Hong Kong

Introduction

Hong Kong is often applauded as one of the most free economies in the world. Paradoxically, it does not have a general, cross-sector competition law, unlike the vast majority of the world's other developed free economies. Instead, Hong Kong has two competition law regimes that apply only to the telecommunications and broadcasting sectors, with the remainder of the economy being subject to the oversight of the Competition Policy Advisory Group (COMPAG), which is a statutory body that oversees competition in Hong Kong without a competition law that it can enforce, or powers of sanction or enforcement.

After a number of attempts, the topic of Hong Kong's competition policy resurfaced in 2005, culminating in the government's decision to introduce a general, economy-wide competition law (the Competition Law). The original legislative timetable was ambitious, with a targeted introduction of the bill (the Competition Bill) to the Legislative Council by the end of 2007, and for the law to be voted on and adopted by mid-2008.

At the time this article went to print (March 2008), the original legislative timetable had lapsed. However, the government has decided to launch a second consultation in April 2008 to discuss the specifics of the Competition Law before introducing the Competition Bill. On the most optimistic estimate, the earliest the Competition Law could be introduced into the Legislative Council for deliberations would be the end of 2008, based on this revised, and perhaps more realistic, timetable.

Although not much more is publicly available on the legislative status of the Competition Law, there have been a number of developments in Hong Kong that demonstrate the government's, and increasingly, the Community's, interest in the issue of competition policy and law in Hong Kong. Even though Asia has largely lagged behind the rest of the industrialised economies in the world in relation to competition law and policy, the topic is clearly gaining currency. Notable new regimes include the Singaporean regime, and mainland China's Anti-Monopoly Law which was adopted in August 2007 to take effect in August 2008.

This article will first briefly recapitulate Hong Kong's existing regime on competition law, and provide a summary of the key components of the Competition Law. Following that, the article will explore a number of key issues which have recently gained attention in the competition law debate, including in particular the vocal opposition of Hong Kong's small and medium-sized enterprises (SMEs) towards the introduction of the Competition Law and the corresponding need for competition advocacy; and the debate on whether the Competition Law should include a merger control regime - which still appears to be an open issue. The article will then discuss a number of other changes that are being considered by the government which would further demonstrate Hong Kong's growing commitment to a vibrant competition culture. Finally, the article will consider the often neglected reality of the proximity of mainland China to Hong Kong and the impact such close links have on the application of the Competition Law.

Competition regulation, Hong Kong-style

Hong Kong is known as one of the four economic tigers of South-East Asia, alongside Taiwan, Singapore and South Korea. It is also frequently referred to as one of the world's freest economies, reflecting its high scores on a combination of indicators such as the size of government spending, levels of corruption, reliability of legal system, access to funds, freedom to trade internationally, and regulatory trade barriers, such as price controlmeasures.

For a long time many have mistakenly equated such economic freedom with competitiveness of Hong Kong's domestic economy. This is reflected in the absence of a general competition law. In fact, when the issue of Hong Kong's competition policy started to enter the spotlight in 1992 through efforts of the last Governor of Hong Kong, Chris Patton, there was (and continues to be) much confusion amongst the Hong Kong public as to the need for such a law.

However, with gradual changes being brought into the Hong Kong domestic economy in the form of two sector-specific competition regimes applicable to the telecommunications and broadcasting sectors, and the attendant increase in competition amongst players in those sectors (particularly telecommunications, which touch upon the lives of the citizens of Hong Kong almost daily), public attitude towards competition law appears to be taking a turn.

The two sector-specific competition regimes currently in effect in the telecommunications and broadcasting sectors regulate anti-competitive conduct, abuse of dominance and - in the case of the telecommunications sector only - merger control. They also incorporate provisions regulating unfair business practices, such as prohibition on misleading or deceptive conduct.

