant to explain some of the reasons why the enforcement mechanisms become ineffective.

Differences in the assessment standards and notification procedures of merger policy across jurisdictions impose substantial transaction costs on international business and commerce. In this chapter, the issue of the internationalization of merger policy will be discussed by focusing on the extraterritorial applications, conflicts, and solutions provided by three important antitrust jurisdictions—the US, EU and China. Empirical studies on merger decisions in the US, EU and China show that such differences may come from the higher, or lower standard in the analysis of merger effects, and the different priorities of competition goals by the antitrust authority. An international convergence in merger policy may face challenges because jurisdictions may easily incorporate non-economic goals, such as protecting domestic enterprises, when making decisions on transnational mergers. Since the EU and the US proposed two distinct approaches on the internationalization of competition policy, and after the initiatives on creating a global antitrust legal framework failed, today’s antitrust world relies on bilateral agreements and multilateral cooperation through transnational networks. Technical assistance, experts’ working groups, and the use of “best practice” recommendations provide useful resources for antitrust agencies’ to enhance mutual learning. A global convergence in merger policy, although it is difficult from the view of agreeing on one single text of global antitrust law, might be gradually achieved through the efforts by antitrust agencies across jurisdictions by improving their capacity, applying similar analytical tools, and harmonizing assessment procedure rules.

The Anti-monopoly Law of China (the AML) was promulgated in 2007 and came into force in August 2008. The AML has incorporated both economic and non-economic goals, and industrial policy concerns are considered to be predominant.