On November 9, 2011, an earlier rumor indicating that China Telecom is under antitrust investigation for alleged abuse of dominance in the broadband market was confirmed by the National Development and Reform Commission ("NDRC"), the authority in charge of price-related breaches of the Anti-Monopoly Law ("AML").  This is by  far the first time for China's antitrust enforcement authority to conduct an antitrust investigation on large state-owned companies.  It is speculated that billions of antitrust fines could possibly be levied if the violation is established.

This article is a follow-up of our previous article entitled " Chinese Antitrust Enforcement Agencies Ready to Show Teeth to Large State-owned Enterprises? ", which includes a comprehensive analysis of the claimed violation.

The news

The news was released by News in 30 Minutes, the daily midday news program of CCTV (China's state television broadcaster) on November 9.  According to the exclusive interview with Ms. Qing Li, the Deputy Director General of the Price Supervision and Anti-monopoly Bureau of the NDRC, NDRC has been investigating China Telecom and China Unicom for their alleged abuse of dominance in the broadband access and inter-network settlement sector.

According to Ms. Li, the followings have already been found through investigations:

  • China Telecom and China Unicom together account for more than 2/3 shares in the internet    access market, indicating the companies have dominant market positions;
     
  • Both companies charged their competitors much higher prices than non-competitors, which   could constitute "price discrimination" (one of the prohibited abusive conducts) under the AML.

 

Ms. Li further stated that if the abuse is established, fines of 1% to 10% of the companies' sales of the preceding year could be imposed in accordance with the AML. She also mentioned that the turnover of China Telecom and China Unicom in relation to their internet access business is approximately RMB 50 billion and RMB 30 billion respectively.  It is therefore speculated that the potential antitrust fines can be as much as billions of RMB.

This news report verified an earlier report claiming that China Telecom has been under antitrust investigation by certain "relevant authorities". Furthermore, it suggests that the investigation has extended to another telecommunication giant—China Unicom. As mentioned in our previous article, the two companies almost duopolize China's broadband access market.

The news led to a plunge in the two companies' share prices. Later on the same day, both China Telecom and China Unicom, in conformity with their disclosure obligations under the Hong Kong Stock Exchange rules, made announcements in response to the news. China Telecom claimed that it would fully cooperate with the authorities on the investigation.1  China Unicom declared that it was in the process of providing the NDRC with pricing, volume, turnovers and other relevant information of its involved business.2

Comments

NDRC's confirmation of its antitrust investigations against the two giant State-owned telecommunication operators can be seen as a clear indication that Chinese competition authorities are ready to show their teeth to all violators of the AML regardless of their identity.  In this sense, it is an improvement for AML enforcement, and clears doubts as to whether state-owned enterprises will be treated differently under the AML.

From a technical perspective, as mentioned in our previous article, assuming the alleged abusive conducts existed, the companies are likely to be caught by Article 17 (1) or Article 17 (6) of the AML.  According to Ms. Li, the companies potentially violate Article 17(6) of the AML for conducting "price discrimination".

 What is "price discrimination"?

Pursuant to Article 17(6) of the AML, a dominant operator shall not abuse its dominance by "adopting differentiated terms of transactions, such as transaction price, with trading counterparts of same conditions without a valid reason".  We have said before that one of the key points in establishing price discrimination is whether the companies' competitors and other internet bandwidth renters (such as Internet Content Providers) can be regarded as "trading counterparts of same conditions" thereby deserving equal trading terms.  Furthermore, the companies can also defend their differentiated pricing policies by claiming they have "valid reasons" for doing so.

What are possible "valid reasons" as defense?

There is no hint in the NDRC's Rules on Anti-Price Monopoly about what could constitute a "valid reason" for a dominant company to exercise price discrimination. However, we may find some clue in the State Administration for Industry and Commerce ("SAIC")'s Rules on Prohibition of Abuse of Dominance ("SAIC Rules") that governs non-price-related abuse of dominance.  The SAIC Rules provide that when determining valid reasons, SAIC may consider: (1) whether the conduct is based on normal operations and for normal benefits of the company; and (2) the impact of the conduct on economic efficiency, public interest and economic growth.  Although the SAIC Rules are not binding on the NDRC, it is reasonable to make reference to these provisions since the SAIC and NDRC are both antitrust authorities having close relationships.

 What is the finable turnover?

Another interesting issue we noticed in the news report is that the turnover of the companies the NDRC official referred to only relates to the companies' internet access business, which is the subject of this investigation.

Article 46 of the AML provides that an operator in violation of the AML could be imposed a fine of 1% to 10% of its turnover of the preceding year. The AML and the relevant rules provide no further guidance as to whether the turnover here, as the basis for calculating penalties, refers to a company's total turnover or it only relates to a company's business segment where violation is found.  Neither is there clarification as to whether the turnover here is on worldwide or China–wide basis. The NDRC's statement shed some light on this unsettled issue: it appears that at least for now, only the turnover of the relevant business is taken into account.

Although the NDRC has yet to make a definitive finding on its investigation of China Telecom and China Unicom, its fierceness on this event is ground-breaking and reflects the growing emphasis and attention on AML enforcement in China. Whatever the result is, this investigation will become a milestone of AML enforcement in China.   

As one of the most powerful state agencies, the NDRC had been challenged for not taking significant actions to enforce the AML. Apparently, the NDRC is trying to change the landscape and it is reasonable to expect that it would become more active in the future in combating price-related anti-competitive conducts.

1Available at http://www.chinatelecom-h.com/eng/announcements/announcements/a111109.pdf.

2 Available at http://www.chinaunicom.com.hk/tc/investor/ir_annouce.html. As a dual listed company, China Unicom also made a similar announcement with Shanghai Stock Exchange.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.