China: China’s competition regulators launch new year reforms: Part 1 - Pricing - 7 January 2011

Last Updated: 12 January 2011
Article by Martyn Huckerby

China's competition law regulators have published much anticipated implementation rules under China's Anti-Monopoly Law (AML), announced a new price fixing decision, and sent a warning to firms in China that they should expect further investigations in 2011 and should take immediate steps to review their pricing policies.

Overview

On 4 and 7 January 2011, the National Development and Reform Commission (NDRC) and the State Administration of Industry and Commerce (SAIC) respectively published their long awaited substantive rules, which provided much needed assistance in the interpretation of the broad framework prescribed under the AML. The issuance of the new regulations is timely given the government's intention to ensure price stability by putting in place measures to help safeguard pricing practices in China, particularly among dominant market players.

The NDRC and SAIC are two of the key competition regulators with responsibility for enforcing the AML, along with the Anti-Monopoly Bureau of the Ministry of Commerce (which is responsible for merger control). The NDRC shares its responsibility for investigating monopoly agreements and abuses of market dominance with the SAIC but has exclusive responsibility for cases that involve monopolistic pricing practices.

The NDRC promulgated Regulations on Anti-Price Monopoly (NDRC Price Regulations) and Procedural Regulations on Administrative Enforcement of Anti-Price Monopoly (NDRC Procedural Price Regulations). Whereas the SAIC promulgated three pieces of legislation: Regulations on Prohibiting Monopoly Agreements (SAIC Monopoly Agreement Regulations), Regulations on Prohibiting an Abuse of a Dominant Market Position (SAIC Dominance Regulations) and Regulations on Prohibiting an Abuse of Administrative Power (SAIC Administrative Abuse Regulations).

The new NDRC and SAIC regulations were developed from earlier consultation drafts respectively published in August 2009 and May 2010 and will all take effect on 1 February 2011.

We will discuss the new legislative developments by the NDRC in this Part 1 article and address those relating to the SAIC in a subsequent review (Part 2) in the coming days.

1. NDRC Price Regulations

Once in effect, the NDRC Price Regulations will supersede the 2003 Provisional Regulations on Prohibiting Price Monopoly (which were formulated under the Price Law) and will cover three main types of monopolistic pricing activities:

  • Price monopoly agreements;
  • Dominant undertakings excluding or restricting competition through price-related means; and
  • Administrative organisations and agencies engaging in discriminatory pricing or other conduct to exclude or restrict competition.

The NDRC Price Regulations confirms our view that the AML, including its abuse of dominance provisions, will be fully applicable to large State-owned enterprises (SOE). However, it is unclear how and to what extent these provisions will be enforced against SOEs given that the NDRC Price Regulations seemingly exempt sectors that are considered a "national economic lifeline" or involve "state security". It is clear that the new rules do not apply to agricultural producers and rural economic organisations in respect of their business operations.

In respect of the exercise of intellectual property rights, it is generally not governed by the NDRC Price Regulations or the AML unless an abuse of intellectual property rights would have the effect of excluding or restricting competition. It is expected that further specific implementing regulations clarifying what would constitute an abuse of intellectual property rights will be issued in the future.

Price monopoly agreements

Prohibited price monopoly agreements include both 'horizontal' agreements with competitors and 'vertical' agreements with counterparties. Generally, prohibited horizontal agreements are those with competitors that fix or change price or a range of prices, which would essentially have the effect of collectively predetermining the price of a product. Prohibited vertical agreements are those with counterparties that fix a resale price or determine a minimum resale price.

Monopoly agreements extend to "concerted acts" and can be either made orally or in writing. The NDRC Price Regulations assist in formally clarifying factors that would be used to determine what constitutes "concerted conduct". While they remain broad and subject to further interpretation, factors include considering whether there has been conformity in pricing and communication among undertakings and a review of the relevant market's structure and dynamics. The definition of "conformity" provided in an earlier draft has been excluded from the final regulation, leaving greater discretion to the authorities to interpret the same.

Recognising that industry associations play an important role in assisting the development of competitive markets, they are specifically prohibited from organising undertakings to engage in the above mentioned monopoly agreements.

Dominant undertakings excluding or restricting competition by price-related means

The NDRC Price Regulations provide long-awaited clarity in relation to what conduct constitutes an abuse of dominance.

