China: Chinese Competition Regulators Focus On Cartels And Sharpen Their Investigatory Tools - 14 July 2009

Last Updated: 15 July 2009
Article by Martyn Huckerby and Alex Yang

China's Anti-monopoly Commission (AMC) has published guidelines that provide a basis for all enforcement activity under the Anti-Monopoly Law (AML) that involves defining the relevant market. Firms should now prepare themselves for possible dawn raids and other enforcement action by the National Development and Reform Commission (NDRC) against pricing cartels.

The Guidelines for Defining the Relevant Market (Guidelines) were issued by the AMC on 7 July 2009, the AML coordination body directly under the State Council. Therefore, they apply to any anti-monopoly enforcement work involving defining relevant markets, including controlling concentrations of undertakings, prohibiting monopoly agreements and abuse of dominant market positions, and prohibiting price monopolies, which are respectively handled by the Ministry of Commerce (MOFCOM), the State Administration of Industry and Commerce (SAIC) and the NDRC.

These guidelines follow draft rules on price monopolies and draft procedures for investigating and preventing price monopolies released by the NDRC on 9 June 2009. As a result of these draft rules and procedures, firms should review their pricing policy to ensure that they do not inadvertently involve monopolistic conduct at any of the following levels:

  • Prices charged to customers especially where the prices are "too high" (e.g., excessively above cost) or "too low" (e.g., insufficient to cover cost)
  • Prices paid to suppliers, especially where the firm uses "buying power" to extract a price that is "too low" (e.g., insufficient to cover the supplier's cost)
  • Prices offered to rivals who compete in downstream markets where the prices offered are "too high" such that it amounts to an effective refusal to supply
  • Any condition imposed on the price at which resellers may on-sell goods or services, and
  • Any arrangements on price with rivals or potential rivals, including any "informal understanding" that may develop independently of any formal agreements.

The draft NDRC rules may prohibit pricing conduct that some firms would not normally view as monopolistic. Australian firms in particular should consider these rules as they differ quite considerably from the rules applicable to Australian companies operating in Australia. They also prohibit administrative measures taken by public authorities that restrict or eliminate price competition.

Firms should take the opportunity to review whether they are affected by any administrative measures that may restrict or eliminate competition and consider asking the NDRC to review those measures.

1. Background To The NDRC rules

The draft NDRC rules and procedures complement those issued by the State Administration for Industry and Commerce (SAIC) which were the subject of two earlier alerts: Chinese regulators nearly battle ready - 30 April 2009, and Chinese antitrust regulators signal the commencement of AML investigations and fines - 9 June 2009. Whereas the draft SAIC rules concern monopolistic conduct on matters other than price, the draft NDRC rules concern price-related monopolistic conduct.

There are two types of price-related monopolistic conduct:

  • Monopoly agreements on price, and
  • Price-related abuses of market dominance.

The draft NDRC rules also apply to administrative measures issued by government agencies and organisations with a public affairs function conferred under a law or regulation.

2. Price Monopoly Agreements

The draft NDRC rules apply to written and oral agreements, and also to tacit understandings and co-ordination. Undertakings may be regarded as co-ordinating their pricing if the prices they charge for the same or similar products are subject to changes that are same or similar. While the NDRC rules recognise that there may be legitimate justification for such pricing behaviour, the rules do not indicate what justification would be accepted.

The draft NDRC rules go on to list a range of agreements that are prohibited. These include horizontal agreements (between competitors) to:

  • Fix price, discounts, changes in price and other price-related terms, and
  • Restrict output or sales with a view to fixing or altering price.

The draft NDRC rules also prohibit vertical agreements (between counterparties) on a minimum resale price. The agreements listed in the draft NDRC rules appear to be prohibited "per se", although this is not entirely clear.

The AML does allow monopoly agreements to be exempted on "policy grounds" where they are for the purpose of R&D, improved product quality, improved efficiency, or to protect the public interest (e.g., environment). However, exemption is conditional on the firm demonstrating that the monopoly agreement does not substantially restrict competition and that consumers will benefit from the agreement.

3. Abuse Of Market Dominance

As with other jurisdictions, China's AML prohibits firms having a dominant position in a market from abusing its market dominance. Unlike most jurisdictions, the AML also contain presumptive rules on market dominance (see bold text below). While this presumption may be rebutted (e.g. if there is evidence of easy entry, or of sufficient competition) the burden lies on the firm to do so. It could be difficult in practice to rebut a presumption of market dominance.

A firm is presumed to have market dominance if:

  • The firm accounts for more than 1/2 the market
  • The firm is one of two firms that together account for 2/3rd of the market
  • The firm is one of three firms that together account for 3/4th of the market.

