By Susan Ning, Kate Peng and Gong Ting King & Wood Mallesons’ Commercial & Regulatory Group

Ountitlednpeng_kate 14 June 2016, China’s State Council published on its website the Opinions on Establishment of the Fair Competition Review Mechanism in the Development of Market System (“Opinions”).[1]The introduction of the fair-competition review mechanism represents a landmark progress in developing market economy in China.[2]According to the Opinions, Chinese government departments at different levels shall conduct a fair-competition review during the formulation of policies and regulations starting from July 2016.

1. Background

Over the past decades, China has made extraordinary economic progress in a relatively short period of time. Notwithstanding this development, China’s transition to a modern market system is still on-going and the legacy of a centrally planned and highly administered and regulated system still remains in some areas of the economy. Such as certain current administrative and economic management system gives central and local government bodies extensive powers to intervene and participate in markets relevant to the industries and geographical areas in their jurisdictions.

At the central level, government departments providing targeted sectors (e.g. regulated industries) and enterprises with preferential treatment or protection at the expense of non-favoured enterprises with which potentially they compete. The use of such preferential treatment are evident not only in regulated industries (e.g. tobacco, post and telecommunications, construction, machinery) but in some non-regulated industries such as foodstuffs, beverages and real estate.[3] At the local level, local governments create barriers to internal trade between regions and protect locally owned or controlled enterprises. Regional monopolies and protectionism in China has resulted in excessive duplication of various industries across provinces, with a very large numbers of local producers in industries such as automobiles and cement.[4]

Such problems of administrative monopoly are well recognized in China, and are basic aspects of the relationship between the state and the market that China is seeking to reform. The November 2013 decision of the 3rd Plenum of the 18th Party Congress to make the ‘market play the decisive role in resource allocation’ and to establish a ‘unified, fair, open and competitive market’ constitutes a major breakthrough in China’s economic reform policy.[5] The lately issued Opinions are thus deemed as a follow-on major progress in the development of a competition policy.

2. Fair Competition Review Mechanism in the Opinions

In response to such problems of administrative monopoly, the Opinions introduce the fair competition review mechanism by setting out the review targets, methods and standards as follows.

a) Review Target:

According to the Opinions, the following items shall be subject to the fair competition review: laws, regulations, administrative policies, administrative practices and all instruments, which are issued from a public authority entrusted with administration tasks to manage public affairs, regarding economic activities of a market player. The economic activities include market entry, industry development, investment solicitation, tendering and bidding, procurement, operational regulation and other qualification criterion.

In terms of administrative regulations and other policy measures issued by the State Council, and local regulations, the relevant legislative authorities are required to conduct such fair competition review during the process of drafting. Without such prior review, the foregoing legislative measures shall not be submitted for approval.

b) Review Method

The relevant policy making authorities shall conduct self-review according to the standard of review during the course of measures making. The measures could only be issued then implemented if they do not eliminate or restrict competition; otherwise, the measures shall not be issued unless they are adjusted in a manner consistent with the review standards. Such review shall be conducted in parallel with soliciting opinions from interested parties, or consulting public comments when drafting relevant measures. After the issuance of relevant measures, these measures shall be publicly available according to the Regulation of the People’s Republic of China on the Disclosure of Government Information.

c) Review Standard

According to the Opinions, the review shall be conducted in a way to protect an integrated national market and fair competition, in particular, in accordance with four major standards and a list of eighteen “not-to-do” items.

The four major standards are Standards relating to Market Entry or Exit; Standard regarding Free Movements of Goods and other Production Elements Standard; Standard regarding Affecting Manufacturing and Operating Costs; and Standard regarding Affecting Manufacturing and Operating Conducts.

These standards accurately address and then redress a variety of commonly seen forms of administrative monopoly in China, such as relevant authorities set out unreasonable and discriminatory conditions for market entry and exit, and oblige undertakings to deal or use goods and services provided by the designated undertakings, which fall into the first major standards category regarding Market Entry of Exit.