In 1997 and in response to the Hong Kong Consumer Council's influential report of the previous year identifying a pressing need for a comprehensive competition law, the government established an independent body, known as the Comeptition Policy Review Committee (COMPAG). COMPAG is mandated to oversee competition-related issues in Hong Kong by applying the government's stated competition policy. COMPAG has no powers of sanction or investigation, and is therefore generally regarded as lacking in efficacy.

The Chief Executive made competition policy one of his election issues in 2005, and this resulted in the appointment of the Competition Policy Review Committee (CPRC) to examine Hong Kong's competition policy. The CPRC recommended the adoption of a general, economy-wide competition law. On the basis of the CPRC recommendation, the government launched a public consultation in 2006 which ended in 2007, following which the government decided to introduce the Competition Law.

Overview of the Competition Law

Community interest in the subject of competition law intensified following the landmark decision of the Hong Kong government to introduce a general, cross-sector competition in March 2007. In the absence of a publicly available draft Competition Bill, the below is a summary of the prevailing features of the Competition Law on the basis of the key government documents including the CPRC paper of June 2006 and the government public consultation discussion paper and report.

The Competition Law is to introduce prohibitions on anti-competitive conduct, which cover seven activities:

  • price fixing;
  • bid rigging;
  • market allocation;
  • sales and production quotas;
  • joint boycott;
  • unfair or discriminatory standards; and
  • abuse of dominance.

It remains unclear whether the Competition Law will have a generally worded prohibition on anti-competitive agreements and/or conduct, and abuse of dominance generally, much like the approach taken in the other mature competition law jurisdictions such as the European Union and the United States, or if it will adopt a straightforward, brightline prohibition against the seven types of named conduct. In any case, it remains the plan that the Competition Law will be accompanied by guidelines setting out the manner in which the Competition Law will be enforced.

Despite the reservation against the inclusion of a merger control regime, this nevertheless appears possible, and the second public consultation should clarify this. Additionally, the Law also contemplates granting exemptions on the grounds of economics or public policy. It remains to be seen whether the government will provide the exemption within the body of the law, or will empower the regulatory authority to grant exemptions on a sector-by-sector or case-by-case basis.

It is contemplated that the Law will be enforced by a single regulatory authority, the Competition Commission (the Commission), which will be established under the Competition Law. The exact functions to be assumed by the Commission remains to be seen. However, on the basis of the public consultation, there appears to be a preference for an institutional framework whereby the Commission is to assume only investigatory and enforcement roles, with the adjudicatory functions resting in another body such as the Courts or a specialist dedicated appeal board.

Sanctions envisaged are broadly civil penalties which include both fines and the imposition of cease and desist orders, and directors' disqualifications orders. Leniency is also being actively considered by the government as a way to assist it in cracking down unlawful cartels. Private litigation is also an option being considered.

Public sentiment and concern following the decision to introduce the Competition Law

Despite the delay to the introduction of the Competition Law, there continues to be debate on the issue of Hong Kong's competition policy, both within and outside Hong Kong. The international competition community (such as the European Commission) has also urged Hong Kong to adopt a comprehensive competition law as soon as possible.

However, opinions continue to be divided, reflecting an array of views and the business culture prevalent in Hong Kong. Below are a number of key themes which are likely to shape the debate surrounding the second public consultation, which will be launched in April 2008.

Concerns of the SMEs

The SMEs in Hong Kong are a vocal group. The government's receptiveness towards the SMEs is understandable given there are some 270,000 SMEs in Hong Kong, constituting 98 per cent of the number of business entities in Hong Kong and employing about half of Hong Kong's private sector workforce.The SMEs have, through their industry associations or individually, voiced concerns of the negative impact that could be brought about by the Competition Law. It appears that much of the concerns can be addressed through effective competition advocacy.

One particular concern of the SMEs is the possibility of tactical litigation brought by large corporations under the Competition Law. While it is not difficult to appreciate the concern of the SMEs in light of the prevailing Hong Kong business culture, this assessment of the risk profile of litigation is nevertheless flawed, as it fails to take account of the fact that in the absence of a prior finding of infringement, private claims are extraordinarily difficult to bring. Furthermore, the normal judicial safeguards such as cost orders against vexatious and unmeritorious litigants as well as possible adverse media publicity provide further disincentives for litigants to pursue unmeritorious competition claims.