A firm that meets the presumptive rules on market dominance should carefully review its pricing policies. Under the draft NDRC rules, any of the following practices could be regarded as an abuse of market dominance:

  • ("Monopoly/predatory pricing") charging prices that are "too high" (e.g., excessively above cost) or "too low" (e.g., insufficient to cover cost)
  • ("Monopsony pricing") using "buying power" to extract a price that is "too low" (e.g. insufficient to cover the supplier's cost)
  • ("Price squeeze") offering prices to competitors (in downstream markets) that are "too high" such that it amounts to an effective refusal to supply, and
  • ("Price discrimination") charging different prices for the same or similar products to customers who are in the same or a similar position.

The draft NDRC rules are expressed very broadly and potentially cover a host of pricing practices that firms may regard as normal commercial practice in their home countries. While this does not mean that the NDRC is set on using its powers indiscriminately, firms that meet the presumptive rules on market dominance should avoid dealing in a high-handed manner with customers, suppliers and rivals.

4. Abuse Of Administrative Power

Uniquely, China's AML prohibits abuses of administrative power that eliminate or restrict competition. These provisions reflect an attempt by the national government to prevent provincial and local authorities, as well as organisations having a public affairs function, from using their powers to eliminate or restrict competition.

The draft NDRC rules specifically prohibit measures that restrict inter-regional trade, including measures that:

  • Impose discriminatory charges and standards against non-local production, and
  • Impose discriminatory prices on non-local production.

The draft NDRC rules are, however, silent on other forms of price-related discrimination that may restrict competition as between:

  • Public enterprises and private firms, or
  • Domestic firms and foreign firms.

In principle, these forms of discrimination should also be prohibited under the AML to the extent they eliminate or restrict competition.

Some administrative measures may have the effect of eliminating or restricting competition to achieve certain legitimate public policy objectives. For example, it may be necessary to restrict competition in the provision of postal services in urban areas to subsidise the delivery of standard mail in rural areas.

It is not clear to what extent NDRC acknowledges that there may be a trade off between promoting competition and promoting other legitimate public interest objectives (e.g. health & safety, environmental protection, social security), and how the trade offs will be made. As these trade offs are a matter of public interest, ideally they should be made in a transparent manner with an opportunity for interested parties and members of the public generally to contribute to these decisions.

5. Guidelines On Market Definition

The Guidelines incorporate few changes to the draft that was previously published for consultation. The few changes that were made seem to address comments made on the earlier draft. For example, evidence of consumers switching to other products or to other geographic areas due to changes in price or other factors affecting competition is now stipulated as the primary consideration in defining a relevant product or geographic market from a view of demand-side substitutability. These changes indicate a willingness on the part of AMC to take on board legitimate comments on its draft Guidelines.

The Guidelines also provide an insight into AMC's thinking on the fundamental principles that underlie the AML. The Guidelines suggest that AMC's thinking is heavily influenced by established principles in other jurisdictions which in turn reflect economic theory. In particular:

  • The effect that a concentration has on competition is to be assessed in the context of a "market"
  • The scope of a market is based on "substitutability" - in particular, the market includes all products or services that are close substitutes, and
  • The extent to which products are close substitutes depends on the extent to which a hypothetical monopoly supplier of a given product can profitably raise the price of the product without causing customers to switch to the substitute product.

The principles described above are well established in antitrust/competition law, and appear to have been reproduced in the Guidelines. That said, there remains considerable discretion on how those principles are applied in practice, and how consistently they are applied over time and across different transactions.

6. Implications For Business

The approach to regulating price-related monopolistic conduct under the draft NDRC rules closely reflects the approach to regulating other monopolistic conduct under the SAIC rules. This indicates a high degree of co-operation between NDRC and SAIC.

However, it remains to be seen how closely and how well NDRC and SAIC will co-operate at a practical level when investigating specific instances of monopolistic conduct that involve both price and non-price aspects.

The clear implication of NDRC's and SAIC's actions to date is that firms should carefully review the way they conduct business in China, including the way they set prices and any price-related arrangements (whether formal or informal) they may have with customers, suppliers and rivals. This applies particularly to firms that meet the presumptive thresholds for market dominance under the AML.

While it is hoped that NDRC and SAIC will be cautious in the way they enforce the AML; as with the settling in period of any competition law, there are aspects of the AML which could be interpreted as prohibiting commercial practices that are considered normal and legitimate in other countries.

With regards to the Guidelines, they are generally based on orthodox principles. However, it remains to be seen how these principles are applied in practice.

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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