Under the second major category of Standard regarding Free Movements of Key Production Elements, relevant authorities are prohibited from restricting the entry of non-local and imported goods or services into the local market, restricting non-local undertakings from joining the local tendering or bidding, or restricting non-local undertakings to invest or set up subsidiaries in the local market.

The third major Standard of Affecting Manufacturing and Operating Costs requires that relevant authorities are prohibited from providing preferential policies or financial aids, in the form of tax or social security exemptions, to certain undertakings.

The fourth major Standard focuses on state interventions in obliging undertakings to conduct certain monopolistic behaviours fell into the AML. For example, the relevant authorities require undertakings to disclose sensitive information or facilitate for such information disclosure, or regulate prices of goods and services beyond the legally prescribed scope of authority.

d) Review mechanism

The Opinions requires that Chinese government departments at different levels shall conduct a fair-competition review during the formulation of policies and regulations starting from July 2016. The review mechanism will be proceeded in a step by step manner given such review would be a difficult and time-consuming process. The Opinions go further to require a regular evaluation mechanism to safeguard the due process for such review.

In addition, the Opinions require NDRC, MOFCOM and SAIC, together with the Legislative Affairs Office of the State Council, to separately issue implementation rules and provide specific guidelines regarding public supervision to complement the implementation of such review. These implementing rules are widely expected to function as essential guidance in the future implementation process of such review mechanism.

3. The existing rules to fight against administrative monopoly

The introduction of fair competition review indeed makes a significant progress in fighting state restraints in a market economy; however, before the issuance of the Opinions, China has already made a series of efforts in this regard.

a) In the context of the AML

Chapter V of the AML prohibits the abuse of administrative powers that eliminates or restricts competition or favors enterprises at the expense of other market players. Specific forms of abuse and their consequences are largely identical to the stipulations in the Opinions.

Article 51 of the AML serves as the primary enforcement provision for Chapter V, instead of directly granting the Anti-monopoly Enforcement Authorities (“AMEAs”) the power to punish government agencies for violating the AML, establishes that the AMEAs can only identify such violations and propose corrective actions to the relevant superior authorities of the agencies in question. According to the AML, the government officials who are directly in charge and/or other directly responsible public servants can be individually held liable and disciplined.

The enforcement power granted in Chapter V is shared between NDRC, which is responsible for price-related anti-competitive conducts, and SAIC, which is responsible for non-price related conducts. To provide more clarity and details regarding the procedures, NDRC[6]and SAIC[7]each promulgated their respective provisions on the enforcement regarding abuses of administrative monopolies.

As of this writing, NDRC has published four infringement decisions concerning administrative monopoly, in which NDRC has either imposed penalties towards the undertakings concerned, or made suggestions to the relevant authorities to rectify the administrative measures in question.

In Gansu Transport Bureau case, Gansu Provincial Transport Bureau allegedly abused its administrative power by having appointed China Satellite Navigation and Communication as the sole supplier of vehicle terminals for the platform, and setting the price of the terminals. The alleged abuses involved in these cases include exclusive dealing in favour of a locally owned enterprise or imposing discriminatory requirements for non-local enterprises. The local NDRC branch published its decision with suggestions that Gansu provincial government shall order its local transportation department to rectify its measures in accordance with the AML by fully removing the entry restrictions for non-local satellite navigation terminals providers and ceasing any pricing control over the products concerned, etc.

Similarly, in Shandong 9TONG case, NDRC issued an infringement decision in 2015 against the Shandong Department of Transport for abusing its administrative power to have entrusted only one undertaking with the tasks to positioning vehicles through its satellite navigation system. In this decision, NDRC also made suggestions that Shandong provincial government shall order its local transportation department to rectify its measures by fully opening the vehicle monitoring and control market, and allowing road freight carriers to freely choose the platforms; removing restrictions on market entry for terminal product providers in Shandong Province; and permitting qualified terminals to be connected to the relevant monitoring and control platforms.

