Share this article

What the Proposed Changes to China’s Anti-Monopoly Law Mean for Businesses in China

Summary

After only a dozen years since promulgating its initial Anti-Monopoly Law, currently proposed revisions promise to strengthen anti-monopoly enforcement in China and reshape the regulatory landscape in the world’s second largest economy. Actions by regulators over recent years have shown a commitment to more vigorous monopoly busting, and supplementary draft regulations indicate that China intends for its enforcement to be as robust as that found in the West.

While market economies excel at fostering competition and encouraging innovation, if left unchecked, problems inevitably arise. Even in the U.S., where deregulation has become something of a religion among conservatives since the Halcyon days of the Reagan Administration, a responsive bureaucracy policing private and public companies has remained firmly in place. This has certainly been the case with antitrust law (generally referred to as anti-monopoly law or competition law outside of the U.S.). 

While some commentators bemoan the lack of vigor in antitrust enforcement in the face of the novel environment that U.S. behemoths such as Amazon, Google and Facebook have created, antitrust regulation is still no slapdash affair. 2020, far from a record-breaking year, still saw criminal antitrust fines levied by the DOJ top US$500 million. While China’s relatively new Anti-Monopoly Law does not have the storied history one finds in U.S. antitrust enforcement, penalties levied against companies have grown in recent years. Now, with draft revisions to the Anti-Monopoly Law and the release of multiple draft regulations expressly addressing anti-monopoly issues, everything indicates that enforcement will become considerably more vigorous.

Initial Formation of China’s Anti-Monopoly Laws

Left to their own devices, businesses in competitive environments have an incentive to increasingly rely on monopolistic practices as they grow in power and influence, be that by one company securing a dominant position in a particular market, or by a small number of leading companies agreeing to prevent new challengers from entering their arena. The U.S. was perhaps the first nation to see this happen on a grand scale with large corporations and railway conglomerates in the late 1800s, and the Sherman Antitrust Act was passed in 1890 to put the breaks on burgeoning monopolies. Since then, antitrust investigations have been an important part of the U.S. regulatory environment, and landmark Antitrust cases have come down every few decades, with the breakup of AT&T in 1982 and Microsoft Corp. in 2001 being the most prominent examples in the last half century. Now, some say the time has come for another round of landmark antitrust cases.

With the importance of antitrust or anti-monopoly laws for the regulation of large modern economies, it is thus perhaps a little surprising that China waited decades before promulgating its own devoted anti-monopoly statutes in 2008. While there is little of modern Chinese jurisprudence that predates the reform and opening period, most of China’s current civil code can still trace its origin to the ‘80s, in the early years of reform and opening. Yet for many decades, what anti-monopoly law China did have was spread sparsely over a number of disparate legal and regulatory codes.

Of course, the historical context for the initial promulgation of China’s anti-monopoly laws was considerably different from the unfettered capitalism of 1890s America. Indeed, state-owned enterprises – often equivalent to state run monopolies – were a defining feature of Mao-era China, and are a major component of China’s economy even to this day. Of course, with one of the main purposes of SOEs being to provide employment to citizens, the incentives in play were totally different from Western corporations. It is perhaps not so surprising that monopolistic behavior among private and public companies was not of immediate concern during the reform and opening period. The Chinese economy had to first digest much of its inefficient and bloated SOEs before such concerns really rose to surface.

However, as non-SOEs rose in prominence in the Chinese economy after the turn of the century, the need to establish devoted anti-monopoly statutes became more apparent. Promulgated in 2007, and taking effect in 2008, China’s Anti-Monopoly Law (AML) aimed to add this important component to the regulatory framework. There was an ulterior motive here as well: while the China of the aughts saw some of the most explosive growth of the Chinese economy, the largest domestic Chinese companies were still predominantly SOEs. It was foreign entities that accounted for the largest non-SOE entities operating in China at the time, and there is at least circumstantial evidence that foreign entities operating in China may have been the initial targets of China’s fledgling anti-monopoly investigations. The year after the AML was enacted for example, it was used to deny Coca Cola’s purchase of Huiyuan, China’s largest domestically owned juice company.