Another concern of the SMEs is the likely rise in compliance costs, particularly where the enforcement of the Competition Law is likely to be subject to a great deal of discretion on the part of the Competition Commission. To address this anxiety about rising business costs, the government in the discussion paper has discussed the possibility of promulgating guidelines to assist the SMEs to ensure that they are complying with the law.

The SMEs' concerns highlight the need for more competition advocacy - a task the government is committed to not only during the legislative process, but also after the Law takes effect, by making competition education one of the key mandates of the Commission.

Merger control

As noted earlier, merger control remains one area that the government is yet to decide whether to introduce into the Competition Law. The government's reservation is based on the theory that Hong Kong, being a small economy, is likely to have sectors with a high degree of concentration and as such, it would be superfluous to further regulate 'market structure'. In fact, it is a stated policy in the CPRC paper that, considering Hong Kong's competition policy, it would not be appropriate to introduce new legislation to 'open up' markets to competition. This position is further bolstered by the claim that Hong Kong is commonly referred to one of the most open and free economies in the world, with minimal trade barriers.

The likely exclusion of a merger control provision has been under much scrutiny. One basic problem is that the reference to regulation of 'monopolies' or 'market structure' has unduly skewed the debate somewhat, as it implies that merger control provisions would target the holding of an existing market position, when in actual fact it is the attainment of market power under certain market structures and conditions that a properly-drafted competition law would prohibit. Many of the dissenting arguments are in fact predicated on this misunderstanding.

Even properly understood, there is concern by a number of respondents that the inclusion of a merger control provision is likely to be onerous, adding to the cost of doing business. What the public consultation process has not highlighted is the fact that often it is too late or ineffective to combat competition problems through ex post regulation such as the prohibition on anti-competitive conduct. Also important and perhaps not highlighted is the experience of other mature competition law jurisdictions where the vast majority of transactions subject to merger control review are cleared.

Practical suggestions alleviating these concerns include a staggered introduction of the merger control provisions to permit business operators to acclimatise to a competition culture, the so-called 'incremental approach'. Others have suggested the Commission adopt a 'safe harbour' test, much akin to that used by the Telecommunications Authority under the sector-specific merger control regime.

Other related initiatives

Other initiatives the government has been engaged in which demonstrate its rising level of commitment towards instilling a competition culture are briefly set out below.

Electricity supply overhaul

In Hong Kong there are only two incumbent electricity suppliers, each supplying different geographic areas. The government has entered into scheme-of-control agreements (SCAs) with each of the two incumbents. The SCAs set out the framework under which the suppliers are regulated, including in particular an obligation to provide sufficient facilities to meet demand, the permitted rate of return on investment, and rules concerning the tariff charges. The regulation of the electricity industry has come under much criticism in recent times, with research asserting that Hong Kong consumers are in fact overpaying for electricity, and the levels of return on investment are the highest in the world by a significant margin.

The SCAs will soon expire in 2008 and the government has conducted two stages of public consultation in 2005 and 2006 seeking views on how the supply of electricity should be regulated post-2008. Interestingly, there appears to be a degree of resistance from the respondents towards the introduction of competition into the electricity supply markets, apparently underpinning the predominant concern that there be a reliable and consistent electricity supply.

However, despite lukewarm public reception during the consultation process, the government has decided to 'improve the phenomenon of natural monopoly', and to open up the electricity market further from as early as 2018, provided requisite market conditions are present. Measures being considered to further and implement measures, such as increasing interconnections between the incumbents and establishing arrangements for third-party connection and grid access to prepare for potential new supply from China. It remains to be seen how the government will liberalise the electricity market.

