Update: Competition Policy & Enforcement in China


Executive Summary

  • China’s competition regulators seem to have paused some controversial Antimonopoly Law (AML) enforcement practices in response to concerns raised in the US-China Business Council’s (USCBC) September competition report and echoed by international government and industry stakeholders.
  • The National Development and Reform Commission (NDRC) completed only two new pricing investigations since that time, though both involved foreign companies. NDRC has recently announced new enforcement priorities, indicating plans to resume more high-profile investigations in areas such as abuse of intellectual property rights (IPR) in the near future.
  • The Ministry of Commerce (MOFCOM) approved 137 merger and acquisition (M&A) deals in the same time period with no rejections and no conditions imposed on approvals.
  • The State Administration of Industry and Commerce (SAIC) announced decisions in five investigations, all involving domestic companies.
  • At the December 2014 Joint Commission on Commerce and Trade (JCCT), China committed to treat foreign and domestic companies equally in competition enforcement, increase transparency, and allow legal counsel to attend meetings and enforcement proceedings.
  • A review of public NDRC price investigations reveals several interesting data points:
  • Chinese companies and foreign companies are both being fined on the basis of revenues in China. Initial concerns that foreign companies might be fined based on global sales so far are unfounded.
  • The average fine is 2.5 percent of sales, well below the cap of 10 percent allowed by the AML. However, foreign companies are being fined at a higher average rate (3.3 percent) than their domestic counterparts (1.9 percent).
  • USCBC has also updated the data regarding foreign versus domestic cases:
  • Twenty-five percent of the NDRC’s concluded pricing investigations have involved foreign companies, while approximately three-quarters have involved Chinese companies.
  • While 97 percent of M&A deals since 2008 have been approved by MOFCOM without conditions, all of the 26 rejected or conditionally approved transactions have involved foreign companies.
  • All of the 22 completed monopoly investigations by the SAIC have involved Chinese companies, but foreign companies are involved in two ongoing cases yet to be decided. 
  • Despite the pause, it remains to be seen if foreign company concerns have been sustainably resolved. These concerns primarily revolve around how investigations and M&A reviews are conducted and decided, including 1) fair treatment and nondiscrimination; 2) lack of due process and regulatory transparency; 3) lengthy time periods for merger reviews; 4) the role of non-competitive factors in competition enforcement; 5) determination of fines and remedies; and 6) the broad definition of monopoly agreements. Addressing these concerns would also benefit domestic Chinese companies.
  • Broad questions raised six months ago have not yet been put to rest: Will China use the AML to protect domestic industry rather than promote fair competition? Is the government using the AML to lower prices, rather than letting the “market play the decisive role” as prioritized at the Third Plenum? Decisions and investigations in the coming months may provide further insight.
  • As the second largest economy in the world, China should and needs to have a well-designed and predictably executed antitrust regime. Government and industry groups in the United States and other countries must work with their counterparts in China to promote further progress toward reaching this mutually beneficial goal. 

Competition issues have been prominently featured in discussions about China’s business landscape for the last several years, given the growing number of high-profile competition cases involving foreign and domestic companies. In 2008, China launched the Antimonopoly Law (AML), the country’s first comprehensive competition law, and has taken notable steps to build the knowledge base, government infrastructure, and regulatory capacity needed to enforce it.

The AML created a unique regulatory structure that divided competition enforcement among three antimonopoly enforcement authorities (AMEAs): the Ministry of Commerce (MOFCOM) for reviews of mergers and acquisitions (M&A), the National Development and Reform Commission (NDRC) for price-related monopoly investigations, and the State Administration of Industry and Commerce (SAIC) for non-price-related monopoly cases. With the framework in place, these agencies began creating the processes China’s new competition regime would use in practice, releasing a flurry of follow-up regulations designed to guide antimonopoly enforcement. Each AMEA has also boosted enforcement personnel and capacity, permitting greater competition enforcement activity.

China’s AML enforcement activity has garnered attention from stakeholders around the world, including governments, companies with operations in China, and media outlets. Many stakeholders question whether foreign companies are being treated fairly and equally in these investigations in line with their Chinese counterparts. Such concern has partly been fueled by extensive media reporting on investigations of foreign companies—not only in the West, but also in China, where media outlets continue to cover foreign-related investigations much more extensively than those of domestic companies. Specific questions focus on how AMEAs launch competition investigations, how they conduct those investigations, how they determine fines or remedies—and lastly—whether foreign companies and domestic companies are treated equally in each of these steps. 

