The US Department of State has called out China’s competition authority as allegedly favouring local companies in its enforcement of anti-monopoly laws.
The foreign affairs agency last week released its annual Investment Climate Statements, as US embassy economic officers analyse how friendly to business more than 170 countries are. The report said that foreign companies have voiced concern that antitrust enforcement in China is “often selectively used to target foreign companies, becoming an extension of other industrial policies that favour [state-owned enterprises] and Chinese companies deemed potential national champions.”
For example, the report claimed there is suspicion that China rarely puts conditions on its approval of any deals involving two local companies, “thus signaling an inherent anti-monopoly law bias against foreign enterprises”.
Last year, China consolidated three government ministries to establish the country’s new single competition authority – the State Administration for Market Regulation. The SAMR has been vested with the power to review mergers and to investigate possible cartel agreements, abuse of dominant market position and abuse of administrative powers.
The Chinese government has said that unifying antitrust enforcement under one roof is meant to help consolidate competition guidelines from the three predecessor agencies and provide greater clarity for businesses operating in the country.
But according to the investment climate report, US companies and other observers have criticised the SAMR for being required to consult with other Chinese agencies when reviewing a potential deal. Those other agencies are allowed to raise concerns that are “often not related to competition to either block, delay or force” one or more of the companies to comply with a condition, the report said.
“Inconsistent central and provincial enforcement of antitrust law often exacerbates local protectionism by restricting inter-provincial trade, limiting market access for certain imported products, using measures that raise production costs and limiting opportunities for foreign investment,” the Department of State said.
The report also claimed that government authorities at all levels in China may “restrict competition to insulate favoured companies from competition through various forms of regulations and industrial policies”.
The report acknowledged that the State Council in June 2016 issued guidelines for the Fair Competition Review Mechanism, which targets administrative monopolies created by government agents, and hailed procedural developments in China’s competition policies as being seen as “generally positive”.
Still, it said the actual enforcement of competition laws and regulations is “uneven”.
The Department of State also accused China of discouraging foreign investments in favour of its own “national champions” in the 2017 investment climate report. Last year, the US called out the Chinese government for the country’s lack of intellectual property rights protections.
The view outside the embassy
Linklaters partner Fay Zhou in Beijing said that she has not seen any examples of “clearly inconsistent enforcement actions at [the] central and provincial levels of antitrust law as suggested in the report”. On the contrary, she said that China is trending toward a higher level of openness and liberalisation, rather than restrictions on foreign investments or products.
She has also not seen any instances of selective enforcement actions against foreign companies, Zhou said. Penalties against foreign companies often attract more foreign media attention, which she said may contribute to the impression that those companies have been treated differently.
The investment report notes the promulgation of the new foreign investment law in China, which “makes it clear that the focus of reform is not limited to rolling back foreign ownership restrictions, but also to improve the business environment significantly on an ongoing basis after the investment is made,” Zhou added.
The SAMR and its predecessors have spent tremendous resources training staff at the local level and supervising local enforcement activities, Zhou said. While it cannot be excluded that there is a possibility that local authorities may have applied different practices in certain individual cases, she said she has not seen any “universal inconsistencies” of this sort of conduct.
Michael Han, a partner at Fangda Partners, also said that based on his experience representing foreign companies in China, he has not seen “any sign or pattern that SAMR is enforcing the [Anti-Monopoly Law] unevenly or selectively against foreign companies”.
“In the merger control area, we are still seeing cross-border M&A transactions involving foreign companies – including US companies amid the current US-China trade war – be cleared by SAMR without any problems,” Han said.
If one were to compare the number of antitrust investigations against foreign companies versus Chinese companies, Han said, the relevant statistics would most likely show that there have been “far more cases against Chinese companies than foreign companies”.
Hogan Lovells partner Adrian Emch in Beijing said that the suggestion that the Anti-Monopoly Law does not, or does not really apply to state-owned enterprises is “painting an inaccurate or incomplete picture”.
After looking at conduct cases brought by the SAMR and its local offices since the agency’s creation last year, Emch said that “the numbers don't seem to back up the claim that foreign companies are targeted more than domestic companies, likely not even more than” state-owned enterprises.
However, on the merger front, he said the picture is a bit different. In line with the investment report’s point about China rarely approving local deals “on condition”, Emch said that only deals between foreign companies have been approved subject to remedies.
“Even in failure to file cases, the majority of companies targeted, or close, were not from mainland China,” Emch explained. “So, the overall impression you get from looking at the numbers is that there may be some supra-representativeness of foreign companies in the merger control area, but not so much in the conduct area.”
Hazel Yin, a partner at Freshfields Bruckhaus Deringer and co-head of the China competition practice, said that in an effort to tackle protectionism by the local governments, the SAMR and its predecessors have handled more than 200 cases involving the abuse of administrative power by local government.
A nationwide fair competition review mechanism was adopted to help prevent public policies or local rules from “distorting and restricting competition, which is often associated with local protectionism”, she said.
The China State Administration for Industry and Commerce, whose competition arm was merged into the SAMR, has an “impressive track record of investigating monopolistic conducts by the public utility” state-owned enterprises, Yin said. According to a statement by China’s state council last year, these investigations represent approximately 40% of its total caseload, she added.
In a decision published last week, the SAMR penalised the state-owned water supplier in the city of Tianjin for abusing its dominance by forcing real estate developers to use a designated company when constructing certain secondary water supply facilities.
Yin also noted that since its creation, the SAMR has fined state-owned enterprises in sectors including petroleum, liquefied natural gas, power generation and telecommunications.