China’s National Development and Reform Commission (NDRC) and State Administration for Industry and Commerce (SAIC) are the two authorities in charge of investigation and supervision of “monopoly” agreements and abuses of dominant market position. NDRC focuses on price-related cases while SAIC takes care of non-price related violations of the law. Compared to MOFCOM, which is responsible for merger control, NDRC and SAIC have been relatively quite since China’s AML came into force on 1 August 2008.
We know that, according to Article 46 and 47 of the AML, NDRC and SAIC are entitled to impose a fine of up to 10 per cent of an undertaking’s turnover in the previous year. Despite such significant punishment power in hand, NDRC and SAIC seem to be proceeding prudently. From 2008 to 2010, NDRC and SAIC have dedicated their resources to creating detailed rules for implementing the AML. After implementation rules were introduced, 2011 saw more action from NDRC and SAIC.
Major Actions in 2011
SAIC Imposes First Fine in Anti-Monopoly Case
According to SAIC’s website of January 2011, the Jiangsu branch of SAIC (Jiangsu AIC) fined the Committee for Concrete (which belongs to the Lianyungang City Construction Material and Machinery Association) RMB 200,000 for illegally organizing a cartel in the local concrete market. According to news from online media, Jiangsu AIC also fined five participants of the cartel RMB 530,723.19 and confiscated their illegal profits amounting to RMB 136,481.20. These actions were taken by Jiangsu AIC in response to the participants’ illegal division of the concrete sales market. This was the first fine under the AML that was handled and imposed by SAIC.
Eighteen months earlier, in June 2009, the local branch of SAIC in Lianyungang City received “whistleblower” information from construction companies alleging that the Committee for Concrete forced its member concrete manufactures to honour an “agreement” in which the signatories cannot conclude a contract with buyers independently. The local branch of SAIC in Lianyungang City reported such information to Jiangsu AIC. With the authorization of SAIC, Jiangsu AIC formed a special investigation team to conduct the investigation, with team members carefully chosen from all its local branches. It was not until 200 days later that the team had collected sufficient evidence for their investigation. Finally, it was found that the Committee for Concrete organised (required) 16 premixed concrete manufacturers to abide by various agreements such as the Self-Discipline Regulations for Premixed Concrete Manufacturers, Regulations of Inspection and Punishment, together with other agreements (Self-Discipline Agreements), and conspired to monopolize the premixed concrete industry through coordination between its members. Further investigations revealed that in order to implement the Self-Discipline Agreements, the Committee for Concrete partitioned the market and sold zones of control to member manufacturers by making assessments of their production lines, cement mixers and pumping equipment.
This case showed a changing of attitude by SAIC. The head of the Anti-Monopoly and Anti-Unfair Competition Enforcement Bureau of SAIC, Ning Wanglu, pointed out that it was a good start in terms of AML enforcement and would set a precedent to warn others against illegal activity by market players. This case also suggested a typical case and the practice under SAIC’s investigation procedure: the local AIC receives whistleblower information; the local AIC reports to the provincial AIC; the provincial AIC reports to (central) SAIC and obtains investigation authorization from SAIC; the provincial AIC forms a special team and then conducts the investigation.
NDRC Investigating China Unicom and China Telecom’s Abuse of Dominant Position
In an interview with China Central TV Station, Li Qing, deputy director of the Price Supervision, Inspection and Anti-Monopoly Bureau of NDRC, revealed that NDRC is investigating China Telecom and China Unicom for abuses of their dominant market position in the broadband internet market. The two telecom state-owned enterprises (SOEs) are being investigated for discriminatory pricing for access to their broadband network by charging competitors more than what they charge non-competitors. The investigation therefore concerned Article 17.6 of the Anti-Monopoly Law, which provides that enterprises with dominant market positions may not apply, without justification, differential prices or other discriminatory transaction terms with their trading parties.
This is a significant development, as it shows that, contrary to many foreign commentators’ views, the NDRC is prepared to take action against powerful SOEs. Until this case, it was assumed that because large SOEs were so close to the government, no government agency would subject these companies to investigations or public criticism. Clearly, however, the NDRC has not taken this approach.
According to an announcement published on China Telecom’s website on 2 December 2011, China Telecom had submitted a correction plan and applied for a suspension of the investigation with NDRC. However, no news indicated that NDRC accepted such an application. The investigation may be still ongoing.
NDRC Fines Two Pharmaceutical Distributors for Monopolistic Practice
News concerning this case was released on 14 November 2011, just days after NDRC revealed its investigation into suspected anti-competitive behaviour of China Unicom and China Telecom (see above).
In this case, two pharmaceutical distributors, Shandong Weifang Shuntong Pharmaceutical Co. Ltd. and Weifang Huaxin Medicine Trading Co. Ltd., were found to have dramatically raised the price and monopolized the supply of promethazine hydrochloride, a raw material of the compound reserpine, which is a medicine included in China’s essential drug list for high blood pressure treatment. Annually in China, more than ten million patients, mostly low- and middle-income earners, consume in total eight to nine billion reserpine tablets.
The two pharmaceutical distributors are related companies and are controlled by the same individual shareholder. Each concluded separate, exclusive distribution agreements with the only manufacturer of promethazine hydrochloride in China. The two companies (although actually "one operator") obtained a dominant position by means of such exclusive arrangements. After controlling the supply for promethazine hydrochloride, the two distributors raised the price from less than RMB 200 to a range of between RMB 300 and RMB 1,350. Many producers of compound reserpine tablets could not afford such price increases and were forced to cease production in July 2011. This endangered the supply of compound reserpine tablets and resulted in a serious price increase. Such behaviour was deemed a violation of Article 17.1 of the AML, which prohibits a dominant undertaking from selling products at an “unfairly high price".
The NDRC ordered the two distributors to terminate the exclusive agreements immediately and imposed fines of RMB 6.877 million (approximately US$ 1.08 million) on Shuntong (including confiscating illegal gains of RMB 3.77 million) and RMB 152,600 on Huaxin (including confiscated illegal gains of RMB 52,600).
This case indicates that NDRC is beginning to take a more active role in enforcing the AML. Those doing business in China should be careful when entering into exclusivity arrangements with suppliers and distributors.
At the National Price Supervision, Inspection and Anti-Monopoly Meeting held on 23 and 24 December 2011, the deputy chief of NDRC indicated that in 2012 NDRC will proceed with further enforcement of the AML, and investigate and inspect fees charged by banks, prices of coal for generating electricity, and educational expenses. Undertakings in the banking, thermal coal and educational sectors should therefore be ready for inspections and ensure they have effective compliance programs in place. At this meeting, Mr. Xu Kunlin, the head of the Price Supervision, Inspection and Anti-Monopoly Bureau of NDRC, pointed out that NDRC will strictly enforce the law and impose heavy punishments.
Equally, at a national meeting held by SAIC in early February 2012, Wang Dongfeng, deputy chief of SAIC, also indicated that SAIC will strictly punish anti-competitive behaviour in 2012.
In 2012 we expect that there will very likely be even more investigations conducted by NDRC and SAIC, and potential fines in the millions of Renminbi.