Dominant party

China’s new Anti-Monopoly Law could have been introduced with a bang. Anticipation was high when it was reported that Microsoft was being investigated just before the law was to come into effect on August 1.

A Microsoft probe would confirm multinationals’ worst fears about the new competition law – that it would be used as a protectionist tool to shut foreign business out. The tension dissipated when both Microsoft and government officials denied an ongoing investigation. But with the new law, it’s just the beginning.

The Anti-Monopoly Law covers three types of corporate behavior: Mergers and acquisitions, abuse of a dominant market position and monopolistic agreements. Observers say the law is neutral in its wording and that both foreign and domestic firms are treated fairly, in theory.

“There’s always a risk that a company as big as Microsoft, with such a big market share, it would be easy for them to be considered a dominant market position,” said Peter Wang, a partner at Jones Day. “The question is: Are things they are doing abusive under the law?”

A pricing debacle that arose last August concerning instant noodles offers insights into what the Chinese authorities may consider abusive. The China chapter of the World Instant Noodle Association announced that instant noodle prices would be raised by 20%. It said the price rise reflected higher costs.

Consumer advocacy lawyers promptly intervened, complaining that the price rises was the action of a cartel. The National Development and Reform Commission (NDRC) stepped in, telling the noodle makers to rescind the price hike while clarifying rules about future price increases. At least one noodle-maker, Hong Kong-listed Tingyi, has not raised prices since December.

“If we want to increase prices we need to send the application to the NDRC 10 days before,” said Debbie Ho, who is in charge of investor relations at Tingyi, which makes the Masterkong brand of instant noodles. “If they don’t reply within seven days, we may go ahead and increase the price.”

It was a victory for consumer advocates in China, and an indication of the uses the anti-monopoly law would have when it comes into effect. The law specifically covers trade associations, and it is believed coverage was extended after the instant noodle incident, according to a Jones Day research note.

State-driven monopolies
Lawyers are also paying close attention to the new law’s provisions for administrative monopolies. These are monopolies created by state policy – for example, the government forcing all taxi companies to buy only Volkswagen Santanas. Although the law does not prescribe penalties for non-compliance with the rules regarding administrative monopolies, observers say it is remarkable that the issue gets a mention at all.

“There are no actual penalties, but it’s not permissible anymore,” said Peter Corne, managing director of law firm Eversheds’s Shanghai office. “It creates a basis for doing something further in the future.”

However, the SOE stranglehold on certain industries isn’t likely to be overturned soon. The law holds out an exception for state-owned firms in industries that “implicate national economic vitality and national security” and does not specify what those industries are. It’s effectively a cover for SOE dominance in areas like banking and telecoms, although the law still states that abuse of a dominant position to the detriment of consumers will be dealt with.

“The precise application of [the law] to SOEs remains far from resolved,” said Kirstie Nicholson of law firm Lovells. “As with any other laws in China, the proof of the pudding will be in the eating.”

The law must be viewed in the context of China’s transition from state to private economy. A competition law requires a separation of state and economy, which is one of the reasons why it took more than a decade for the law to be promulgated.

“The paradox [of capitalist markets] is that they can only remain free and give the benefits of an effectively competitive economy if they are regulated at the edges to prevent cartels, anti-competitive mergers and exclusionary commercial strategies,” said Steven Anderman, a law professor at Essex University who advised on the Chinese competition law.

“Each country tends to define the scope for legitimate competition differently. I would expect China to decide on its own balance.”

Statement of intent
The Anti-Monopoly Law isn’t exactly filling a legislative vacuum. It overlaps with a number of other laws and regulations that have been used to deal with competition issues. The 1997 Price Law, for example, prohibits price-fixing among market players. The 1993 Unfair Competition Law outlaws abuse of dominance, which includes the “tying” arrangements that got Microsoft in trouble elsewhere. Therefore, the new Anti-Monopoly Law can be seen as a statement of intent – that China takes fair competition seriously.

“It’s a positive development generally … the way it’s written also seems to be positive, it’s fair,” said Wang.

The big question for multinationals is enforcement of the law. The law refers to two agencies – the Anti-Monopoly Enforcement Agency and an Anti-Monopoly Commission – as the investigative and policy research agencies responsible for enforcing the law.  But just how the agencies will be staffed, and who they will report to, among other issues, have not been made clear.

The law’s scope means a case could fall under the jurisdictions of several agencies, including the commerce ministry, the State Administration of Industry and Commerce and the NDRC. The public would have some channel to submit complaints to the government. The appropriate agency would then be tasked with investigating and using the law against the company.

According to Jones Day’s Wang, it’s unlikely that consumers or competitors will be allowed to bring lawsuits against companies under the law in the near future, although it remains a possibility.