The Anti-Monopoly Law ("AML"), China's first antitrust law, was adopted on 30 August, 2007 and it entered into force on 1 August, 2008. Whilst the Chinese antitrust authorities have made significant progress in fleshing out a modern antitrust law regime, they have yet to tackle one of the most vexing issues in China's economy − namely, the status of China's state-owned enterprises ("SOEs") within the antitrust hegemony, and the extent to which such companies should be subject to the AML. Owing to the sensitive relationship between the State and the SOEs, there has been a degree of scepticism as to whether the AML will be applied in an impartial manner towards the SOEs as compared with other private companies in China. Recently, however, there are signs that SOEs may no longer be immune from antitrust scrutiny in China. In the meantime, the European Commission (the "Commission") appears to be taking an increased interest in foreign direct investment by Chinese SOEs. In two recent cases, the Commission has delved deeply into a notifying SOE's relationship with the wider Chinese State.

Recent investigation of China Telecom

China Telecom Corp. Ltd. ("China Telecom"), one of China's largest state-owned telecommunications companies, is reportedly facing an antitrust probe which has the potential to give rise to the imposition of significant penalties.  According to a news release on 19 September, 2011, an unnamed Chinese antitrust authority has commenced an investigation into whether China Telecom has abused its allegedly dominant position in the broadband backbone network market by charging rival broadband operators higher fees for using its network than other internet operators in order to squeeze out rival providers of broadband services. The relevant authority has carried out a number of inquiries at China Telecom and met with industry experts, industry associations and other companies to gather evidence.

Increased scrutiny by the European Commission of mergers involving SOEs

In two recent merger cases involving Chinese SOEs, the Commission has taken the position that since the SOEs are owned by the Chinese State, it is necessary to assess whether the SOE involved is an independent economic entity, or whether it belongs to a wider economic group including other enterprises over which the Chinese State enjoys decisive influence. This assessment is relevant both in terms of the substantive issues raised by the merger, and jurisdiction – i.e. whether the turnover of other SOEs which fall under the aegis of the Chinese State need to be included when determining the turnover attributable to the relevant SOE.

This issue was first raised in China National Bluestar/Elkem, a case notified to the Commission on 24 February, 2011 (Case COMP/M.6082 China National Bluestar/Elkem).  The case involved the acquisition of Elkem, a Norwegian company, by Bluestar, a subsidiary of China National Chemical Corporation ("ChemChina"). As with other large SOEs, ChemChina reports directly to the State-owned Assets Supervision and Administration Commission ("SASAC"), which is established under the State Council, China's highest executive organ. The parties argued that ChemChina and other SOEs in the market should not be treated as a single economic group, because ChemChina has power of decision-making which is independent from SASAC, and the level of State intervention in the industry sectors relevant to the transaction is very minor. Despite this, the Commission investigated in detail the extent to which Bluestar and ChemChina may make their business decisions independently from other SOEs in the same sector, and whether there were any other forms of coordination between SOEs in the relevant industry. Ultimately, the Commission did not reach a conclusion on this issue, as it determined that even if ChemChina and other SOEs operating in the markets concerned were regarded as one economic group, the proposed transaction would not give rise to any substantive competition concerns.

The Commission revisited the same issue less than two months later in DSM/Sinochem/JV, a joint venture between Sinochem Group ("Sinochem"), a wholly state-owned SOE and Koninklijke DSM N.V. ("DSM"), a Dutch company (Case COMP/M.6113 DSM/Sinochem/JV).  As in the case with China National Bluestar/Elkem, the parties submitted that Sinochem is an economic unit that enjoys decision-making power independent from the Chinese state. The Commission was not convinced − it pointed to the core legislation and the associated information outlined in SASAC's website, which contain a number of provisions that could be read as suggesting that SASAC does in practice have certain powers to influence Sinochem's strategic commercial behaviour. Moreover, the Commission identified a number of external sources which suggested that the commercial decisions of SOEs could be influenced by the Chinese State. Again, the question was ultimately left open, as the competitive assessment showed that even if the market shares of all Chinese SOEs in the same sector were cumulated, the combined market shares would remain modest.

Nevertheless, the Commission's close scrutiny of the SOEs involved in the China National Bluestar/Elkem and DSM/Sinochem/JV cases may demonstrate that European regulators are becoming increasingly interested in China's outbound investment and the country's intricate State owned asset management system.

Conclusions

The above cases demonstrate that the position of SOEs is coming under increased antitrust scrutiny. Such interest emanates both from the domestic regulators (demonstrated by the reported investigation of China Telecom) and overseas regulators (such as the Commission with its two recently published merger decisions). It would therefore seem sensible for not only SOEs, but also any entities involved with SOEs, or which contemplate entering into business arrangements with SOEs, to make sure that antitrust compliance remains a high priority.