China: Antitrust Alert: Chinese Pricing Enforcers Impose Higher Fines as New Rules Proposed

Recent actions by the Chinese price regulator, the National Development and Reform Commission ("NDRC"), indicate an increasing emphasis on enforcement against pricing and other competition law violations. Companies in agriculture industries and other business sectors that could implicate national or industrial policy concerns are especially likely to face review during periods of high or anomalous pricing.

This month NDRC has announced a series of enforcement actions against several agricultural product companies for seeking to increase prices through collusion, false rumors of price hikes, and forestalled production. This follows cartel enforcement actions against domestic rice noodle suppliers announced a few months ago (as described in our prior alert.

Then, on July 13, NDRC released for public comment draft Special Rules on Penalties for Price Violations During Abnormal Market Price Fluctuation (the "draft Special Rules"). Although more price regulation than antitrust, together the draft Special Rules and recent enforcement actions suggest several developments:

  • Policy considerations (such as curbing inflation) will play a significant role in NDRC's enforcement priorities.
  • NDRC is likely to actively enforce the Anti-Monopoly Law ("AML") against nationally significant pricing conduct in the future.
  • The Price Law, for which NDRC is the sole enforcement agency, will remain an important tool for anti-cartel and anti-monopoly enforcement, while the AML will remain the principal enforcement tool against global cartels, as it authorizes extraterritorial jurisdiction over offshore conduct affecting Chinese markets.

Background

Enforcement actions. The antitrust actions against agricultural product cartels followed widely-reported price hikes for daily necessities, such as garlic and green beans, and are consistent with continued focus on the food and agricultural industries by multiple government agencies, including NDRC and the market supervision departments of the Ministry of Commerce ("MOFCOM") and the State Administration of Industry and Commerce ("SAIC").

The NDRC announced four sets of enforcement actions challenging (1) green bean distributors for colluding to raise prices through industry conference discussions of decreased production and spreading rumors of price increases, (2) a garlic distributor for hoarding, withholding product from the market, (3) a trade association that circulated a document requiring local companies to offer refrigeration services to garlic distributors at a fixed price, and (4) a green bean distributor for raising prices significantly, resulting in "excessive" profits. These actions resulted in Price Law fines ranging from RMB 20,000 or USD 3,000 (for raising prices significantly) to RMB 1 million or USD 150,000 (imposed on the industry conference organizer).

NDRC announcements and media statements indicate that these enforcement decisions were made by local branches of NDRC under the Price Law, not the AML.

The draft Special Rules. Although the NDRC has available to it a detailed penalties regime for Price Law violations (in the NDRC Regulation on Administrative Penalties for Price Violations), NDRC has found itself unable effectively to deal with abnormal price fluctuations. The new draft Special Rules enhance NDRC's authority. They provide for the same general penalties –up to five times the illegal gain – as in the existing Regulation, but they double the maximum statutory fine to RMB 2 million and provide for unspecified criminal liability if the conduct severely disturbs market order.

On the other hand, the scope of the draft Special Rules is restricted. They would apply only during "special" circumstances, namely, abnormal price fluctuations in important commodities (a term that is left undefined) that may significantly affect everyday life or industrial production (like a five-fold increase in garlic prices). They will be discontinued after the abnormal price fluctuations cease. They would apply only to a limited range of prohibited conduct – price collusion, false rumors of price increases, malicious withholding of goods, and price increases producing excessive (twice "normal") profits. They may be enforced only by the NDRC itself and/or provincial governments – not local NDRCs or local governments.

Observations

Risks of industry meetings. These enforcement actions highlight the risk that market discussions among competitors can lead to competition law violations.

The green bean price-fixing action centered on the Jilin Corn Centre Wholesale Company, which organized an industrywide conference and later circulated a report predicting nationwide green beans output would decrease by 64%. Since the State Administration of Grains officially estimated only a 15% decrease, the Jilin Corn Centre was accused of collusion and "spreading rumors of price increases and pushing up prices significantly" in violation of the Price Law. The Jilin Corn Centre was fined RMB 1 million – a substantial fine by nascent Chinese standards. The conference co-sponsors and 100 attending companies were also found liable for colluding to increase prices, on the grounds that the Jilin Corn Centre report facilitated a common understanding regarding production deceases and price increases.

Statements by the NDRC suggest it was not required to prove intent to collude to decrease production and increase prices or to prove that the companies actually caused price increases. Some news reports indicated that the green bean and garlic price increases were due instead to "hot money" (market speculation) and natural disasters. However, as evidence of collusion, NDRC, in a television interview, pointed to statements by conference speakers: "output will definitely decrease," "do not sell your green beans, the price will increase," and "this meeting will help us to reach a common understanding of the market." NDRC claimed that, after the conference, many distributors began to make large purchases of green beans, and green bean prices rose steadily.

Risks from unilateral conduct. These enforcement actions indicate Chinese law may impose liability for pricing conduct that would be safe under other jurisdictions' competition law.

In one case, a garlic distributor was fined RMB 100,000 or USD 15,000 for holding more than 3,000 tons of garlic off the market for a year and for speculating on garlic forward contract prices on an electronic trading market. In another case, a green bean distributor was fined RMB 20,000 or USD 3,000 for raising its green bean prices significantly over a few months. This distributor appears to have been penalized under Article 14(7) of the Price Law for making "excessive" profits, which is interpreted by the draft Special Rules as twice the difference between production cost or purchase price and the selling price. There is no indication that the accused distributor had market power or dominance. Thus, it appears that, although the AML only subjects dominant firms to its prohibition of "selling at unfairly high price," NDRC will rely on the Price Law and forthcoming Special Rules to reach more broadly.

These are examples of unilateral conduct that may be challenged if the purpose or effect was to limit output, increase price, or obtain "excessive" profits.

Risks of substantial but unpredictable fines. These enforcement actions highlight the monetary risk of violations and suggest that broader policies may inform enforcement decisions.

The penalties imposed by NDRC in these recent enforcement actions included warnings, confiscation of illegal gains, and fines. Price Law fines can be up to five times any illegal gain, or as high as RMB 1 million if no illegal gain can be proven. The organizer of the Jilin Corn Centre conference was fined RMB 1 million – the highest statutory fine available under the Price Law – while the co-sponsors each were fined RMB 500,000 or USD 75,000. These are significantly higher than past NDRC agricultural product fines and the fines imposed in the earlier rice noodle price fixing case, where local NDRCs imposed fines of only RMB 100,000 or USD 15,000.

NDRC and its local offices actually enjoy considerable discretion in fines, and their standards are unknown. It is widely speculated that policy concerns, such as the prioritization of inflation control in agricultural products markets, play an important role in determining whether take enforcement actions and what fines to impose.

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.

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