China: PRC Competition Law - New Rules Provide Partial Clarification

Last Updated: 17 August 2009
Article by Jonathan Selvadoray and Elaine Zhu

Due to the lack of detailed implementation rules, the new Chinese Anti-monopoly law (the "AML") is still not fully enforced in China, even one year after coming into effect. To further progress the enforcement of the AML, the Chinese authorities recently promulgated several implementation rules to clarify some important issues, in respect of (1) the investigation of monopoly agreements (price-related) and abuse of a dominant position (price-related), (2) definition of relevant markets and (3) calculation of turnover for the notification of concentrations in the financial industry. This article provides you with highlights of and comments on these new rules.

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Due to the lack of detailed implementation rules, the new Chinese Anti-monopoly law (the "AML") is still not fully enforced in China, even one year after coming into effect. To further progress the enforcement of the AML, the Chinese authorities recently promulgated several implementation rules to clarify some important issues, in respect of (1) the investigation of monopoly agreements (price-related) and abuse of a dominant position (price-related), (2) definition of relevant markets and (3) calculation of turnover for the notification of concentrations in the financial industry. This article provides you with highlights of and comments on these new rules.

Several new rules have recently been issued for the implementation of the new Chinese Anti-monopoly Law (the "AML"), effective on 1 August 2008. The following are some highlights of these new rules, which clarify certain issues and enhance the transparency of the law.

I. SAIC Investigation Rules

On 5 June 2009, the State Administration for Industry and Commerce ("SAIC"), one of the three anti-monopoly enforcement agencies (the "AMEA") in China, issued the Procedural Rules for Investigating Monopoly Agreements and Abuse of a Dominant Position (the "Investigation Rules") which came into effect on 1 July 2009. Note that the Investigation Rules are only applicable to "non-price related" monopoly agreements or abuse of a dominant position as the "price-related" issues are under the authority of another AMEA, being the National Development and Reform Commission ("NDRC").

The Investigation Rules provide that SAIC is fully responsible for regulating non-price related monopoly agreements and abuse of a dominant position, which means that only SAIC can initiate the investigation of such anti-competitive activities. This power can be vested by SAIC in one of its provincial branches under certain circumstances, but no further authorization is permitted to lower levels. The centralisation of the regulatory power is due to the complex nature of anti-competitive activities and in order to maintain the standards of enforcement.

In the AML, it is generally provided that if a party involved in a monopoly agreement can provide crucial evidence to the enforcement authorities, such party "may" be exempted from penalties or have only mitigated penalties imposed. The Investigation Rules repeat the same general provision and further state that such leniency policy is not applicable to the instigators of monopoly agreements and "crucial evidence" is defined as the evidence which is crucial to initiate the investigation and to define the monopoly agreements. However, these provisions still do not give the parties involved enough incentive to confess their illegal activities to the enforcement authorities as the use of the word "may" leaves uncertainty, leaving the application of the leniency policy to the discretion of the authorities. A similar leniency policy is also adopted in the EU. However, more detailed requirements and procedures to qualify for exemption or reduction of penalties are provided, which are more practical and straightforward for companies to follow.

II. Market Definition Guidelines

The Anti-monopoly Committee ("AMC") of the State Council published the long-awaited Guidelines on the Definition of Relevant Markets (the "Guidelines") on 7 July 2009, following a draft of the Guidelines circulated on 5 January 2009 for public comment. AMC is an advisory authority established to advise and coordinate the work of different AMEAs. It has regulatory power to draft and promulgate competition policies and guidelines.

The Guidelines adopt similar methodologies of market definition as those used in other more mature jurisdictions, such as the EU and US. The Guidelines detail the relevant definitions and concepts, as well as theoretical basis, methods and practical factors to be considered when defining a relevant market.

The Guidelines provide that a relevant market is usually defined in two dimensions, which are the relevant product market and the relevant geographic market. The relevant market shall be defined on the base of "demand substitutability" and "supply substitutability". In line with international practice, the demand substitutability analysis should first be used and the supply substitutability analysis is also applied in certain circumstances. Furthermore, if neither of these two methods clearly defines the relevant market, a third method, being the hypothetical monopolist test (also known as the Small but Significant and Non-transitory Increase in Price Test), can be adopted. The Guidelines also provide that economic analysis based on objective and true statistics is encouraged to be used and consumer interests should be considered. By applying these methods of defining a relevant market, the Chinese authorities may still face difficulty in obtaining sufficient objective statistics to carry out the analysis.

III. Calculation of Turnover

The Ministry of Commerce ("MOFCOM") as the competent authority for merger control, together with other financial market related authorities, issued the Measures for Calculating the Turnover for the Notification of Concentrations in the Financial Industry (the "Measures") on 15 July 2009, which will come into effect on 15 August 2009.

According to the Rules on the Notification Thresholds for the Concentration of Business Operators (the "Threshold Rules") promulgated on 3 August 2008, the Chinese authority chooses the turnover thresholds applicable to all sectors. The Threshold Rules further provide that, due to the special characteristics of the financial industry, the calculation of turnover for enterprises in this industry will follow further implementation rules to be issued. The Measures have now been promulgated to clarify this issue.

The Measures are applicable to the calculation of turnover of financial enterprises, including banks, securities companies, futures companies, fund management companies and insurance companies.

The Measures detail the calculation method of turnover for each kind of financial company. For example, the following income of a bank should be included in the calculation: net interest income, net commission fees, investment income, income from changes in fair value, exchange gains and other business income. The calculation formula is as follows: Turnover = [Sum of all above income – (Business Tax + Surcharges) ] × 10%.

IV. Conclusion

Comparatively speaking, the merger control system is better implemented by MOFCOM and there are several existing test cases that reflect this. However, the legislation of the other two main pillars of the AML, being monopoly agreements and abuse of a dominant position, is relatively slow. This is the first time SAIC published related rules and NDRC is still delayed in publishing its rules for regulating the price-related anti-competitive activities, which always raise more severe competition concerns. It is reported that the three AMEAs are busy drafting more implementation rules which are likely to be promulgated by the end of this year. Being essential to the full and effective enforcement of the AML, supporting rules with more details and certainty are both expected and welcomed.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 17/08/2009.

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