Wednesday, December 30, 2009
China’s Antimonopoly Law—One Year Down Part 5. A De Facto “Dual-Track” Competition Regime?
Posted by Wentong Zheng
In my previous post on this space (see here), I mentioned that SAIC and NDRC, China’s two
government agencies charged with enforcing the AML’s abuse-of-dominance
provisions, are giving a free pass to abuse-of-dominance conducts by China’s
largest state-owned-enterprises (“SOEs”).
As I will discuss below, the two agencies’ inactivity is part of a
larger pattern of not enforcing the AML against the largest SOEs. In this post below I will offer my assessment
of what this differential treatment for the largest SOEs means for China’s
broader competition regime.
First, some brief backgrounds on China’s SOEs. Before the 1980s, almost the entire Chinese
economy consisted of SOEs. Due to
privatization and the emergence of the private sector in the last three
decades, SOEs now account for only a third of the Chinese economy by some rough
estimates. However, the shrinkage of the
relative share of SOEs in China’s overall economy masks their sheer sizes and
dominance in many sectors. Since the mid
1990s, China has been implementing a strategy of strengthening control of the
largest SOEs while loosening control of or privatizing the smaller ones. Today, a substantial number of the largest
companies in China are SOEs directly controlled by the central government. These largest SOEs are the dominant players
in such sectors as energy, telecommunications, banking, petroleum and
petrochemicals, transportation, heavy industry, and infrastructure.
So how does the AML deal with the SOE-dominated sectors? The answer to that question lies in Article 7
of the AML, which in relevant part states (translation is my own): “In SOE-dominated
sectors concerning the health of national economy and national security, and in
sectors where state trading is authorized by law, the lawful operations of the undertakings
are protected by the state. The state
will supervise and regulate the conducts of these undertakings and the prices
of the goods or services provided by them to protect the interests of consumers
and promote technology advancement.” The
language of Article 7, however, is remarkably ambiguous. It pronounces that “lawful” operations of
SOEs in SOE-dominated sectors are protected by the state—but “lawful” under
what laws? If the conducts of dominant
SOEs have to be lawful under the AML in order to be protected, Article 7 will
bring SOE-dominated sectors within its reach.
But if the conducts of dominant SOEs need only be lawful under laws
other than the AML in order to be protected, Article 7 will effectively create
a blanket exemption for SOE-dominated sectors.
From the text of Article 7 alone, it is just not clear which
interpretation is correct.
Whether or not the AML creates a de jure exemption for dominant SOEs,
all evidence indicates that the AML is simply not being enforced against such
SOEs as a practical matter. We have
already seen an example of the non-enforcement in the abuse-of-dominance area
in my previous post. Similar
non-enforcement could be found in other areas, too. In the area of horizontal agreements, for
example, blatant violations by the largest SOEs of the AML’s prohibition of
price-fixing and market allocation—violations that would have almost certainly
landed the responsible individuals in prison had they occurred in Western
countries—are widely reported by the Chinese media but ignored by the
antimonopoly enforcement agencies. The
Chinese media reported (see one report here in Chinese) that in April 2009, China’s two
largest importers of potassium fertilizers—Sino-Chem and Sino-Agri, both being
SOEs—decided at a meeting in Shanghai to jointly “maintain and push up”
potassium fertilizers prices that were being pressured downwards by lagging
domestic demands. Another highly
publicized attempt at price-fixing was done by none other than CNPC and
Sinopec, which were also involved in the abuse-of-dominance conducts discussed
in my previous post. The Chinese media
reported (see here for one report in Chinese) that in March 2009,
CNPC and Sinopec carried out two joint “price pushing campaigns” to stabilize
falling diesel prices in China. Yet
another high-profile horizontal agreement in violation of the AML is the market
allocation agreement reached in February 2007 between China’s then landline
telecommunications duopoly, China Telecom based in southern provinces and China
Netcom based in northern provinces, both among China’s largest SOEs. Under the agreement (see one report here in Chinese), the two telecommunications giants
agreed not to compete for landline business in each other’s base
territory. Although the market
allocation agreement was signed before the AML was enacted and China Netcom was
later merged into China Unicom in October 2008 in China’s latest round of
telecommunications restructuring, after the AML went into effect there has been
no report that the agreement has been revoked, nor has there been any report of
government investigations into the agreement.
Certainly, the fact that the AML is not being enforced against the
largest SOEs in the areas of abuse of dominance and horizontal agreements does
not, in and of itself, indicate a special treatment for the largest SOEs. After all, the two agencies charged with enforcing
the AML’s abuse-of-dominance and horizontal agreements provisions—SAIC and
NDRC—have not brought enforcement actions under the AML against anybody.