Under the NDRC Price Regulations, market dominance is determined by presumptions based on market share and indicative factors, which mirror the provisions of the AML. Provisions explaining each indicative factor in further detail in previous drafts (i.e. ability to control purchase and sales in a market, financial and technological attributes, and factors affecting entry into the market) have since been removed. However, recent cases provide guidance to firms in this area; please refer to our previous alerts for further details.

A list of prohibited activities by dominant undertakings under the AML is referenced below together with corresponding guidance provided under the NDRC Price Regulations:

AML Prohibited Activity

Clarification under the
NDRC Price Regulations

Comments

Article 17(1): Selling or purchasing at an unfairly high or low price

Factors to determine "unfairly high/low price" include:

  • price as compared to that of undertakings;
  • normal magnitude of price increase/decrease when cost unchanged;
  • the extent of increase in sale price as compared to the extent of cost increase; and
  • the extent of decrease in purchase price as compared to the extent of cost decrease of the counterparty.

An earlier reference that benchmarked the cost of a product has been removed.

Implication: This assists firms who do not price their products solely based on cost (e.g. patented products).

Article 17(2): Selling below cost without justification

Justifications include:

  • disposing fresh, live or seasonal products, or overstocked products;
  • price reductions due to cessation of business; and
  • new product promotion.

As compared with earlier drafts, fewer justifications have been included. Proposed justifications such as responding to others' below-cost strategies or benefits from economies of scale have been excluded.

Further, the definition of "selling below cost", where an undertaking continuously sells products at a loss for anti-competitive purposes has also been excluded from the current version.

Implication: While the provisions are not as favourable as previous drafts, the remaining justifications are sufficiently broad to enable dominant firms to have flexibility in their pricing behaviour.

Article 17(3): Refusal to deal by setting excessively high/low prices without justification

Justifications include:

  • to manage risk borne from counterparty's poor credit record; and
  • the counterparty having other options for similar or substitutable products at a reasonable price.

The definition of "excessively high/low price", which referenced profit in earlier drafts has not been not adopted in the current version.

Implication: The stated justifications should leave dominant firms with commercial freedom to choose their trading partners, but will require a carefully developed and implemented strategy to ensure they do not infringe the AML.

Article 17(4): Exclusive dealing by price-related means without justification

Justifications include:

  • to ensure the quality and safety of products;
  • to maintain brand image or improve service quality; and
  • to distinctly decrease cost or improve efficiency, which benefits customers.

A newly introduced provision which now directly corresponds and reflects provisions under the AML.

Implication: Firms should carefully review their pricing policies based on these amended provisions.

Article 17(5): Tying unreasonable fees in addition to charging sale price

No justifications available.

A newly introduced provision which now corresponds and reflects provisions under the AML.

Implication: Firms should carefully set prices and avoid incurring additional fees that may be considered illegal.

Article 17(6): Applying discriminatory price terms without justification

No justifications are provided and no clarification on how to determine if counterparties are in the same/similar condition to determine if discriminatory treatment exists.

Provision in earlier drafts which deemed discriminatory treatment to exist when counterparties are in different conditions has been excluded.

Implication: Dominant firms should have an objective policy in place to assist them to defend any claim that they have been abusing their dominant position.

Administrative organisations and agencies engaging in discriminatory pricing or other conduct to exclude or restrict competition

Administrative organisations and agencies are prohibited from imposing discriminatory charges, standards and prices on non-local goods and services or otherwise impeding the free flow of goods and services by setting prices or charges. These provisions on prohibiting abuses of administrative power that exclude or restrict competition basically echo Chapter 5 of the AML.

Administrative organisations and agencies are also prohibited from enforcing undertakings to engage in monopolistic pricing activities or setting rules that would exclude or restrict price competition. As such, firms should take the opportunity to review whether they are affected by any administrative measures that may restrict or eliminate competition and consider requesting the NDRC to review any such measures.

2. NDRC Procedural Regulations

The NDRC Procedural Regulations are generally consistent with those promulgated by the SAIC (see our earlier alert) and cover process relating to whistle-blowers, investigation of alleged price monopoly activities, circumstances where an investigation would be suspended, leniency regime and decision-making.

