China: Price hikes and price signaling

Last Updated: 9 May 2011
Article by Susan Ning

On 6 May 2011, the National Development and Reform Commission (NDRC) announced that a manufacturer of household and personal care products (the Manufacturer) has been fined a total of RMB2 million for breaching the Price Law. The NDRC also appeared to have made some Anti-Monopoly Law (AML) references in relation to this case.

Price Law breach

The following describes how the Price Law breach came about:

  • In March 2011, several manufacturers of household and personal care products separately announced that the retail prices for their respective brands of washing agents would be increased by as much as 10% commencing early April 20111.
  • In its announcements, the Manufacturer had reportedly made public statements to the effect that "the household and personal care products industry has entered into a 'price hike' cycle" and "[other than the first round of price hikes to commence in early April 2011] a second round of price hikes can't be ruled out".
  • Shortly after these announcements, the NDRC and its associated price authorities held discussions with these manufacturers and certain trade associations. The NDRC also commenced an investigation into these proposed price hikes. As a result, the above mentioned price hikes did not take place in April 2011 as planned.
  • The NDRC reported that the above mentioned announcements by the Manufacturer caused many consumers to panic – these consumers then went around "snatching up" the relevant household and personal care products in specified cities around China. According to the NDRC, this also led to suppliers (e.g. supermarkets) raising the prices of such products by up to ten times.
  • The NDRC was thus of the view that the Manufacturer breached the Price Law. Specifically, the Price Law prohibits business operators from spreading news in relation to price hikes and thus disturbing the market price order.  Pursuant to the Provisions on Administrative Penalty of Illegal Price Conduct, business operators which breach the Price Law face up to five times of their illegal gains or up to RMB 3 million (in absence of illegal gains).
  • In considering how much to fine the Manufacturer, the NDRC took into consideration that the Manufacturer had agreed to suspend their proposed April 2011 price hikes and also apologized to consumers for causing the "scare", after talks with price authorities. These, according to the NDRC, constituted as "mitigating" factors. The NDRC thus decided to fine the Manufacturer a total of RMB 2 million.

Possible AML references

As mentioned above, the NDRC made references to some AML concepts in respect of the above mentioned Price Law violation. 

During a press interview, NDRC officials noted that representatives from the Manufacturer made public statements to the following effect in or around March 2011: "the process of raising prices have to be made gradually in order to see whether competitors would follow suit"; and "if competitors do not follow suit, it would be a disaster for us and therefore, we should only raise prices gradually". It appears that the NDRC also made comments to the effect that such statements may amount to "price concerted practices".

The AML prohibits anticompetitive concerted practices between competitors.  Fixing prices by way of a concerted practice between competitors can be said to be a "hard core" breach of the AML.

Concluding comments

The Manufacturer was found to be in breach of the Price Law despite the fact that they did not, in effect, carry out their proposed price hikes. Thus, in relation to the prohibition re spreading news in relation to price hikes to disturb the market price order – it is clear that an "illegal gains" test is not necessary.

Furthermore, we note that the references to "price concerted practices" are interesting. We note that in Australia, recently, there is a Bill in place which proposes to outlaw conduct amounting to price signaling. In China, however, price signaling per se is not illegal pursuant to the AML. However, since price signaling may be a symptom of a business operator trying to act in "concert" with competitors to raise prices – business operators would be well advised to think twice before making such announcements.

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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