Key Points:

  •  Requires formal security examination of foreign investors seeking to invest in Chinese companies
  • Designed to protect industries key to Chinese economy

On August 30, 2007 the Standing Committee of the National People’s Congress adopted the Anti- Monopoly Law, designed to enhance fair competition and regulation of the market. Because the new law does not take effect until August 1, 2008, businesses have ample opportunity to gain an understanding of the law before being required to comply. Designed to protect key economic sectors, the law requires that foreign investors seeking to invest in Chinese companies, via merger, acquisition or capital investment, undergo a formal security examination. This development parallels an existing requirement under China’s M&A regulations that foreign investors submit to a fundamental security examination when undertaking mergers or acquisitions.

The issue of security examinations has become increasingly important because, in recent years, major Chinese companies have matured and become targets for foreign investors. Famous brand-name companies are especially at risk. Since last year, a prospective transaction of any value involving a key economic industry, a sector of national security importance or a famous brandname entity has required the approval of the Ministry of Commerce; also, state control must be retained in certain key industries, primarily petroleum, coal, energy, telecoms, civil aviation and shipping. In cases in which the prospective transaction involves a national security industry, the foreign investor is subject to both anti-monopoly and national security examinations.

As expected, the new law outlaws “monopolistic practices” such as cartels and collusion except for (i) government approved monopolies in areas of critical economic importance, although these are not defined, and (ii) monopolistic agreements that promote and enhance technological innovation and progress. Moreover, like antimonopoly laws worldwide, the new law prohibits dominant market practices that adversely affect competition, such as price fixing. Under the law, market dominance exists where a company holds more than 50 percent of the market share, or where two companies hold more than 66 percent, or three companies hold at least 75 percent. The primary focus of these provisions is to protect and strengthen consumer welfare.

Enforcement of the law will be undertaken by the Anti-Monopoly Law Enforcement Authority, not to be confused with the Anti-Monopoly Law Committee responsible for drafting policy.

The new law has been broadly welcomed, with the EU Chamber and AmCham China both issuing statements welcoming its promulgation.