Antitrust in China: The Anti-Monopoly Law (AML) and Its Enforcement

From tacking monopolies to discouraging the formation of cartels (a type of oligopoly) and acting as a collusion deterrent, the antitrust dimension of a legislative system has received quite a bit of attention in Western jurisdictions such as the United States, European Union and so on.

Why?

Simply because the three phenomenon types mentioned previously and variations thereof risk affecting not just the best interests of the average consumer (being on the receiving end of competition-generated lower prices, superior products/services, etc.) but the very sustainability of a nation’s economic growth model by stifling innovation. Yes, some business owners would be able to remain in their proverbial comfort zones by let’s say bypassing competition but… well, everyone else would suffer.

What about China?

Contrary to popular belief, China’s antitrust legislative landscape is quite robust, with it revolving around the Anti-Monopoly Law or AML, adopted in 2007 (on the 30th of August, to be more precise) by the Standing Committee of the National People’s Congress and coming into effect in 2008 (approximately one year later, on the 1st of August). All People’s Republic of China market participants have to abide by the AML framework, with Hong Kong and Macau representing exceptions, in light of the fact that they have the status of Special Administrative Regions.

As mentioned in other articles, the AML does not represent China’s only anti-monopoly, anti-cartel and/or anti-collusion initiative, with past examples including:

1. The Anti-Unfair Competition Law of 1993
2. The Pricing Law of 1998
3. The Law on Bid Invitation and Bidding of 2008

… the list could go on and on, with more niche/specific examples.

However, the Anti-Monopoly Law does represent the first ever COMPREHENSIVE legal framework, one which views the entire situation as a whole and tries to essentially establish clarity as well as balance when it comes to anything that revolves around the idea of anti-competitive behavior, from various more or less murky agreements between business owners, to a financially potent player abusing his market position and mergers/partnerships which result in an entity so powerful that competition is inhibited. Again, “comprehensive” is the operative word, with existing legislation such as the previously mentioned three examples remaining in force.

What about the enforcement dimension, one oftentimes tricky when it comes to China?

Formally speaking, two regulatory bodies are in charge of overseeing monopoly-oriented activities:

1. The Anti-Monopoly Committee, or AMC, which is in charge of both shaping policy and coordinating enforcement
2. The Anti-Monopoly Enforcement Agency, or AEA, which (as the name suggests) focuses on the enforcement dimension through three agencies. The National Development & Reform Commission or NDRC tackles issues pertaining to prices, the Ministry of Commerce or MOFCOM overviews mergers and last but not least, the State Administration for Industry & Commerce or SAIC is in charge of enforcement with respect to anti-competition practices, anything from monopoly power situations to various agreements which inhibit innovation and the emergence of new competitors

Can the average Chinese also take action?

Indeed, even if the number of successfully seen through cases isn’t exactly overwhelmingly optimistic. Still, there is an intellectual property division in each and every major Chinese court and these divisions have also been put in charge of anti-competition cases. Again, the number of “textbook wins” isn’t exactly impressive but still, there are several noteworthy examples which involved significant damages being awarded to those who took their concerns to court.

Which activities are considered illegal?

For the most part, activities which revolve around:

1. Fixing prices of goods or altering them in a manner that isn’t conducive to facilitating competition
2. Deals between companies which revolve around them isolating a competitor or market participant by deciding to cease any dealings with the entity in question
3. Collectively agreeing to tone it down a notch when it comes to endeavors such as research & development investments
4. Dividing a market into sub-markets, with each competitor being in a de facto monopoly position when it comes to the segment it has been granted exclusivity to
5. Anything that has to do with setting production quotas which wouldn’t have existed in a competitive framework
6. Not competing on the marketing front, for example by synchronizing marketing campaigns in a manner that leads to none of the “competitors” gaining an edge by standing out

… the list could go on and on.

What are offenders risking?

In some cases, the penalties can be downright financially debilitating, for example 10% of last year’s total turnover for monopolistic behavior, agreements which are perceived as going against the AML being declared void and subsequent C&D orders being issued, the confiscation of income that is deemed to have been generated illegally… the list of examples could continue for quite a while.

Are the results compelling enough?

Simply put:

1. By Western standards… not quite, a state of affairs one can consider understandable in light of the fact that China has not yet had enough time to establish a proper track record, with not even 15 years passing since the first comprehensive competition-related framework has been adopted. As mentioned previously, laws did indeed exist prior to 2007 but nothing one can consider comprehensive enough to be satisfactory by Western standards
2. Compared to the past, most definitely. While it is fair to state that the legislative landscape seems decent enough (even by Western standards) but the enforcement dimension less so, it would be unfair not to acknowledge the tremendous progress which has been made over the years, with the Xi Jinping administration manifesting its willingness to meaningfully tackle issues past administrations have primarily addressed through rhetoric

As always, adjusting expectations is the name of the game and as an investor, let’s just say that judging more exotic jurisdictions (along with their comparatively greater wealth building potential) by Western standards would be… sub optimal, to put it mildly. Instead, it makes more sense to adopt a more realistic approach, one which revolves around acknowledging the progress that has verifiably been made but not deluding yourself into thinking that China can turn into a “fully Westernized” jurisdiction overnight.