As this issue has gained attention, the US-China Business Council (USCBC) and other foreign stakeholders have regularly raised these issues directly with Chinese government officials at all levels. At the July 2014 Strategic & Economic Dialogue (S&ED), the US and Chinese governments affirmed that “the objective of competition policy is to promote consumer welfare and economic efficiency rather than promote individual competitors or industries, and that enforcement of their respective competition laws should be fair, objective, transparent, and non-discriminatory.” Such language marked a step in the right direction, but did not address many of the specific concerns raised by USCBC and other groups.

To advance the agenda on these issues, in September 2014 USCBC published a comprehensive report on China’s competition regime, including a detailed analysis of China’s competition enforcement activity, a summary of the questions and concerns of foreign companies, and specific recommendations for how to further improve the substance, implementation, and perception of China’s competition regime. While the efforts of USCBC and other stakeholders have elevated this issue on the US-China commercial agenda and have led to some progress, many key questions remain unanswered.

This report provides an update on US company views and perspectives on China’s competition regime based on developments that have occurred in the eight months since USCBC’s initial report.

New Developments in Competition Enforcement (September 2014-April 2015)

Since September 2014, there have been notable developments on China’s competition enforcement, including progress made in bilateral discussions, changes to relevant laws and regulations, and changes in the enforcement landscape—including new investigations of both foreign and domestic companies.

Western and Chinese media reporting on China’s competition regime have featured monopoly investigations targeting foreign companies and their resulting fines. A review of publically available information provides fuller detail on competition enforcement in China.

  • Foreign companies only constitute about twenty-five percent of the completed NDRC monopoly pricing investigations since 2008, (Appendix 2) none of the companies involved in completed SAIC investigations(Appendix 3).[1] Chinese companies have been investigated in sectors such as pharmaceuticals, financial services, Chinese liquor, cement, and insurance. Notable foreign company investigations have occurred in the pharmaceutical, infant milk powder, automotive, and high-tech sectors.
  • The AML has unclear provisions about the basis of fines for competition violations, but public information on completed cases indicates that fines imposed on foreign and domestic companies are being assessed on the same basis: sales in the China market, not global sales. Every case decision claiming an AML violation by a foreign company either explicitly states that fines are based on sales in China, or implies it based on the fine amount. Some decisions further clarify that the basis for the fine is sales from the “relevant market” in China, though they do not always define relevant market. It is not clear whether this standard is upheld in all AML investigations, but there is no clear evidence that it is inconsistent among investigations of foreign versus domestic companies.
  • While the basis for the calculations may be the same, foreign companies are more likely to be fined at higher percentages than their domestic counterparts. The AML permits NDRC to assess fines of up to 10 percent depending on the details of the case, but does not provide any specific guidance for determining the appropriate percentage, leaving NDRC with considerable discretion. In reviewing publically available case decisions for AML investigations conducted by NDRC, the average fine is 2.5 percent of sales, well below the upper limit of 10 percent allowed by the AML. However, foreign companies were fined an average rate of 3.3 percent, while Chinese companies were fined at a rate of 1.9 percent. When coupled with the sizable sales figures of many multinational corporations in China, this disparity in percentage can lead to a significant difference in the overall fine.
  • While the majority of M&A transactions are approved without conditions, all of the 26 transactions that were rejected or approved with conditions have involved foreign companies. Overall, the Ministry of Commerce (MOFCOM) has reviewed more than 1,000 M&A transactions since 2008, approving more than 97 percent without conditions. While most M&A approvals since 2008 have involved domestic companies, a number of transactions involving foreign companies have also been approved, including transactions involving foreign companies such as Abbott, Cummins, Siemens, Dow, and Toyota.
Domestic Developments

Although the bulk of China’s competition legal framework is now in place, work continues on a number of key laws and regulations. The most notable regulatory development during this time period was the release of SAIC’s final Provisions to Prohibit Intellectual Property Abuse to Eliminate or Restrict Competition in April 2015. These regulations, which had been in the drafting process since 2009, cover the relationship between intellectual property and competition, addressing issues such as essential facilities, patent disclosure in standard-setting processes, and intellectual property (IP) related trading practices like bundling and tying. USCBC and other industry groups had concerns with various provisions within the law, and provided written comments on many of the areas listed above.