An alternative explanation for the non-enforcement is the relatively
short period since the AML went into effect and the slowly building capacity of
the enforcement agencies. This otherwise
plausible explanation, however, is cast in doubt by the fact that NDRC once
moved swiftly against price-fixing by China’s major instant noodle
manufacturers in 2007 even before the AML was adopted (see here for one report in Chinese), when the companies
involved in that incident happened to be private or foreign.
There is one area of the AML where evidence of a de facto exemption for
the largest SOEs is more definitive, and that area is merger review. As I pointed out in my earlier post on
China’s new merger review regime under the AML (see here), all of the mergers for which MOFCOM has made
its merger decisions publicly available involve foreign investors. The question that is relevant for our
purposes here is: Do mergers involving SOEs, particularly the largest SOEs,
undergo merger review by MOFCOM under the AML?
The answer to that question is a clear “no” in at least one high-profile
SOE merger case. In a rare admission to
the media in May 2009 (see here for a report in Chinese), MOFCOM confirmed that
the merger between China Unicom and China Netcom, consummated in October 2008
as part of China’s restructuring of its telecommunications industry, was not notified
to MOFCOM for merger review despite that it reached the notification threshold
under the AML. For other mergers
involving the largest SOEs, definitive evidence is not available as to whether
they underwent merger review by MOFCOM, but anecdotal evidence indicates that
they very likely did not. By my tally,
since the AML went into effect in August 2008, there have been fourteen other
mergers (excluding the China Unicom and China Netcom merger) (see list here in Chinese) involving China’s largest SOEs that
are supervised by the State-Owned Assets Supervision and Administration
Commission (“SASAC”). The press releases
issued by SASAC for all of these mergers only mentioned that the mergers were
approved by the State Council and did not mention that they were approved by
MOFCOM.
In short, more than a year after the AML went into effect, there appears
to be emerging a de facto exemption from the AML for the largest SOEs. But it will be wrong to say that China has
entirely ruled out competition in SOE-dominated sectors. Indeed, in recent years China has taken
important, though limited, steps aimed at injecting competition into these
sectors. For example, in certain sectors
such as telecommunications and electricity, China has been pushing for more
competition for years by breaking up dominant SOEs into smaller ones or
creating additional SOEs that compete with one another. After several rounds of government-initiated
restructuring, China’s telecommunications market has evolved from one in which
a single SOE—China Telecom—monopolized the entire market to one in which three
SOEs—China Telecom, China Unicom, and China Mobile—compete with one another for
both landline and mobile businesses (see here for an analysis in English of the latest round
of telecommunications restructuring in China).
In the electricity sector, China has broken up the all-powerful
integrated electric power monopoly—China National Electricity Corporation—into
two electric grid companies and five electric power generation companies.
In addition to breaking up SOE monopolies, China has also opened up some
of the SOE-dominated sectors to private and foreign capital, though only to a
limited degree, by relaxing the stringent market entry restrictions in place in
those sectors. An important milestone in
this respect is what becomes known in China as “Thirty-Six Articles on
Non-Public Economy,” a guidance document issued by the State Council in
February 2005 that allowed private capital to enter any sector into which the
law does not otherwise forbid entry and any sector into which foreign capital
has been allowed entry. As a result,
since 2005 China’s private capital has made forays into sectors long
monopolized by SOEs, such as railroads, airlines, and petroleum, with varying
degrees of success.
What all of these boil down to is that a de facto “dual-track” competition
regime appears to be taking shape in China, with one track relying on the AML
to promote competition in private and foreign-invested sectors and the other
track relying on government-initiated market liberalization measures to promote
competition in SOE-dominated sectors. It
remains to be seen how well this dual-track competition regime will serve China
in promoting competition. In the
earliest stage of a country’s transition from a centrally planned economy to a
market economy, government-initiated market liberalization measures, rather
than antitrust law, would be the only way to open up market competition, as
there would not be much competition in the first place to be regulated by
antitrust law. But I suspect that most
of China’s industries have gone past that stage. As market liberalization exposes a bigger and
bigger portion of China’s economy to market competition, it will become more
and more questionable to continue shielding the remaining SOEs from the reach
of antitrust law. But maybe—and just
maybe—China’s de facto dual-track competition regime will become another
successful example of its gradualist approach to economic reform, an approach
characterized by tolerance of imperfections and even defects along the way to
accomplishing the ultimate goal.
Speaking of goals, what makes the implementation of the AML and China’s broader competition regime particularly challenging is the fact that promoting competition is not the only goal of many of China’s economic policies. In many areas, the goal of promoting competition comes into conflicts with other policy concerns, most notably industrial policy concerns. In my next post, I will offer some thoughts on the tension between antitrust and industrial policy in China. Stay tuned.
https://lawprofessors.typepad.com/antitrustprof_blog/2009/12/chinas-antimonopoly-lawone-year-down-part-5-a-de-facto-dualtrack-competition-regime-.html