China antitrust watchdogs sharpen teeth

The move,broadcast to an audience of tens of millions,signals a new assertiveness by regulators that have largely remained in the shadows,treading gingerly around state enterprises that are among the biggest companies in the world and connected to China’s highest echelons of power. It also could bring foreign firms in China under new scrutiny.

By announcing this case so publicly,the PRC regulators are showing that they are serious. We are talking about a fine worth 10 percent of annual business revenues,said David Livdahl,a partner at the Paul Hastings law firm in Beijing.

Since the anti-monopoly law came into effect in 2008,enforcement has been largely confined to the Ministry of Commerce’s (MOFCOM) screening of large mergers and acquisitions. Officials at the NDRC and the State Administration for Industry & Commerce (SAIC) have largely stayed on the sidelines.

The NDRC concentrates mainly on monopoly pricing issues,while the SAIC enforces other anti-trust rules,including those on monopoly agreements. Now,having taken on a difficult target,regulators look set to broaden their campaign against unfair competition.

A case like this gives the NDRC the opportunity to show that it too has sharp teeth,said Nicholas French,a partner at the law firm Freshfields.

It has wasted little time. Already,the NDRC has followed up last week’s move with an announcement on Monday that it had fined two local pharmaceutical companies for price-fixing.

HIGH PRICES,ANGRY CUSTOMERS

Though the NDRC’s move surprised many,pressure for some sort of action against domestic price-fixing by government-owned enterprises has been building for a while.

Soaring consumer prices and a string of corruption scandals involving the bosses of state companies have soured the public’s view of the state sector,said Gary Liu,director of the Lujiazui International Finance Research Centre at the China Europe International Business School in Shanghai.

Monopolies have become a big problem for the Chinese economy,said Liu. In recent years,we have seen the public getting angry with these companies,especially the telecoms and oil industries.

And little wonder. China’s Internet connections,for example,are notoriously slow and costly. China ranks 71st in the world in terms of connection speeds and its telecoms providers charge rates 3-4 times higher than what customers in developed countries pay,according to the Advisory Committee for State Information,a Chinese government research institute.

While China’s Communist Party officials are not elected by the people,its leaders are acutely sensitive to public discontent,particularly among the burgeoning middle class.

Taking on the state sector is politically delicate,though. These companies,whose spending accounts for 35 percent of China’s total fixed-asset investment,have close links to the Communist Party itself. For example,Wang Xiaochu,chairman of China Telecom,holds a Party rank equivalent to vice minister.

Seen in that light,the choice of the Internet businesses was a savvy move. The high cost of online service is a sore point for Chinese customers,but Internet services represent a comparatively small piece of the overall business of the telecoms giants.

(The probe) is not a big deal for these companies,said Liu,but it’s a signal. The government is trying to tell the public that they aren’t blind to this obvious monopoly. I think this action is more of a gesture than a real action against China’s state-controlled monopolies.

MORE ACTION?

The move could also be seen as a signal that regulators will also target foreign multinationals.

A lot of foreign companies ought to take this as a real wake-up call because so far the attitude has generally been that they don’t need to worry about the anti-monopoly law just yet,said Frank Schoneveld,a partner at the McDermott,Will & Emery law firm in Shanghai.

Over the past few years,the NDRC has been studying how antitrust cases are pursued by Western regulators,said Schoneveld,who has advised regulators on anti-monopoly issues as part of a European Commission project.

And this summer the NDRC established a new division to focus on monopoly issues,expanding its staff in the process.

The whole process will speed up as they have more resources,said Schoneveld. They’ll take on more cases and we’ll see more action.

For foreign companies,that could mean not just more intensive merger reviews,but scrutiny of the arrangements many have with local distributors to fix the resale prices for their products,something that’s usually barred under Chinese law.

Some lawyers even expect China will soon work with the U.S. and EU anti-competition authorities on global antitrust investigations.

I suspect the Chinese agencies are moving towards wanting to get involved in the big international cartel investigations,said Nicholas French of Freshfields. They are working hard towards being serious competition authorities on the world stage.