Other competition and monopoly-related laws and regulations active during this period include:

  • Draft Template for Intellectual Property Policies in Industry Standardization Organizations.[2] This draft template, issued for comment by the Ministry of Industry and Information Technology’s Electronic Intellectual Property Center in November 2014,  includes a number of provisions that relate to antitrust and licensing concerns, including provisions dealing with essential patents, patent disclosure to standard-setting groups, and requirements for licensing of standard-essential patents.
  • Measures Concerning the Divestiture of Assets or Businesses when Implementing Concentrations of Business Operators. These rules, released by MOFCOM in December 2014 to replace earlier interim regulations, provide guidance on how MOFCOM oversees the implementation of remedies imposed in merger and acquisition transactions, including a variety of structural and behavioral remedies such as divestitures, “hold separate” provisions, and other business conditions.
  • Draft Interpretation on Issues Related to the Application of Laws in Reviewing Act Preservation Cases of Disputes over Intellectual Property Rights and Competition. This draft interpretation, released for public comment by the Supreme People’s Court in February 2015, describes the process by which parties can apply for judicial orders requiring another party to act—or not act—in a certain way, such as a preliminary injunction or evidence preservation order.

On the enforcement side, NDRC saw a significant—but perhaps temporary—slowdown in pricing investigations, while MOFCOM and SAIC have continued a steady pace of M&A reviews and monopoly investigations.

  • MOFCOM continued to review a steadily increasing number of M&A transactions, reviewing 75 deals in the fourth quarter of 2014 and an additional 62 in the first quarter of 2015. All of the deals reviewed by MOFCOM during this time period were approved without conditions. While MOFCOM did not apply new conditions to any M&A deals, it approved an application from Google to remove one of the specific restrictions that had been imposed in 2012 when Google purchased Motorola Mobility(Google would treat all original equipment manufacturers in a non-discriminatory manner with respect to the provision of its Android platform). That application and decision were prompted by Google’s sale of Motorola Mobility and its smartphone business to Lenovo, which closed on October 30, 2014.

In total, MOFCOM has reviewed 1,058 deals since the AML went into effect in August 2008, and has approved all but 26 of those deals. However, all of those deals that were rejected or approved with conditions involved foreign parties, many involving foreign-foreign global acquisitions in which the reviewed companies had subsidiaries in China.

MOFCOM’s simplified case procedures (initially implemented in April 2014) have been increasingly relied upon since their introduction. Since the first of these simplified cases was posted for public comment on May 22, 2014 through the end of 2014, 103 deals have been approved through this process—nearly half of all deals. In the first quarter of 2015 alone, 36 of the 62 deals that were approved without conditions came through the simplified process—nearly 60 percent of that total.

  • NDRC has seen a notable slowdown in enforcement activity. After announcing investigations involving both foreign automotive and domestic cement and insurance companies in September 2014, NDRC and its provincial branches have announced a final decision in only two cases:
  • In February 2015, NDRC determined Qualcomm was in violation of the AML, fining the company RMB 6.088 billion ($971.7 million[3]), or eight percent of Qualcomm’s sales revenue in China in 2013. NDRC’s decision stated that Qualcomm holds a dominant market position in several key telecom standard-essential patents and in chips, and had abused that position by charging excessive royalty rates, tying wireless and non-wireless patents, and attaching conditions to chip sales.
  • In April 2015, the Jiangsu Price Bureau ruled that Mercedes-Benz dealers in Nanjing, Wuxi, and Suzhou violated the AML, fining Mercedes-Benz RMB 350 million ($56.4 million), or one percent of the company’s sales revenue of the previous year. The bureau also fined the dealers a total of RMB 7.86 million ($1.27 million). In its ruling, the bureau said that Mercedes-Benz and its dealers had reached monopoly agreements by enforcing minimum prices for final products and fixed prices for components.