The past decade has seen the rise of a number of influential private or publicly held Chinese companies – among them Huawei, Pingan, JD.com and, of course, Alibaba. Furthermore, while still heavily ‘bloated’ and overleveraged, years of reforms have marginally improved SOE efficiency. With an increased emphasis on competition by China’s SOEs, anti-monopoly regulation has proved valuable here as well (though the law is a little contradictory, with Article 7 of the AML giving more leeway for some monopolistic tendencies by SOEs, but the entirety of Chapter 5 ‘Abuse of Administrative Power to Exclude, Limit Competition’ aimed at regulating SOEs and government agencies for example). Considering this rapid maturing of the Chinese economy, it is perhaps not unexpected that revisions to the AML were put on the agenda, with draft revisions released for public comment in January 2020.

Notable Changes in the 2020 Draft Revisions of the Anti-Monopoly Law

Overall, the 2020 Draft Revisions of the Anti-Monopoly Law (“Draft AML”) seem to indicate a shift towards a more aggressive regulatory regime concerning anti-monopoly issues. Through several new provisions, the Draft AML both expands the scope of the law and adds teeth to enforcement actions and penalties. Specific additions include “organizing and facilitating other undertakings to conclude monopoly agreements” (Article 17), which suggests that more complex schemes involving orchestrating companies or price fixing rings will now be easier to deal with. Under the Chapter 3 of the law, new language expands the scope of where abuse of dominance applies, including language specifically aimed at up and coming technology companies. Article 21 sports new language that reads “…Recognizing operators in the internet field that have market dominant positions should also consider the factors of network effects, economies of scale, lock-in effects, capabilities to ascertain and process relevant data and other factors.” 

The revisions also expand the scope of where merger transactions would require filings with the regulating agency, and further empowers regulators to investigate failures to file such notifications. Statutory penalties have also been markedly increased, providing more leeway in calculating penalties across the board. This keeps with the trend of increasingly large penalties seen in anti-monopoly cases in the last few years. The revisions also pave the way for criminal liabilities in anti-monopoly cases, adding in an important component hereto lacking (while there have been a few cases of criminal penalties in anti-monopoly cases, these have been in situations where employees of a company committed adjacent criminal acts during the case, such as beating up anti-monopoly investigators when the investigators showed up for a surprise audit of their company).

The agency charged with enforcement of the AML is the State Administration for Market Regulation (“SAMR”). The SAMR only came into existence in 2018 as the result of a massive reshuffling of government departments that abolished once vitally important agencies such as the State Administration for Industry and Commerce (“SAIC”), while also bringing multiple other agencies directly under its control, including the State Intellectual Property Office. This reorganization resulted in multiple government agencies previously responsible for anti-monopoly enforcement (the Anti-Monopoly and Anti-Unfair Competition Bureau, the Price Supervision and Anti-Monopoly Bureau, the Anti-Monopoly Bureau, and the Anti-Monopoly Commission) to be merged under the SAMR’s Anti-Monopoly Bureau. This will likely be advantageous in terms of efficiency, with regulators being able to more easily coordinate and avoid wasting resources. The establishment of the SAMR represents a massive consolidation of regulatory power, and during its short two year history, it has not shied away from pushing the envelope in terms of anti-monopoly enforcement. Early last year saw the imposition of CN¥325.5 million in fines (US$50.2 million), the maximum allowable under the current law, in an anti-monopoly investigation into three pharmaceutical companies.

November Surprise

On November 10, 2020, the SAMR published its “Draft Anti-Monopoly Guidelines on the Platform Economy” (“Draft Guidelines”), inviting interested parties to submit comments on the guidelines before November 30, 2020. The Draft Guidelines doubled down on a few short passages that appeared in the Draft AML to create a robust framework through which the SAMR’s Anti-monopoly Bureau can pursue antitrust enforcement against internet companies. The guidelines cover monopoly agreements, abuse of market dominance concerns, and concentration of operators.

