China: China Adopts Its First Anti-Monopoly Law

Last Updated: 3 September 2008
Article by Diarmuid O'Brien and Jian Xu

Key Points:

  • Requires formal security examination of foreign investors seeking to invest in China-based companies

  • Designed to protect industries key to China's economy

  • State Council issues Provisions on Criteria for Filing of Concentration Of Undertakings

In August 2007 the Committee of the National People's Congress adopted the Anti-Monopoly Law, designed to enhance fair competition and regulation of the market. The new law took effect August 1, 2008.

Over the past year, businesses have had ample opportunity to gain an understanding of the law before being required to comply. Designed to protect key economic sectors, the law requires that investors from outside China seeking to invest in Chinese companies via merger, acquisition or capital investment undergo a formal security examination. This development parallels an existing requirement under China's merger and acquisition regulations that global investors submit to a fundamental security examination when undertaking mergers or acquisitions.

The issue of security examinations has become increasingly important because, in recent years, major China-based companies have matured and become targets for investors from outside the country. Famous brand-name companies are especially at risk. Since 2006, a prospective transaction of any value involving a key economic industry, a sector of national security importance or a famous brand-name entity has required the approval of the Ministry of Commerce. Also, state control must be retained in certain key industries – primarily petroleum, coal, energy, telecoms, civil aviation and shipping. In cases in which the prospective transaction involves a national security industry, the outside investor is subject to both antimonopoly and national security examinations.

As expected, the new law outlaws "monopolistic practices" such as cartels and collusion except for (i) government-approved monopolies in areas of critical economic importance, although these are not defined, and (ii) monopolistic agreements that promote and enhance technological innovation and progress. Moreover, like antimonopoly laws worldwide, the new law prohibits dominant market practices that adversely affect competition, such as price fixing. Under the law, market dominance exists when a company holds more than 50% of the market share, when two companies hold more than 66%, or when three companies hold at least 75%. The primary focus of these provisions is to protect and strengthen consumer welfare.

Enforcement of the law will be undertaken by the Anti-Monopoly Law Enforcement Authority, not to be confused with the Anti-Monopoly Law Committee responsible for drafting policy.

The new law was broadly welcomed, with the EU Chamber and AmCham China both issuing statements welcoming its promulgation.

Regarding enforcement, a new Anti-Monopoly Commission ("AMC") has been created, which will be under the supervision of the State Council. The AMC has been described as an inter-agency coordinating body that will include divisions of three key agencies engaged with the development of China's competition law system: the Ministry of Commerce, the State Administration of Industry and Commerce ("SAIC") and the National Development & Reform Commission ("NDRC"). Select divisions of MOFCOM will be responsible for issues involving mergers and acquisitions; the SAIC will be responsible for market dominance and anti-competitive activities; and the NDRC will address issues concerning price fixing and price-related anticompetitive activities.

On August 3, 2008 the State Council promulgated the Provisions on Criteria for Filing Notice of Concentration of Undertakings (State Council Decree No. 529) ("Provisions"), which took effect as of the same date. The Provisions stipulate that concentration of undertakings include not only mergers of undertakings or one undertaking acquiring control of another undertaking through acquisition of its shares or assets, but also when one undertaking acquires control or is able to impose a determining influence on another undertaking by way of contract or other means.

An undertaking must file notice in either of the following situations: (a) when the aggregate global turnover of all undertakings participating in the concentration for the previous fiscal year exceeds RMB 10 billion and at least two of the undertakings had respective turnover over RMB 400 million inside the territory of China during the previous fiscal year; (b) when the aggregate turnover within China of all undertakings participating in the concentration for the previous fiscal year exceeds RMB 2 billion and at least two of the undertakings respectively had turnovers over RMB 400 million within China for the previous fiscal year. Even if the scale of the concentration does not satisfy the above criteria, the enforcement authority is legally entitled to conduct an investigation to determine the existence of any other form of concentration that may have the effect of eliminating or restricting competition.

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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