However, recent developments signal that NDRC may resume its more robust level of competition enforcement activity. In March 2015, Zhang Handong, the new head of NDRC’s Price Supervision and Antimonopoly Bureau, stated at a Chinese Academy of Social Sciences (CASS) symposium in Beijing that abuse of intellectual property rights (IPR) will be the next major focus of AML enforcement in China. He also noted that NDRC and other agencies would focus investigations on specific industries such as the pharmaceutical, automotive, and agricultural machinery industries. Zhang said that his bureau would seek to boost AML enforcement by targeting monopoly agreements, abuse of dominant market position, abuse of administrative power to eliminate or restrict competition, and other types of monopolies.

  • SAIC continued a slow but steady stream of decisions involving monopoly behavior, announcing five new decisions since September 2014 that involved companies in the mining, tobacco, natural gas, concrete, and water industries. As with all of SAIC’s previously announced decisions, these involved domestic companies and focused on monopoly agreements and abuse of market dominant position. SAIC has yet to announce a final decision in either of the two ongoing SAIC investigations involving foreign companies, Microsoft and TetraPak.
  • In private litigation, the most significant recent development was the Supreme People’s Court’s October 2014 final decision in the ongoing legal battle between Chinese companies Qihoo 360 and Tencent, upholding the decisions of lower courts that ruled in favor of Tencent. The case had centered on whether Tencent’s decision to incorporate its antivirus software (QQ Doctor) into its popular QQ instant messaging program could be considered antimonopoly behavior. Qihoo’s initial suit against Tencent in the Guangdong Higher People’s Court was unsuccessful, leading it to appeal to the Supreme People’s Court.
Bilateral Developments

Due to the high visibility of competition issues among US and Chinese stakeholders, the two governments have spent considerable time and effort discussing these issues over the past several months. Just prior to USCBC’s previous report, the US and Chinese governments included competition issues among the outcomes of the July 2014 S&ED. At that dialogue, the two sides affirmed that “the objective of competition policy is to promote consumer welfare and economic efficiency rather than promote individual competitors or industries, and that enforcement of their respective competition laws should be fair, objective, transparent, and non-discriminatory.”

As attention grew, Chinese officials responded. Premier Li Keqiang addressed foreign company concerns related to discriminatory investigations at the September 2014 Davos Forum in Tianjin, saying that he shared their concerns. Later that month, Vice Premier Wang Yang also raised these issues with USCBC at the 18th China International Fair for Investment & Trade.

At the December 2014 JCCT, China reiterated its S&ED commitments, stating further that all companies should be treated equally in AML enforcement. Additionally, China stated that enforcement measures would be carried out to address competition concerns and not to protect domestic companies or industries. AMEAs would also improve transparency of enforcement proceedings, strictly follow statutory limits on their authority, and allow legal counsel to attend meetings and enforcement proceedings.

Top Challenges and Policy Recommendations

Despite the increased level of attention and bilateral engagement on competition issues, key strategic questions remain about the direction and objectives of China’s competition regime. These questions include:

  • Will China use the AML to protect domestic industry rather than promote fair competition?
  • Is the government using the AML to force lower prices rather than letting the “market play the decisive role” as enshrined at the third plenum?
  • What approach will China ultimately adopt for its economy and its antitrust regime—a government-dictated, state-run model, or a market- and consumer-oriented model?

In addition to these broad questions, foreign stakeholders continue to raise questions about issues such as fair treatment and non-discrimination, due process and regulatory transparency, the role of non-competitive factors in competition enforcement, and determination of remedies and fines. As noted above, the two sides have made some progress in discussions, particularly on non-discrimination and due process issues. US companies will be watching Chinese enforcement actions very closely in the coming months to see if bilateral commitments made at the S&ED and JCCT are fully and consistently implemented, and if China takes steps to address additional areas of concern.

USCBC’s September 2014 competition enforcement report includes a series of recommendations that address these issues in greater detail.

