The dragon awakes: Is Chinese competition policy a cause for concern?

Mario Mariniello 09 November 2013

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Foreign businesses are increasingly realising that China has antitrust laws, and is not shy about using them. The Glencore/Xstrata merger in the spring was cleared only with conditions imposed by the Chinese Ministry of Commerce. In August, the Chinese National Development and Reform Commission imposed a record €82 million fine on milk powder producers for a price-fixing conspiracy. The Chinese authorities are also taking more decisions. They issued only one in 2008, compared to 34 European Commission decisions concerning mergers that were not cleared unconditionally, abuse of market dominance, and major cartel cases. In 2012, the figures were 16 for China and 23 for Europe (see Figure 1 below).

Figure 1. Number of competition policy decisions, 2008–2013

For foreign investors, this raises the question of whether more robust Chinese antitrust enforcement is not simply a way for China to promote its domestic industries at the expense of foreign competitors. An analysis of the data shows that they might be half right.

China's Anti-Monopoly law was adopted in 2007. Its provisions are partly consistent with Western economies’ competition policy frameworks, in that they provide for a substantive test of the impact on competition and consumers of the merger or anti-competitive conduct. In contrast to the European law, however, the Chinese law also explicitly allows the inclusion of ‘economic development’ and ‘national interest’ in the assessment.1 The Chinese antitrust law can therefore technically be used to pursue industrial policy objectives and protect domestic industries. As others have suggested (Fels 2012), the emergence of a substantive test aligned with those applied by the most advanced economies therefore very much depends on the actual implementation by the Chinese antitrust authority.

In recent research, I analyse the Chinese antitrust authorities’ enforcement since the entry into force of the Anti-Monopoly law (Mariniello 2013b). Bruegel’s Policy Contribution focuses on the action of Chinese antitrust authorities – an analysis of private litigation proceedings (the other channel through which the Anti-Monopoly law is enforced in China) would fall outside the scope of the contribution.

Structural and behavioural remedies in the EU and China

As in Europe, most merger applications received by the Ministry of Commerce are cleared with no conditions. The Ministry has blocked one merger and required commitments in 20 others. From a substantive point of view, there appears to be a divergence in the EU and Chinese approaches to merger assessment. In stark contrast to the EU approach, the Ministry of Commerce has made extensive use of ‘behavioural’ remedies as opposed to ‘structural’ remedies, as a condition to authorise a merger.2 Although structural remedies are more efficient and the Ministry of Commerce is severely under-staffed, behavioural remedies were used in 60% of the commitment decisions, as opposed to 20% for structural remedies.3 During the same period, just 7% of EU commitment decisions entailed only behavioural remedies, while 77% imposed structural remedies (see Figure 2 below).

Figure 2. Merger remedies as a share of conditional clearances in the EU and China, 2008–2013

The Ministry of Commerce’s treatment of foreign companies

Importantly, all Chinese conditional clearance decisions involved foreign companies. This is surprising. The rate of merger activity in China is comparable to that in Europe, but the majority (about 60%) of the mergers cleared with conditions by the European Commission involve only European companies. There are two possible reasons why in China commitment decisions only concern foreign companies. First, domestic companies might not notify even if they are required by law to do so (only 15% of the decisions dealt with by the Ministry of Commerce concern domestic deals, as opposed to 47% in the case of the European Commission – see Figure 3 below).4

Figure 3. Origin of merger cases in the EU and China

Second, the Ministry of Commerce’s commitment decisions often aim to protect domestic competitors from the potential increase in the competitiveness of the merged companies. Companies are sometimes even prevented from pursuing a certain line of business (for example Wal-Mart/NiuHai) or from reducing their input costs (Marubeni/Gavilon). Synergies and efficiency gains might allow merged companies to outperform Chinese competitors. China's competition authorities appear to want to limit this, rather than to enable market conditions that will result in lower prices and better quality products for Chinese consumers.

Anti-cartel enforcement in China

By contrast, antitrust enforcement has been used mostly as a weapon to fight inflation. The National Development and Reform Commission’s job is to keep prices under control, especially in key sectors for mass consumption. It is no wonder that major cartel cases have concerned rice noodles, garlic, mung beans, and infant milk formula. China’s antitrust authorities have not attempted to protect domestic companies; rather, they have tried to protect domestic consumers, as do most antitrust authorities. There has been no evident bias against foreign companies – only two major cartel investigations (flat-screen LCDs and milk powder) have also affected foreign companies. In more than 30 cases in which the Chinese authorities have applied sanctions, only domestic companies have been involved.

Moreover, imposed fines are much lower in China than in Europe. Fines have been negligible compared to those imposed by the European Commission in nominal or PPP terms (see Figure 4 below).5 Even looking at the more recent cases, fine levels are much lower in China than in Europe. For 2013 – when Chinese fines peaked – the total value of fines imposed by the Chinese authorities was more than three times smaller than the total fines imposed by the European Commission.

Fines are sunk costs – they do not affect the marginal cost of production, and in principle they are potentially distortionary only if they are so high that they push companies into bankruptcy – an unrealistic scenario under current penalty levels in Europe (for a discussion, see Mariniello 2013a). If the two Chinese cartel cases involving at least one foreign company (LCD and milk powder) are compared with the average cartel case sanctioned by the European Commission between 2008 and 2013, a significant difference in the size of the sanction per undertaking can be observed. Companies in the LCD and milk powder cases received average fines of approximately €10 million. By contrast, the average fine per undertaking in Europe is €64 million. Moreover, the European Commission imposed average fines of 2.6% of the involved companies’ global turnover, whereas for the two cartels sanctioned by the National Development and Reform Commission, the average fine level was just 0.17% of the companies’ global turnover.

