On 30 August 2007 the Twenty-ninth Session of the Tenth National People's Congress approved the Anti-Monopoly Law ("Law"), which is China's first comprehensive competition law incorporating both anti-monopoly provisions and prohibitions against anti-competitive conduct. The law prohibits companies (and industry associations) from engaging in certain anti-competitive practices and market concentration activity, and also contains prohibitions relating to the anti-competitive conduct of government departments.

The Law is scheduled to commence on 1 August 2008.

Full Update

The Law regulates conduct within China, and conduct outside of China that has 'eliminative or restrictive effects on competition' in a domestic market in China.

Under the Law, companies are prohibited from entering into 'monopoly agreements', abusing a 'dominant market position', or participating in a 'concentration' that has the effect (or likely effect) of eliminating or restricting competition. Government departments or authorised organisations are prohibited from abusing their administrative powers to exclude or restrict competition.

1.  Prohibited 'Monopoly Agreements'

'Monopoly agreements' are divided into horizontal monopoly agreements and vertical monopoly agreements in the Law.

Horizontal monopoly agreements include agreements between competitors to fix prices, limit production or sales volumes, share markets, restrict technology development, or boycott competitors or customers. Vertical monopoly agreements include agreements that fix resale prices or restrict minimum resale prices to third parties.

Under the Law, these agreements are deemed to unlawfully restrict competition unless any of the exceptions set out in the Law apply. The exceptions include agreements that can improve technology, raise quality of product and production efficiency, enhance the competitiveness of small or medium-sized companies, release the pressure of decreasing sales or over supply during economic downturn, achieve public interests and protect proper interest of foreign trade and foreign economic cooperation. The concept of 'public interests' is not defined, but examples like 'energy saving' and 'environmental protection' are provided.

2.  Prohibited Abuse Of A 'Dominant Market Position'

Abuse of a 'dominant market position' is defined to include the sale of products at unfair high prices, and (where it cannot be justified) the act of selling below cost, refusing to trade with partners, or imposing unreasonable trading conditions or 'tie-ins' to sales. 

The Law denotes that a company has a 'dominant market position' where it is able to control the price or quantity of products or other trading conditions or to engage in conduct restricting or affecting entry of other companies into a relevant market. When an assessment on 'dominance' is made, several factors have to be taken into account, which include market share and competitive situation of the relevant market, power to control sales and supply markets, financial power and technical conditions of a company, the relevant company's relationships with other entities and the ease of entry into the relevant market.

3.  Prohibited 'Concentrations'

The Law prohibits participation in a 'concentration' that has the effect or likely effect of eliminating or restricting competition. In this context, a 'concentration' refers to merger activity, the acquisition of control over other companies through the purchase of shares or assets, or acquiring control of or the capability of imposing determinative effect on other companies by virtual of contractual rights or other means.  

Although the Law contemplates that there will be thresholds for notifying concentration activity, they are not currently included in the Law. It is anticipated that the State Council will issue regulations or guidelines for setting the thresholds. However, it is not clear whether the thresholds will reflect those set out in the Regulations Concerning the Merger and Acquisition of Domestic Enterprises by Foreign Investors (the "M&A Regulations") or the new thresholds set out in a prior draft of the Law. If the threshold or thresholds are met, notification has to be made and approved before the concentration can be implemented. Unlike the M&A Regulations, the notification requirement does not only apply to acquisitions by foreign investors but also to acquisitions by domestic companies. However, the Law provides an exemption to the notification requirement for intra-group transfers which does not exist in the M&A Regulations.

The Law further sets out detail in relation to the procedures and timeline for investigations. If a notifiable 'concentration' does not cause any competitive concern, the notification may be approved or deemed to be approved within 30 days after all the relevant documents and information are submitted. However, if further investigation is necessary, it may last up to a maximum of 180 days. 

Another notable provision which caused much concern to foreign investors is that the Law requires a national security review to be carried out before foreign companies are allowed to purchase or invest in Chinese operations where such activity could affect 'national security'. No explanation of the term 'national security' is provided in the Law, and it remains to be seen whether the Law will effectively broaden existing arrangements under the M&A Regulations whereby foreign investors must obtain regulatory approval if their purchase of a domestic company affects or likely to affect national economic security, takes place in key sectors or transfers the operating rights of famous domestic brands.

4.  Prohibited Abuse Of Administrative Powers

The Law also prohibits government departments and authorised organisations from abusing their administrative powers to curb competition. Examples provided include conduct that hinders the free movement of commodities among regions, and imposing discriminating requirements on products from other regions.

5.  Enforcement

According to the Law, State Council will set up the Anti-Monopoly Commission to organise, harmonize and lead the anti-monopoly work. Regarding enforcement of the Law, State Council will entrust the power to certain authorities ("Enforcement Authority") which are likely to be the existing enforcement agencies (such as the Ministry of Commerce and State Administration of Industry and Commerce) of anti-monopoly provisions under other competition legislation. 

6.  Penalties And Remedies

The Law provides for significant penalties and remedies in the event of an infringement. In relation to monopoly agreements or the abuse of a dominant market position, the Enforcement Authority has the power to make 'cease and desist' orders, and to confiscate illegal gains and impose fines up to a percentage below 10% of total relevant turnover in the preceding year (or, where a monopoly agreement has not been implemented, to impose a fine up to an amount below RMB500,000).   In relation to concentrations in violation of the Law, the Enforcement Authority can order the concerned parties not to proceed with the transaction, or to unwind it. It can also impose a fine up to an amount below RMB 500,000.  

The Law allows for leniency to be exercised where companies 'own up' to participation in prohibited conduct and cooperate in investigations. The Law also contemplates that parties who suffer loss as a result of monopolistic conduct of others can institute a civil action for recovery.

7. The Lead Up To 1 August 2008

In the interim, it is anticipated that guidelines and regulations will be issued by the State Council for providing details to certain provisions in the Law and to regulate the relationship between the Law and a number of existing laws that contain operative competition provisions which prohibit certain anti-competitive conduct (for example, the 1993 Anti-unfair Competition Law and the 1997 Price Law) and restrict merger and acquisition activity involving foreign companies (for example, the M&A Regulations). 

Introduction of the Law comes at a time of increasing focus on competition issues in China. This  suggests that the Law (and perhaps the pre-existing competition legislation) may be enforced with more vigour than has historically been the case for China's competition legislation.

Author: Hannah Ha, Gerry O'Brien

For further information, please contact:

Name: Hannah Ha
Position: Partner
Phone: +852 2843 4378
Fax: +852 2103 5968