In Yunnan telecom case, the local branch of NDRC in Yunnan punished local communication administration for its abuse of administrative power by forcing telecom companies to reach a cartel arrangement involving restrictions on the refunding of benefits to customers. The NDRC branch then ordered the local telecom authority to immediately cease the illegal practice, meanwhile, imposed on China Mobile, China Telecom, and China Unicom each a fine equaling two percent of their previous year’s sales revenue for being part of the cartel. China Railcom did not comply with the cartel, and therefore was given a reduced penalty of RMB 500,000.

In Hebei Toll road case, where NDRC uncovered local governments jointly issued a policy under which favoured local passenger transport companies by granting a 50% discount on toll roads. NDRC therefore sent an infringement decision letter to the Hebei provincial government asking the three departments to rectify the discriminatory policy towards non-local undertakings.

In the meantime, SAIC is also making progress in its enforcement towards administrative monopoly. SAIC published one decision in 2014 regarding six fireworks and firecracker wholesale companies in Chifeng, Inner Mongolia, for unlawful market division under the Anti-Monopoly Law. In that case, the local Production Safety Supervision and Administration Bureau divided the distribution areas for the selected six fireworks and firecracker wholesale companies within their jurisdiction, with the claimed intentions of preventing safety accidents arising from lowered product quality that could be caused by aggressive competition. A similar arrangement was adopted by the other district of the central area in 2009. At such, local SAIC branch punished the infringement by imposing an aggregate fine of RMB 583,700, among which the four wholesalers imposing unreasonable trade conditions on retailers were fined 8 percent of their annual revenues for 2013, and the other two were fined 7 percent. Under provisions promulgated by SAIC, undertakings that benefit from an AML violation by participating in cartel arrangements or engaging in abuses of dominance—even though under the order or arrangements of government agencies—are subject to the fine ranging from 1 to 10% of their previous year’s sales revenue.

Another latest effort made by China’s top government to fight against administrative monopoly to elevate the deterring effects for such potential violations is in the NDRC’s latest draft (for public consultation) guidelines on determining the illegal gains generated from monopoly conduct and on setting fines (“Fining Guidelines”). The Fining Guidelines stipulate that when determining the aggravating circumstances on setting fines, if certain undertakings take the initiative to impel the administrative authorities to eliminate or restrict competition through abusing their administrative powers, the AMEAs may deem it as aggravating circumstance when setting fines.

b) In the context of Administrative Litigation Law

In 2015, the first private litigation against administrative monopoly was initiated, Shenzhen Sware Technology vs. Guangdong Provincial Department of Education. In that case, the Guangzhou Intermediate People’s Court ruled that the Guangdong Provincial Department of Education (“GDOE”) had violated Article 32 of the AML by selecting a company, Glodon Software, as the sole software supplier for a professional skill exam. As a result of the decision to source from a single supplier, other software suppliers, including the plaintiff, were excluded from the possibility of competing to provide software. This case is currently under appeal[8] by the GDOE.

Another effort was lately made to reduce the legal barrier to prevent private individuals and enterprises from initiating administrative litigation against administrative monopoly. The previous Administrative Litigation Law (“ALL”)[9] makes a distinction between “abstract administrative act” and “concrete (individualized) administrative act.” A private individual or entity can only bring to court cases against concrete administrative acts or administrative acts specifically issued against an individual or company. This approach is similar to the EU’s direct effect principle, which enables a private individual or entity to bring a competition law case before a national court. In contrast, administrative litigation against “abstract administrative activity” (i.e., a legislative measure issued by a government agency) was explicitly excluded by the previous ALL. The abuses of administrative monopolies, in practice, are usually carried out in the form of legislative or other similar measures, and therefore are categorized as “abstract administrative act”. At such, if these measures are not concrete or addressed to individuals, under the previous Administrative Litigation Law, no administrative litigation could be successfully initiated. The revised ALL,[10] however, has removed such limitations.

c) Achievements and Limitations

There is no doubt that significant achievements were made by the AML and the ALL to fight against administrative monopoly. Recent intensified enforcement decisions underline the point that the AMEAs have targeted abuses by administrative monopolies as their enforcement priority.[11]

