Antimonopoly Law is No Weapon

Foreign companies discover that they might not be the law's prime targets after all.

Many foreign businesses still remembered their trepidation when the first antimonopoly law was passed in August, 2007 and implemented in 2008 in China. Especially at a time when multinational companies were worrying Chinese policy makers were growing wary of foreign investments in general, their fear was that the law would offer protectionists of domestic business in the government a new weapon to deal a blow to foreign companies. Even now there remains a sense that as the law takes effect, the government is cracking down harder on foreign companies than on local firms. But in reality it is more complex.

The main concerns for foreign companies arise from broad and vague provisions that leave much discretion and offer more power in the hands of Chinese antitrust regulators—and so could potentially be applied unevenly to domestic and foreign firms when mergers and disputes arise. For example, the law prohibits dominant firms from refusing to deal with others "without valid justification," but leaves entirely open what such justifications might be. However, similar broad and vague language is common in any antitrust law. American and European antitrust laws contain similarly open provisions, the meanings of which only became clear over the years as courts and agencies gained experience (and made plenty of missteps, of course) with actual cases.

Beyond that, a few Chinese characteristics of the law have aroused concerns from multinational companies. They are afraid that the law has become a powerful weapon for implementing several of Chinese policy aims which are not directly related to antitrust issues, by the Chinese government. For instance, the law provides for "national security" review of acquisitions of Chinese companies by foreign companies, although little details about the practical implementation of these acquisitions have been released to the businessmen. The merger-review provisions of the law also offer regulators wide scope to consider factors like national economic development, the interests of small Chinese companies in the market and the implications for foreign trade. Many of these provisions follow international precedents, but it's still not clear how Chinese regulators will use their new power which is provided by this law.

Up to now, early evidence seems to show regulators have adopted a fairly conservative approach to antitrust enforcement, with the law not being used solely against foreign multinationals. To date, the Ministry of Commerce in China has reviewed more than 140 mergers under the antimonopoly law. All of its published decisions have involved multinational companies, but in only one case—Coca-Cola's attempted acquisition of the local juice company Huiyuan—was a merger blocked. Although that is more than the number of purely domestic deals the Chinese authorities have blocked (zero, in fact), it's hardly considered to be clear evidence of discrimination against foreign companies.

Although these merger decisions have turned on somewhat aggressive legal principles and theories, they are actually directly inspired by precedents from those more developed antitrust jurisdictions, especially Europe. The Commerce Ministry's decision in China to block the Coca-Cola's acquisition of the local juice company Huiyuan, was based on theories which are reminiscent of the European Commission's refusal to approve the merger between General Electric and Honeywell in 2001.

Meanwhile, according to media reports, it indicate that a good number of the 140 merger cases have involved only domestic firms, including some transactions between large state-owned enterprises. The main message that reflects is that moving forward, foreign businesses should not expect China will be different from any other place where they need to seek regulatory approval.

Nonmerger enforcement mainly has taken the form of action against domestic price-fixing cartels. For example, the PRC National Development and Reform Commission in March, 2010 ruled against 33 producers in southern Guangxi province for jointly agreeing to raise rice noodle prices. The relevant authorities and departments imposed higher fines for cartel organizers while granting much leniency for some participants who were forced into the scheme. In July, 2010, they penalized several domestic distributors of garlic and green beans—both major ingredients in the Chinese diet—for colluding to raise prices, spreading rumors about price increases, and withholding products from the market to artificially increase the prices for huge illegal profits.

These cases may indicate that China is using the antimonopoly law largely for manipulating domestic policy purposes such as preventing artificial price inflation in foodstuffs, rather than as a tool against foreign investment.

A similar pattern plays out with another aspect of the law that gave foreign companies heartburn: the ease with which private parties can sue over alleged competition violations. China is more open to private lawsuits for antitrust complaints than any other country except the U.S. But so far nearly all of these cases appear to have been filed by Chinese complainants against Chinese companies. On the first day the law became effective, January 1, 2008, one individual filed a lawsuit against China Netcom, one of the big state-owned telecoms providers, for allegedly abusing its dominant market position through discriminatory pricing policies. It is easy to foresee that there are and will be cases against foreign companies, but this early record seems to suggest that civil litigation under the law will not merely be another tool with which to bludgeon foreigners.

It's still far too early to say how China's antitrust regime will evolve over time. Understanding how it has been applied up to now, however, offers some important context as commentators worry about a supposed deterioration in the broader economic relationship between China and the outside world. Although foreign companies complain with some justification of growing problems doing business in China, the fact remains that Beijing has shown considerable restraint in its application of a law that easily could have become a blunt tool against foreign firms.