Only days after the end of its period for comments on its Draft Guidelines, the SAMR came out with guns blazing, with a few of those aimed at Jack Ma. On December 14, 2020, pursuant to Article 48 of the AML, the Anti-monopoly Bureau levied a fine of CN¥500,000 (US$77,145) against Alibaba for violating filing requirements concerning its acquisition of Intime Retail Group, a department store operator. Alibaba had acquired 73.79% of stock rights in Intime by the middle of 2017, but failed to file required documents with the SAMR. In an administrative holding, the SAMR found that Alibaba had violated Article 21 of the current AML, which states, “Any concentration…must be notified in advance with the anti-monopoly authorities…” However, the holding also let Alibaba off the hook for more strenuous regulatory enforcement, such as suspension of the concentration of businesses pursuant to Article 48 of the current AML by finding the acquisition did not have any effects on excluding or limiting competition. Note that if calculated according to the new Draft AML (with the relevant language now found under Article 55, formally Article 48), this fine could have been considerably higher, up to 10% of the prior year’s sales volume of the operators. Alibaba had annual revenue of CN¥376.8 billion in 2019 (US$58.1 billion), so the maximum hypothetical fine could have been as high as CN¥37.68 billion (US$5.8 billion) for simply failing to file required paperwork under the Draft AML.

Perhaps more concerning, a short ten days later the SAMR’s Anti-monopoly Bureau put out a short announcement indicating it was investigating Alibaba’s “pick one from two” practice for suspicion of monopolistic behavior. The “pick one from two” practice is certainly not unique to Alibaba, though Alibaba may be the top offender. The practice concerns forcing smaller merchants to choose to list products on only one e-commerce platform, and face being delisted from Alibaba if found on another major competitor’s platform. This raises both abuse of dominant market position concerns as well as concerns of anti-monopoly agreements if it is discovered that Alibaba was coordinating with other major online platforms to force small and medium sized merchants to sign such agreements.

Ant Financial, Jack Ma’s other company and focus of considerable media interest these past few months, has so far managed to dodge anti-monopoly investigations – its trouble has been in other regulatory areas. However, this may soon change, as yet another set of draft regulations was put out on January 20 by the People’s Bank of China – the Regulations for Non-bank Payment Institutions (Draft for Comments). It was regulations concerning the administration of online small loan services put out jointly by the People’s Bank of China and the China Banking and Insurance Regulatory Commission back in November, 2020, that threw a wrench in the highly anticipated Ant Financial IPO last year. This latest bout of draft regulations includes several provisions directed at reigning in anti-monopolistic behavior of non-bank payment organizations such as Alipay and WeChat Pay. Articles 55-57 and 64 lay out a path for the People’s Bank of China to work with the SAMR where it finds situations of market dominance to either provide a warning to such entities or initiate anti-monopoly investigations.

What the Future Holds

After setting up its initial anti-monopoly regime a little more than a decade ago, China is already well on its way to making anti-monopoly enforcement a key feature of its market regulation. It has shown this with steadily increasing fines as the years have gone by. Heavy fines have been levied against many other companies in more traditional sectors. Now, Chinese regulators are aiming to bring China’s tech giants to heel with new laws and regulations, with the CN¥500,000 (US$77,145) fines levied against Alibaba and other major internet companies under the current law perhaps serving as a shot across the bow, a warning of the stricter anti-monopoly regulation sure to come once all the draft laws and draft regulations formally take effect as enforceable law.

Scroll to Top
Teacup_250x233

The Weekly Steep

Arm yourself with bite-sized insights to stay in the know on all China business news. Leave your translator at home – our free weekly newsletter will keep you current on local news updates and top industry developments in the time it takes to drink a cup of tea!