Busting trust

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Jul 17th 2008 | SHANGHAI
From The Economist print edition

The land of the mega-monopoly is about to adopt an antitrust law


IT TOOK more time than the Long March and the Great Leap Forward combined, but after 14 years of wrangling China will introduce a comprehensive antitrust law on August 1st. It could prove to be hugely important: it has been called China’s “economic constitution”. The law would give China’s economy a further big push from central planning and state ownership towards markets, says Lester Ross of the Beijing office of WilmerHale, a law firm.

On the face of it, the law is desperately needed: energy, telecoms, transport, steel and many other industries lack competition, with a handful of dominant firms controlling prices not only for consumers, but for other companies too. Even fragmented industries, such as rice flour and instant noodles, where competition ought to abound, were recently reported to have seen price-fixing and collusion organised through the trade groups that are a legacy of the state-controlled economy.

At the moment competition is governed by a set of regulations from 2006, along with three other laws—the Anti-Unfair Competition Law, the Price Law and the Consumer Rights and Interests Protection Law. These various rules are scattered throughout China’s bureaucracy, and are universally condemned as toothless and lacking clarity. The new competition law reflects a belief by many in the Chinese government that the economic restructuring that began with the death of Mao can go forward only if consumers benefit from the lower prices and higher quality that competition produces.

Matched against this belief are more cynical and protectionist forces that have, alas, had a strong hand in shaping the new law. Many of the big Chinese monopolies are owned in part or whole by the state itself. One of the causes of the new law’s delay was the debate over whether these firms, which comprise a huge chunk of China’s economy, should be covered by it. After a series of drafts included and then excluded state-owned monopolies, a compromise was reached. The law applies to them, but with an exemption when economic or national security is threatened—a loophole almost as big as China itself.

Worse is a suspicion that rather than going after the big monopolies, the law’s initial targets will be foreign companies. Taking a lead from the European Union, China will start reviewing mergers of companies, regardless of where they are based, so long as they operate within its borders or affect companies that do. Regulators will consider the effect on “the progress of technology” and “national economic development”. At the very least, this means large mergers must be blessed by the Chinese authorities, which will have a minimum of 30 days to assess them—and will be able to extend their review to 180 days. International law firms may be celebrating, but other companies must be lamenting that they will now face frictional costs to mergers in Beijing, as well as in Brussels and Washington, DC.

The law may also conflict with intellectual-property rights. Chinese manufacturers in many industries have long bridled at being forced to cut their own production costs to retain sales, even as they have to pay what seem like large royalties to patent holders (as in the production of DVD players, for example). In industries such as software and pharmaceuticals, where the market is dominated by just a few foreign companies, the law may also justify litigation based on a superficial definition of dominance. It then allows prosecution over royalty rates, or restrictions on licensing. It is not hard to see how the law could be used to legitimise expropriation.

Worryingly, with only weeks before the law comes into effect, it has not yet been announced who will oversee it. The delay is a product of the competition within China’s bureaucracy, as rival agencies compete for such a valuable prize. One theory is that the job will be divided between three agencies. The winners will not only gain power within the national bureaucracy, but will be able to disrupt lucrative local monopolies that are often controlled by regional politicians. The new law could, in short, influence not just how business is run, but also how it is locally regulated.