Notions of 'fair' competition: consumer rights movement

While consumer protection legislation is not, strictly speaking, the centrepiece of a competition law regime, nevertheless the increasing focus on consumer benefit through the promotion of fair trade practices demonstrates the government's increasing awareness of the goals of its publicly stated competition policy, which is to 'enhance economic efficiency and free flow of trade, thereby also benefiting consumer welfare'.

In 2007 the Legislative Council introduced a bill to strengthen the operation of the Trade Descriptions Ordinance, a major piece of consumer-protection legislation. The aim of the bill is to combat unscrupulous trade practices with the intended effect of not only maintaining Hong Kong's reputation as a 'shopper's paradise', but also to 'enhance the competitiveness' of the retail and tourist industries.

In a similar bid to raise awareness, the influential consumer rights group, the Consumer Council, recently published a report entitled 'Fairness in the Marketplace for Consumers and Business', in which it identified existing legislative gaps which leave unprotected certain rights of consumers. The Council recommended that a comprehensive trade practices statute be adopted.

The China-Hong Kong nexus: pork supply

The topical issue of rising pork prices experienced in Hong Kong in 2007, and the measures taken to address the problem highlights the unique relationship between Hong Kong and China, and the need for the enforcement process under the Competition Law to acknowledge the existence of such a link in order for it to be effective.

In Hong Kong, approximately half of the pork available for consumption comes from freshly slaughtered pigs, 80 per cent of which originate from the mainland and the remainder from local pig farms. The remainder of the available pork is either chilled or frozen pork, accounting for approximately 3 and 46 per cent of the market respectively, according to COMPAG. The mainland authority granted an export permit to Ng Fung Hong (NFH), who was the sole export agent for freshly slaughtered pig from China for approximately fifty years. In addition, the supply of freshly slaughtered pork from China was also subject to a Chinese government-determined quota.

COMPAG investigated the supply of pork in Hong Kong in 2002, to determine a number of allegations including in particular whether there existed a monopoly over pork supply. COMPAG noted that there was no restriction on the origin of live pigs supplied to Hong Kong, imposing only necessary health standards and sanitary requirements which were equally applicable to local pigs. Interestingly, COMPAG noted that the sole agent system in respect of export of livestock, including pigs, was part of the mainland's economic and trade policy and did not consider the extent to which such a government-imposed system had caused distortions in the market. Additionally, COMPAG also found that NFH did not engage in anti-competitive conduct.

In mid-2007, pork prices in China soared (partly due to the blue-ear disease) and output dwindled, spurring active regulation by the mainland authorities. This had a knock-on effect in Hong Kong and resulted in a shortage of pork supply from the mainland, resulting in public outcry: some have claimed that NFH's monopoly has contributed to the price increase in Hong Kong. In response, the Food and Health Bureau (FHB) of Hong Kong met with the Chinese authority, the Ministry of Commerce (MOFCOM), and came to a solution, which involved the MOFCOM opening up competition at the upstream export level by granting further export licences to two other entities, effectively ending NFH's monopoly.

The pork incident of 2007 is fascinating in that it illustrates a number of issues unique to Hong Kong which will impact on its Competition Law. The impact on the competitive conditions in a market in Hong Kong brought about by the trade policies of the Chinese government serves as a reminder of the closely linked nature of the two economies. In this regard, it is interesting that the public debate on Hong Kong's competition policy has not yet dealt with this nexus in any substantive way. Further, the resolution of the shortage of pork through trade discussions between the FHB and the MOFCOM also shows that the Competition Law will not be the panacea in certain situations.

The government will be launching a second public consultation in April 2008 to educate the public on the likely effect of the Competition Law. Issues that are likely to take centre stage include not only those mentioned above such as concerns over compliance cost, frivolous private claims, inclusion of merger control provisions, but also the underlying fundamental rationale in introducing such a law. In this manner, the government would be well advised to re-emphasise its stated competition policy and objectives, in order to convince remaining sceptics of the very real need for the Competition Law and the benefits for Hong Kong consumers and the economy as a whole that could result from implementing such laws.

Notes

*The authors would like to thank Julia Zhu for her assistance in researching the article.

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