Recently, an alarming story by Reuters reported that during a closed door meeting between Chinese officials from all three Chinese antitrust regulators and over 30 multi-national companies, one senior Chinese official, Mr. Xinyu Xu, reportedly solicited voluntary confessions from the foreign companies for violating China’s Anti-Monopoly Law (AML) and threatened to raise fines should the companies under investigation hire external lawyers. An inconspicuous message on China National Radio’s website a few days later tried to clarify that Mr. Xu made his remarks out of good will and was actually warning companies against hiring lawyers to lobby government agencies. Needless to say, the incident caused concern among foreign companies.

Overview

Since it came into effect in 2008, China has steadily stepped-up enforcement of the AML. Because several different regulatory bodies are involved with its enforcement, this can lead to possible confusion among clients unfamiliar with China’s AML regulatory regime.

Three different authorities share anti-monopoly regulation powers in China: the Ministry of Commerce (MOFCOM), State Administration for Industry and Commerce (SAIC) and National Development and Reform Commission (NDRC). The MOFCOM is in charge of reviewing mergers and industry concentration. The SAIC focuses on horizontal monopolies, cartel agreements, abuses of market dominance and abuses of administrative power. The NDRC is tasked with investigating price-related anti-competitive behavior. Both the SAIC and NDRC have separate task forces to investigate anti-competitive behavior and have independent authority and discretion to impose penalties.

Enforcement History

The AML became effective on August 1, 2008. Prior to 2013, cases investigated and enforced by both the SAIC and NDRC were mainly of domestic Chinese companies and resulted in small penalties.

The SAIC, along with provincial AICs, investigated 23 anti-monopoly cases, of which 12 cases were concluded and issued administrative penalty decisions. Of these 12, all were horizontal monopoly agreement cases, a majority involving indirect agreements between industry association members on such areas as prices, production or sales/input markets. All 12 cases involved small penalties between ¥60,000 RMB and ¥3 million RMB. The highest penalty amount the 12 cases was a ¥16.37 million RMB decision which involved several concrete companies in Liaoning.

The NDRC has initiated more than 50 investigations of price related monopolistic behavior. Of these, over 20 cases were issued a penalty with an average fine of around ¥1 million RMB for those penalties issued before 2013.

Latest Developments

In 2013, anti-monopoly decisions issued by the NDRC took a marked departure from those of previous years.

Starting in February, the NDRC issued a ¥353 million RMB fine against six LCD manufacturers for their participation in a price fixing cartel. This was the first time the NDRC took action against international companies, and penalties were issued only after decisions by the USA, Korea, and the European Union. Soon afterwards, NDRC provincial counterparts in Guizhou and Sichuan province imposed sanctions totaling ¥44 million RMB to two state-owned liquor manufacturers. In August, The NDRC issued fines totaling ¥670 million RMB to six milk powder companies. Soon afterwards, the NDRC issued another fine against five Shanghai-based gold and jewelry stores and a local trade association for price manipulation totaling ¥10 million RMB for the companies involved plus a ¥500,000 RMB fine against the trade association.

These decisions are notably different from previous enforcement actions in that they (1) involve foreign and multi-national companies and (2) involve much higher fines than those previously imposed. Currently, regulators are reviewing information relating to the automotive industry. In that and other industries, “industry associations” are gathering information through surveys and other sources and providing it to the government.

Trends and Practical Tips

The decisions issued by the NDRC in 2013 show signs of an increasingly aggressive stance on AML enforcement.

Although both the SAIC and NDRC are now including foreign companies in their investigations, there is no evidence that either agency is deliberately targeting multinational corporations over domestic Chinese companies. All 12 penalty decisions issued by the SAIC have been against Chinese companies, and although a majority of the companies investigated in the NDRC’s milk powder case were foreign, two Chinese companies were also investigated with the result of one receiving a fine.

Currently, none of the cases concluded by the SAIC have involved abuse of a dominant market position. However, there is likelihood that future decisions will include this type of anti-competitive behavior. The SAIC has launched an investigation into the alleged abuse of a dominant market position by Tetra Pak, showing that it may be interested in pursuing such behavior in the future. It is likely that the complex nature of these cases may be delaying any decisions rendered by the SAIC.

In general, the NDRC takes a “carrot and stick” approach to stopping anti-competitive behavior. Violators who are the first to voluntarily come forward are eligible for leniency provisions provided within the NDRC’s regulations. Behavioral remedies for companies seeking compliance are also available and were utilized in many of the recent NDRC decisions.

Companies should immediately start internal reviews for any clauses in their agreements, contracts, dealership MOU’s, etc. that may have the effect of fixing retail or minimum sales prices. Any practices (formal or informal) that work to fix prices, production quantities or divide sales/input markets should be stopped immediately.

Xu Kunlin, head of the anti-monopoly bureau at the NDRC, told a China Central Television (CCTV) program recently that petroleum, telecommunications, banking and automotive sectors could be those that are next in the crosshairs of anti-monopoly investigators. Companies operating in those sectors should take heed and be diligent in their internal reviews and operations. They should also keep aware of industry association activities, reports and statements.