Antitrust Anxiety

A 2004 survey by the Fair Trade Bureau of China's State Administration of Industry and Commerce (SAIC) concluded that Microsoft Windows had a 95 percent market share in the country. Kodak, the report said, had also obtained a dominant position with 50 percent of the film market. These companies and other multinationals, the authors concluded, frequently used their positions to curb or restrict competition.

But SAIC couldn't do anything about its findings. That's because--outside the M&A area--China had no meaningful antitrust laws. However, all that will change as of Aug. 1 with the enactment of the Anti-Monopoly Law of China (AML). Much like the antitrust legislation of developed countries, the law prohibits monopoly agreements, abuse of dominance and concentration.

"Our clients have known for a long time that this was coming, so it's no surprise to them," says Rocky Lee, a partner in DLA Piper's Beijing office. Still, the AML, like most Chinese legislation, is long on principle and short on details, creating difficulties for multinationals that have never had to concern themselves with antitrust considerations in their China dealings.

"There is a general feeling of dissatisfaction about the law's vagueness, especially for companies that have practical concerns about going forward," Lee says. It's not that the Chinese won't address some of the uncertainties. It's simply that no one has any idea just how they will be addressed. Or, for that matter, who will be addressing them.

Bureaucratic Beast
Naturally, the Standing Committee of the National's People Congress will weigh in. "We're expecting at least 20 sets of regulations, rules and implementation guidelines from the Congress this year," says Bob Kwauk, managing partner of Blake Cassels & Graydon's Beijing office.

The China's Supreme People's Court will also have its say. "When the AML comes into effect, the court will be issuing what amounts to a quasi-judicial interpretation of the law," says Steven Huang, a partner at J&F PRC Lawyers in Beijing.

Also in the mix are provincial authorities, who will have their own interpretations of how to apply the law.
Equally problematic are the AML's enforcement provisions.

The law's enforcement mechanism involves no less than three levels of government agencies. On the State Council level, the AML establishes an Anti-Monopoly Committee; on the ministry level, the State Council will designate an Anti-Monopoly Law Enforcement Agency; and on the local level, the Law Enforcement Agency may empower corresponding local agencies to do the enforcement work. Given China's size, local agencies are a must because the relevant market for antitrust purposes could be a province, an autonomous region, a region within a province or even a single municipality.

At first look this structure may appear to be neat and tidy, if a bit cumbersome. But the harsh reality is that the AML sets out neither the composition nor the working rules governing the Anti-Monopoly Committee, nor does it specify which government agency will be the Anti-Monopoly Law Enforcement Agency.

Because of its level of fragmentation, looking at China's current bare-bones antitrust infrastructure doesn't offer much insight either. The National Development and Reform Commission presides over monopoly agreements; SAIC regulates the monopolistic behaviors of public utilities; and the Ministry of Commerce (MOFCOM) oversees mergers and acquisitions.

"Industry rumors suggest that all three agencies will be involved in implementing the AML," Huang says. "But that doesn't really help us in understanding the powers and workings of the Anti-Monopoly Committee."
Unfortunately, on the substantive front, things aren't much better.

Linking Laws

In 2004, even as it was drafting the AML, the Chinese government embarked on a concerted effort to regulate foreign M&As by establishing an Office of Antitrust Investigation under MOFCOM's auspices. Two years later, and following an outcry over U.S. investment fund Carlyle Group's attempt to buy a domestic construction equipment manufacturer, MOFCOM issued its "Regulations on Merger and Acquisition of Domestic Enterprises by Foreign Investors." About the same time, the State Security Exchange Commission released its "Regulations on Acquisition by Public Traded Stock Corporations (2006)." MOFCOM has been active, having examined some 380 mergers by foreign investors as of August 2007.

The AML, however, offers no clue as to how its provisions will mesh with the existing regime in the M&A area.
"The content of existing laws is quite different from the content of the AML," Huang says. "The standard of what constitutes a market monopoly under existing regulations, for example, is quite different from the AML standard."

Equally problematic are the national security reviews mandated by the AML, the first time such reviews have been enshrined in the legal system. So foreign investors could be looking at a two-pronged process consisting of an anti-monopoly review and a state security review.

Unfortunately, the AML provides no guidance for the standards or procedures that will apply to the national security issue. "The prevailing concern is that the concept of national security is so open-ended," Kwauk says. "You've got to remember that 10 years ago the Japanese government thought rice was a matter of national security."

Legislative Teeth
"Overall, the AML is a good thing because it shows that the economy has opened itself up to the extent that an antitrust law is a must," Kwauk says.

And from all appearances, the Chinese seem intent on giving the AML life. Particularly telling are explicit provisions prohibiting the abuse of administrative powers to restrict competition.

For the time being, however, foreign investors may have to pull in their reins. "Until the implementation rules are out, the AML leaves a lot of foreign companies in the guessing game," Lee says.


Julius Melnitzer

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