Fair Treatment/Nondiscrimination

Chinese authorities regularly state that AML enforcement activities do not target foreign companies. Chinese regulators committed at both the 2014 S&ED and JCCT that they would treat foreign and domestic companies equally and that competition would be “fair, objective, transparent, and non-discriminatory.” Such language is a positive step, but aspects of China’s regulatory framework for competition—and previous enforcement outcomes—fuel continued concern about the ability to translate those words into practice. Such concerns include:

  • Criteria in MOFCOM merger reviews that allow officials to weigh non-competition factors, including those related to industrial policy;
  • Required MOFCOM consultations with industry regulators such as NDRC, the Ministry of Industry and Information Technology, or the Ministry of Agriculture that provide government regulators and domestic interests the ability to influence decisions based on protectionist or industrial policy goals;
  • Security reviews for the foreign acquisition of domestic companies (detailed in Article 31 of the AML) that could be used to promote domestic economic protectionism;
  • Considerable leeway for NDRC and SAIC to select investigation targets and carry out investigations, with little transparency about how those targets are selected, and evidence from high-profile cases that decisions may be influenced by broader Chinese policy concerns on intellectual property, standards, and the protection of domestic industries, as opposed to the interests of fair competition; and
  • Competition investigations that do not fully value market considerations, or that make inappropriate comparisons between prices in China and overseas markets without taking into account local market conditions.

Due Process and Transparency

Transparency has been a major topic of bilateral discussion in the last several months. China has made specific commitments to provide clear information to parties involved in competition investigations about authorities’ concerns, notify parties of the facts and basis for any administrative penalties, and publish final decisions with detailed rationale. Additionally, China made a specific commitment that its AMEAs would allow both internal and external legal counsel to attend meetings with their clients. Both developments are greatly welcomed by US companies seeking due process and transparency in investigations, and should be implemented robustly.

While these commitments should address some of the issues raised by USCBC member companies, they will only be effective if they are implemented fully and fairly by officials at all levels. Specific ongoing issues include the inability during enforcement proceedings to inquire about the nature of complaints, pressure to “admit guilt” without the ability to respond to evidence, the inability to have legal counsel present during competition investigations and enforcement proceedings, and the lack of transparency in publishing case decisions. Companies will continue to raise these issues until stakeholders see a clear track record that enforcement agencies have updated their work practices to reflect China’s commitments.

Time Periods for M&A Reviews

While long and uncertain timeframes across the range of competition investigations create challenges for companies, these challenges have been most acute for merger reviews. Articles 25 and 26 of the AML describe a specific timeline for M&A review processes: a preliminary review that lasts up to 30 days, a more detailed review that lasts up to 90 days, and an extension period if the review is not completed that can last up to 60 days. Clear timelines for reviews were established to provide important guidance to potential filers, helping them make preparations preceding transactions.

In practice, timelines remain increasingly stretched as the number of transactions that MOFCOM reviews grows, and more parties whose reviews approach the 180-day limit have been asked to withdraw and refile the transaction. MOFCOM’s pre-consultation process also remains an issue, as some companies report that they are encouraged to use the pre-consultation process even as increasing MOFCOM workloads have increased the length of the process. Notably, time spent in the pre-consultation process does not appear in official case timelines, as the official 180-day review timeline does not officially begin until MOFCOM accepts the company’s application and supporting materials.

More companies are using MOFCOM’s simplified case review system, which should allow regulators to devote more resources to addressing complex cases on more rapid timelines. However, there has been little evidence of this outcome to date, as MOFCOM has not rejected or imposed conditions on any deals since the simplified case review began to pick up steam in late 2014 that could shed light on whether the existence of this channel could allow shorter timelines in complex merger review cases. 

MOFCOM has also not addressed other structural issues that can delay M&A review timelines, such as required MOFCOM consultation with other government agencies that can result in new concerns being presented to filers late in the process.

Role of Non-Competitive Factors in Competition Enforcement

Two key articles of the AML (Article 4 and Article 27) grant-competition agencies the ability to weigh both competitive factors and non-competitive factors in the law’s enforcement, and specifically define those factors to include areas such as influence on national economic development, influence on technological progress, and influence on consumers and other business operators. Competition review processes allow specific times for government stakeholders to consider such non-competition concerns. For example, MOFCOM is required to consult with other agencies during the merger review process, allowing government regulators and domestic interests to influence decisions based on protectionist or industrial policy goals, rather than on truly competitive factors.