Therefore, even if fines could significantly hamper a company’s competitiveness, it seems unrealistic to believe that current fines in China are a tool to protect Chinese domestic industry against potential European competitors (which, for the same infringement, would face much harsher sanctions at home). If anything, one should point out that Chinese fines are far below the level that would ensure deterrence of anticompetitive behaviour by companies – regardless of whether they are domestic or foreign.

Figure 4. Fines per cartel in the EU and China, 2010–2013

Conclusions

Our analysis suggests that the Chinese institutional framework for competition policy is largely compatible with that of Western economies, but leaves more room for industrial policy considerations in the assessment of competition policy cases. This flexibility may have been used by Chinese authorities to favour domestic players in the context of merger control, but not in the context of antitrust control.

Since the Anti-Monopoly law appears sufficiently refined to allow for unbiased enforcement, it seems that a potentially efficient avenue to achieve a level playing field in global competition would be to support China’s efforts to improve actual enforcement within the boundaries of the existing institutional framework. Exporting the consumer-oriented culture from antitrust to merger control could be a significant step towards an approach consistent with that adopted by more mature economies. Requesting China to effectively enforce notification rules by sanctioning companies that fail to file for merger review would be another significant step.

Convergence on the same substantive assessment tests and improvements in the process would make Chinese merger control more efficient and consistent with mainstream economic reasoning. In the long term, this would not only be beneficial to the Chinese consumer but also to the Chinese economy, as allowing merged companies to fully exploit their increase in competitiveness would put more pressure on domestic companies to become more efficient and keep up with stronger competitors. Convergence also has clear-cut benefits from the perspective of companies willing to do business in multiple jurisdictions, because devising a mechanism for assessing mergers with an international dimension that would minimise the administrative burden on business (for example arising from different notification procedures) is considered one of the major issues in competition law (Whish and Bailey 2012).

Certainty and uniformity in the application of competition rules is a key driver for investment. Bilateral trade talks between representatives of China and the European Union to promote foreign direct investment were just initiated last week. It is a good occasion to bring competition policy to the negotiating table.

References

Emch, A and D Stallibrass (2013), The Chinese Anti-Monopoly Law: The First Five Years, Wolters Kluwer.

Fels, A (2012), “China’s Antimonopoly Law 2008: An Overview”, Review of Industrial Organization 41(1–2): 7–30.

Lin, P and J Zhao (2012), “Merger control policy under China’s anti-monopoly law”, Review of Industrial Organization 41(1–2): 109–132.

Mariniello, M (2013a), “Do European Union fines deter price-fixing?”, Bruegel Policy Brief 2013/04.

Mariniello, M (2013b), “The Dragon awakes: Is Chinese competition policy a cause for concern?”, Bruegel Policy Contribution 2013/14. 

Martina, Michael (2013), “Insight: Flexing antitrust muscle, China is a new merger hurdle”, Reuters, 2 May. 

Motta, M (2004), Competition policy: theory and practice, Cambridge University Press.

Sokol, D Daniel (2013), “Merger Control under China's Anti-Monopoly Law”, Minnesota Legal Studies Research Paper 13-05.

Wei, Tan (2013), SOEs and competition policy in China, CPI.

Whish, R and D Bailey (2012), Competition law, Oxford University Press.


1 In Western jurisdictions, public interest normally plays a role only in exceptional and well-identified circumstances. For example, the EU merger regulation allows EU member states to take public interest considerations into account when mergers might affect public security, plurality of media, or prudential rules. However, these are exceptions that are rarely applied, and when they are, they require antitrust authorities to follow an explicit and transparent ad-hoc procedure.

2 Structural remedies require the divestment of some of the involved companies’ assets in favour of actual or potential competitors in order to maintain the same level of competitive pressure in a market which would otherwise be too concentrated post-merger. Behavioural remedies instead involve a commitment to engage in a specific conduct to preserve the same competition conditions after completing the merger. Examples include: non-discriminatory provisions – preventing the merged entity from favouring the acquired target over its competitors; price caps; mandatory licensing provisions; and prohibitions on the sharing of information within the merged entity. Structural remedies are desirable from a social welfare point of view. They are much more likely to be effective in counteracting the potential negative effects of a merger, because once they are implemented they do not require the intervention of antitrust authorities. Conversely, behavioural remedies require ex-post monitoring – a difficult exercise to perform, particularly if antitrust authorities lack resources. Moreover, behavioural remedies may distort companies’ incentives to compete or to fully exploit the efficiencies brought about by the merger. For example, non-discrimination clauses may reduce the total supply of a certain product, thus reducing consumer welfare (Motta 2004).

3 According to Reuters, the Ministry of Commerce’s antimonopoly merger bureau can count on about 10-12 case handlers; the European Commission’s Directorate General for Competition has 124 officials and external experts assessing mergers assisted by 25 economists from the Chief Economist Team (Martina 2013).

4 Data refers to the period Q3 2012–Q3 2013. The figure does not change if all decisions taken by the Ministry of Commerce between 2008 and 2013 are considered (671 decisions were taken). Amongst them, only 95, or 14%, concerned purely domestic mergers.

5 One possible explanation for the difference is that earlier investigations concerned cases in which the infringement started before the adoption of the new Anti-Monopoly law. For those cases, the fine was set on the basis of the old Price law, which implied smaller penalties (this was the case for the LCD cartel, for example).

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Topics:  Competition policy

Tags:  China, international trade, protectionism, Competition policy, antitrust

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