In respect of the leniency regime, the NDRC Procedural Regulations provide more detailed guidance as to the applicable level of fine reduction if an undertaking (informant) were to actively report a monopoly agreement and provide significant evidence. Fine reductions will depend on an informant's timing relative to that of other informants. These are set out in the table below:

If an informant is the:

Possible fine reduction

First to report

100 per cent

Second to report

≥ 50 per cent

Others

≤ 50 per cent

Although it is not expressly noted in the current rules, the regulatory authority is unlikely to grant relief to informants who acted as ringleaders of a monopoly agreement (including relevant industry associations).

Additionally, compared with the SAIC procedural rules, the NDRC Procedural Regulations impose less onerous documentary requirements on informants. Some information required under the SAIC procedural rules (e.g. whether an informant has reported the same suspected fact to any other authorities or filed with the court) is not required in an informant's application, presumably because it would fall upon the NDRC to investigate and verify the same.

The differences between the leniency regime put in place by the SAIC and that now adopted by the NDRC highlights the potential uncertainty for firms arising from the overlapping jurisdiction of both regulators. Firms wishing to rely on the leniency regime may wish to agree on the specific conditions and seek a guarantee of immunity in advance prior to disclosing information to the regulators.

3. Other recent developments in relation to NDRC enforcement

Revised penalty rules under the Price Law

On 4 December 2010, the State Council of China published revisions to the Provisions on Administrative Penalties on Price Violations, which is currently the key basis for determining penalties imposed on monopolistic pricing activities. The maximum administrative fine for a violation under the Price Law, including collusive price increases and violations against government price controls, has been raised to RMB 5 million from RMB 1  million. The revised penalty rules do however clarify that serious price violations that disturb market order may attract criminal liability.

By comparison, the AML prescribes fines ranging from 1% to 10% on the offending party's worldwide sales turnover for the preceding year. The liability for anti-competitive conduct by an industry association is capped at RMB 500,000.

While local regulators have continued to favour the imposition of penalties under the Price Law, it remains to be seen whether the authorities will make use of the potentially broader range of fines available under the AML as a result of the new NDRC regulations.

Price cartel investigation

While the NDRC has only just published its substantive and procedural rules pursuant to the AML, it has nevertheless been active in conducting investigations under the Price Law, under which it has exclusive jurisdiction (see our August 2010 review). Adding to the list of investigations is the 4 January 2010 announced case of Zhejiang Fuyang Paper Association. A fine of RMB 500,000 has been imposed on this association for organising its members to collectively charge or fix the price of paper packaging between March and September 2010. The NDRC has indicated that it will continuously publish typical price violation cases with a view to strengthening enforcement under the AML. Firms operating in China should therefore expect further enforcement action in 2011.

International cooperation

The NDRC has also been actively pursuing opportunities to exchange knowledge internationally. In early December 2010, the Price Supervision and Investigation Department of the NDRC, which is responsible for implementing price-related laws and regulations (including the AML), held a joint workshop with the Competition Department of the OECD in Beijing. The workshop focused on exchanging legislative and enforcement experience with the OECD member states regarding price cartel enforcement and combating bid rigging.

Conclusion

The new NDRC regulations are a further significant step towards completing the regulatory structure required for effective enforcement of the AML and provides the government additional means to help fight inflation, which is a sensitive issue in the PRC at present. The NDRC played an important role in examining monopolistic pricing practices in 2010 and it is expected that it will take an even more vigorous enforcement role given the promulgation of new regulations. It is also possible that the NDRC will join other regional regulators in commencing action against global cartel conduct (for example against firms in the transportation and travel sectors).

As such, firms operating in China who have till now delayed taking steps to comply with the AML, should take immediate action to address any potential compliance issues. This would include reviewing existing pricing strategies, updating the firm's compliance policy, and providing compliance training for any staff involved in dealings with competitors (for example, through industry associations).

Firms that may also be in a dominant position in a market in China must be extra vigilant given the additional obligations they face under the AML. Such firms should ensure that their promotional claims do not detract from a position they may wish to take in the future.

2011 looks set to become the year that China's competition regulators commence rigorous enforcement of the AML. Anyone working in China should be mindful that serious cases of anti-competitive conduct (for example hard-core cartel conduct, such as price fixing), may attract criminal liability (and the potential for imprisonment).

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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