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Monday, January 11, 2010

China’s Antimonopoly Law—One Year Down: Part 6. Bigger is Better? Tensions Between Industrial Policy and Antitrust in China

Posted by Wentong Zheng

As I mentioned in my previous post on this space (see here), one challenge China faces in implementing the AML and more generally its competition policy is that promoting competition is not always the only or the most important goal of many of China’s economic policies.  In this post below, I will discuss one of the major competitors of antitrust law and competition policy in China, i.e., industrial policy.

 

Although China’s economic success so far can be largely attributed to market-oriented reforms, China has managed to preserve an active role for the state in its economy.  Aside from owning and managing a vast number of state-owned-enterprises (“SOEs”), the Chinese government often employs industrial policy to promote the development of specific sectors or industries.  Industrial policy in China takes a variety of forms, including direct government subsidies, tax incentives, special regulatory measures, and market entry liberalization measures.  In recent years China has proposed or implemented various industrial policy plans for a number of industries, such as coal, cement, paper, steel, and automobiles.

 

As a general matter, industrial policy is not necessarily incompatible with competition policy.  While competition policy ensures the full functioning of market by removing private and public restraints on competition, many forms of industrial policy as applied to particular industries may be justified on grounds of correcting market failures.  In China, industrial policy has a particularly close relationship with competition policy, as many of China’s economic policies serve the function of both industrial policy and competition policy.  For example, the market entry liberalization measures discussed in my previous post are a form of industrial policy, yet they are also the quintessential competition policy because they, perhaps more than anything else in the context of China, promote competition in the sectors in question.

 

However, there is one aspect of industrial policy as exercised in China that does create tensions with the fundamental purpose of competition policy.  Namely, in many of its industrial policy plans China has emphasized the government’s intention to promote mergers and acquisitions that will lead to concentration of market power in a few extra-large companies, or “national champions.”  To be sure, policies favoring the creation and support of national champions are not unique to China.  Many other countries, particularly developing countries, have long used such policies, and in some cases quite successfully.  But perhaps nowhere than in China has the creation and support of national champions been made such a centerpiece of industrial policy for so many sectors.  China’s extensive reliance on national champions is best illustrated in its overall SOE restructuring plan.  In December 2006, China’s State-Owned Assets Supervision and Administration Commission (“SASAC”) issued a document entitled the Guidance Opinions on Advancing the Restructuring of State Capital and the Reorganization of State-Owned-Enterprises (see herefor the document in Chinese).  In that document, one of the primary policy measures announced by SASAC for the restructuring of SOEs is to “push for mergers and acquisitions among large SOEs” to form “a group of extra-large companies that are internationally competitive.”  In an interview given shortly after the issuance of the SASAC guidance document (see herefor the interview in Chinese), the director of SASAC elaborated that China’s goal is to maintain absolute control by SOEs of “strategic sectors,” including national defense, electrical power generation and grids, petroleum and petrochemicals, telecommunications, coal, civil aviation, and waterway transportation.  The leading companies in those sectors, the SASAC director further stated, should become “world class” companies, an apparent reference to what the SASAC guidance document called “extra-large companies that are internationally competitive.”

 

The adoption of the AML and specifically its merger control provisions in August 2007 did not reverse China’s emphasis on national champions in its industrial policy, as one would be inclined to believe.  In two industrial restructuring plans issued by China’s State Council in March 2009 concerning the steel and automobiles industries respectively (see hereand herefor the texts of the plans in Chinese), China again announced that its top priority in the two industries is to push for mergers and acquisitions among the largest companies to form “extra-large companies that are internationally competitive.”  China went a step further in the two industries’ restructuring plans than in the aforementioned SASAC guidance document, setting specific market share targets for the largest companies in the two industries.  The restructuring plan for the steel industry states that after mergers and acquisitions, the top five steel companies should account for forty-five percent of the total capacity of all steel producers in China.  The restructuring plan for the automobiles industry states that China aims, again through mergers and acquisitions, to reduce from fourteen to less than ten the number of automobile companies that have a market share of more than ninety-percent in their respective product market.  The restructuring plans for both industries do not mention how the planned mergers and acquisitions would comport with the merger control provisions of the AML.  As a matter of fact, neither restructuring plan mentions the AML at all.

 

So there appear to be tensions, if not outright conflicts, between the AML’s merger control provisions and China’s goal of forging “extra-large companies” in various industries through government-guided mergers and acquisitions.  China’s emerging de facto dual-track competition regime discussed in my previous post may be one way for China to get around the tensions.  Since the largest companies in industries targeted by China’s industrial policy tend to be all SOEs, by effectively not enforcing the AML against the largest SOEs, China for all practical purposes will have elevated industrial policy above competition policy for those industries. 

 

China’s obsession with “extra-large companies” in many of its industrial policy plans is likely not the only or the greatest impediment for antitrust law and competition policy.  Arguably, the political and cultural bias in favor of concentration of power underlying that obsession poses more fundamental challenges for the implementation of antitrust law and competition policy in China.  In the United States, where modern antitrust law originated, one thing that has aided the implementation of antitrust law is the deep-rooted skepticism of concentration of power, be it political or business (leaving aside the question of whether the implementation of antitrust law is always desirable).  By contrast, China has almost the exact opposite: the Chinese system prizes centralized power and centralized control, and in China anything big tends to elicit pride, not fears.  This bias in favor of “bigness” partly explains the bigger-is-better mentality manifest in many of China’s industrial policy plans.  It is true that China has enacted its antitrust law in the same style as the antitrust law of the United States, but it remains to be seen how the spirit—or even the letters—of antitrust law will be implemented in a country whose broader political and cultural frameworks are not exactly compatible with the spirit of antitrust law.

 

In my next and final post for this blog series, I will survey the latest developments of “administrative monopolies,” or anticompetitive conducts by government agencies, under the AML.  Stay tuned.

 

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