Key competition regulations (such as the SAIC’s Provisions to Prohibit Intellectual Property Abuse to Eliminate or Restrict Competition) and various AML decisions have also raised concerns about how regulators consider non-competitive factors. Some competition decisions, for example, illustrate that regulators are weighing competition concerns alongside Chinese policy goals such as domestic innovation and industry development. This focus undermines the balance struck in other regulations between China’s goal of encouraging the adoption of innovative standards and the need to preserve the free exercise of intellectual property by patent owners. Recent decisions indicate that such non-competitive factors remain an important and concerning part of competition enforcement decisions.

Application of Remedies and Fines

As Chinese AMEAs have gained experience and set best practices for competition enforcement, they have laid out increasingly clear markers for how they will apply remedies to address competition concerns. MOFCOM continues to apply a unique mix of structural and behavioral remedies to address potential competition concerns. The implementation of its updated Measures Concerning the Divestiture of Assets or Businesses when Implementing Concentrations of Business Operators provide further legal grounding toapply remedies such as divestitures and “hold separate” provisions that require companies to maintain separate subsidiaries in China as market competitors. Notably, MOFCOM favors a heavier use of behavioral remedies, including regular application of behavioral remedies even in cases where the monopoly concerns raised have been horizontal. Some of these behavioral remedies restrict or eliminate the legitimate business value of conducting the transaction in the first place.

NDRC and SAIC continue to work within the framework of the AML’s Article 47 to apply fines of up to 10 percent of the previous year’s sales revenue. Significant questions remain, however, as to how these fines are determined and applied, particularly with the lack of specific guidance or standards for when an agency might apply a higher fine versus a lower fine. As noted above, all of the fines levied on foreign companies to date have been limited to domestic sales revenue. Without explicit language to clarify the basis for fines, however, questions remain about whether future fines could be assessed based on global company revenue. In addition, basing fines on a percentage of sales serves to discriminate against large companies while limiting flexibility in setting fines based on the level of the infraction. Additionally, questions remain about whether fines are being applied fairly to both foreign and domestic companies. To date, foreign companies penalized by NDRC under have received higher fines (3.3 percent) than their domestic counterparts (1.9 percent).

Broad Definition of Monopoly and Pricing Agreements

US companies have a number of lingering questions about provisions within the AML that define monopolistic behavior, and little has changed over the past few months to address these questions. Many of their concerns relate to the ways that China’s competition regime differs from international best practices. Companies also highlight provisions that are designed to protect against anticompetitive practice, but in practice produce unintended negative consequences for foreign and domestic companies operating in China.

Such issues include a range of business agreements, such as resale price maintenance (RPM) agreements and “other monopoly agreements” as determined by NDRC or SAIC. Such clauses—which appear to eliminate RPM agreements in blanket fashion—are out of sync with evolving practices in other legal jurisdictions, which have generally shifted to an approach considering a given RPM by looking at its pro- and anti-competitive effects (the “rule of reason”). Chinese case law on these issues remains unclear, with some indications that RPMs have been considered based on their competitive impact alongside final decisions that have ruled these to be anticompetitive.

Companies also fear that other agreements they sign with distributors could be construed as monopolistic. For example, many companies selling complex products such as automobiles frequently sign agreements with their manufacturing partners to ensure that the product-specific parts those partners manufacture are only sold through company-authorized dealers. These agreements are designed to promote strong customer service and customer safety by ensuring that only trained, certified personnel conduct repairs of such products using spare parts. NDRC’s announced focus in 2015 on monopoly agreements raises concerns that these and other agreements could be targeted in coming months without consideration of their pro-consumer effects.

[1] Foreign companies are involved in ongoing monopoly investigations from both NDRC and SAIC. It is challenging to compile a complete list of companies that have been investigated by NDRC and SAIC for a number of reasons. First, it is not clear that all of NDRC’s investigations are made public. Additionally, foreign and domestic media coverage of investigations, which generally name foreign firms but sometimes exclude domestic firms, are uneven, making it difficult to fully evaluate whether the investigation of domestic companies is administered in proportion to their activity in sensitive industries.

[2] The draft template is no longer available via the Electronic Intellectual Property Center site, but can be found at the China IPR blog.

[3] Conversion rates for this and other RMB figures are done based on the RMB/dollar exchange rate on the last day of the month in which the decision was announced. For example, this conversion is done based on the exchange rate on February 28, 2015.


See PDF above for Appendices.