There are, however, certain limitations such as the lack of direct power to enforce Chapter V against administrative monopoly. Article 51 merely provides the AMEAs with the power to refer matters so they can be considered by the superior authority of the infringing body. This inherent weakness of the AML renders the law less deterring when fight against administrative monopoly. Besides, these ex post controls over administrative monopoly are emerged on a case by case basis and therefore require a relatively long time to realize such deterring effects and thus remedy such infringements. Against such backdrop, the said Opinions bring, for the first time, a systematically ex ante control mechanism into the competition enforcement landscape in China. Such mechanism will provide a comprehensive review of all the government measures in place (or in future) by the prescribed competition standards. This review will not only remove the very roots of administrative monopoly, and also promote the awareness of all the government officials at different levels to fully recognize the importance of competition policy in a market economy.

4. Conclusion

The importance of market competition is increasingly well understood in China. As mentioned above, two features of China’s systemic and policy environment raise issues for market competition: abuse of the administrative powers of government agencies, and policies to promote the development of particular sectors and firms. While these features exist in all modern economies, their extent in China is exceptionally large. Alongside the current enforcement of the AML and the ALL, the introduction of fair competition review, conceived by the highest level of the Chinese government, represent a significant change in the government’s thinking about the role of the state and its relationship with the economy. With more resources provided to the Chinese competition authorities to fight against administrative monopoly, we are expecting a more vigorously developing China’s market featured with more fair competition among market participants. In view of the above, the establishment of the fair competition review mechanism is indeed a milestone in China’s efforts to fully transform into a market economy.

Note：

[1] http://www.gov.cn/zhengce/content/2016-06/14/content_5082066.htm.

[2] Zhang Qiong, an adviser to the State Council’s Antimonopoly Commission, published an article in People’s Daily, 24 June 2016, available at:http://theory.people.com.cn/n/2014/1208/c207270-26167950.html.

[3] http://scholarship.law.ufl.edu/cgi/viewcontent.cgi?article=1187&context=facultypub&sei-redir=1&referer=http%3A%2F%2Fcn.bing.com%2Fsearch%3Fq%3Dcompetition%2Bpolicy%2Bin%2Bchina%26go%3D%25e6%258f%2590%25e4%25ba%25a4%26qs%3Dn%26pq%3Dcompetition%2Bpolicy%2Bin%2Bchina%26sc%3D0-27%26sp%3D-1%26sk%3D%26cvid%3D2BFD447026EC44C4841E6C3B2EDB5422%26first%3D31%26FORM%3DPORE#search=%22competition%20policy%20china%22.

[4] Ibid.

[5] http://news.xinhuanet.com/house/tj/2013-11-14/c_118121513.htm.

[6] NDRC promulgated Provisions on Anti-Price Monopoly, which came into effect on Feb. 1, 2011, and Regulations on Procedures for Enforcement of Administrative Law on Anti-Price Monopoly, which came into effect on Feb. 1, 2011.

[7] SAIC promulgated Provisions for Administrative Authorities for Industry and Commerce on Prohibiting Abuses of Dominant Market Positions on Dec. 31, 2010, which came into effect on Feb. 1, 2011, and Provisions for Administrative Authorities for Industry and Commerce to Prevent Abuses of Administrative Powers to Exclude or Restrain Competition on Dec. 31, 2010, which came to effect on Feb. 1, 2011.

[8] At the time of writing, the case is still in process of being appealed.

[9] The Administrative Litigation Law was promulgated by the National People’s Conference on Apr. 4, 1989, and became effective on Oct. 1, 1990. Pursuant to Article 11, only certain kinds of concrete administrative activity could be litigated. The previous practice under the 1989 Administrative Litigation Law was that the People’s Court would not accept litigation related to “abstract administrative activity.”

[10] The Administrative Litigation Law was revised by the National People’s Conference on Nov. 11, 2014, and the revised version took effect on Jan. 1, 2015. In the revised Administrative Litigation Law, the distinction between “abstract administrative activities” and “concrete administrative actives” is no longer referred to. Some scholars comment that the removal of this distinction is intended to remove the previous limitations on administrative litigation.

[11] The following link contains news reports of such decisions: http://news.xinhuanet.com/legal/2014-10/23/c_1112939052.htm.