China’s fair competition review system: Momentum for competitive neutrality and an open market

14 October 2016

China began to implement a fair competition review system on 1 July 2016. The move is in line with China’s efforts to reduce transaction costs caused by unwarranted state interventions, level the playing field for enterprises, and join the trend towards global convergence in competition policies. Government agencies at central and provincial levels are required to comply with the review system as of July 2016, and lower level local agencies will be called upon to do so starting from January 2017.

New policy measures will not be approved, issued, or implemented without a prior assessment for effect on market competition. Existing regulations, rules, and other policy measures regarding economic activities, including market entry, industry development, investment, bidding, government procurement, business operations, and qualification standards are among those specified for review.

Spurring market vitality: The establishment of a national competition policy

The National Reform and Development Commission (NDRC) led the drafting of the review system under the delegation of the State Council. As one of China’s three antitrust enforcement agencies, the NDRC is a vigilant and active enforcer that imposed a fine of CNY 6 billion (US $900 million) on Qualcomm’s abusive conduct in patent licensing and sale of baseband chips in 2015. The NDRC also leads the on-going investigations into the automobile, pharmaceutical, and smart manufacturing sectors.

The review system was introduced through the Opinions on Establishing a Fair Competition Review System in Market Development (the “Opinions”), approved by China’s central leadership in April 2016 and issued in June. The system ushers in a two-pillar national competition policy in China, mandating ex ante competitive assessment of policy measures and ex post scrutiny for monopolistic conduct provided by the Anti-Monopoly Law (AML).

Enacted in 2007 and put into effect the following year, the AML prohibits the abuse of government power through administrative monopolies, which serve to restrict or eliminate competition. Monopolies of this sort are one of the salient problems that challenge China’s economic performance and inclusive growth. Recent empirical research indicates that administrative monopolies have resulted in an annual loss of CNY 2-3 trillion (US $300-445 billion) for the Chinese economy.

In practice, administrative monopolies are usually carried out through rule-setting. Taking China’s automobile market for example, discriminatory criteria on used-car distribution are widespread in local regulations that significantly harm efficiency and consumer welfare. Market data shows that 4 million additional new cars would have been sold in 2015 had local and regional restrictions on the free flow of used-cars not been in place.

Special characteristics of China’s competition policy and limits of the AML

The AML imposes rules to control restrictive agreements, abuse of dominance, and anti-competitive mergers that broadly conform to international norms and are comparable to competition laws in place in the European Union and the United States. Importantly, a number of the AML provisions reflect characteristics specific to China, based on the development stage of the Chinese market and governance, and on concerns such as the treatment of state owned enterprises (SOEs) and export cartels, the role of public interests, and the design of enforcement agencies.

One of the notable features of the AML is the prohibition of administrative monopolies that affect governmental agencies at all levels. However, the current institutional design renders the AML vulnerable when dealing with government restrictions on competition through policy measures. Furthermore, the standard tools of competition law are generally less relevant to the treatment of anti-competitive actions of government because the political challenges are more difficult to surmount. Well-grounded with high-level political support, the review system fills in the gaps by targeting the rule-making process and by declaring that, in cases of conflict between competition and industrial policies, the former should prevail.

Review mechanism, criteria, and list of don’ts

The review system establishes a self-assessment approach safeguarded by external supervision from the public and anti-monopoly enforcement activities. During the rule-making process, agencies are tasked with self-assessment while also soliciting opinions from interested parties, consulting the public, and complying with the relevant rules of information disclosure.

Four major criteria and a list of 18 don’ts for each category are set out for policy-making agencies to conduct assessment. The four criteria include market entry and exit, free movement of goods and factors, effect on manufacturing and operating costs, and effect on manufacturing and operating conduct. The don’ts under each criterion spell out prohibited competition-restricting policy types, ruling out illegal grants of preferential policies to certain operators and imposition of unreasonable and discriminatory criteria for market entry and exit among other practices. Substantially, the current review criteria are similar to the OECD’s Competition Assessment Toolkit, which provides a “checklist” by asking a series of simple questions to screen for laws and regulations that have the potential to unnecessarily restrain competition.

Complementary to the list of don’ts, a catch-all provision stipulates that “no regions or departments shall promulgate policy measures that derogate the legal rights and interests or increase the obligations of business operators without legal basis; or violate the AML by promulgating polices and measures which eliminate or restrict competition.”

Exceptions: Restrictions on competition must be indispensable for achieving policy goals

The review system specifies a number of exceptions. In particular, policies relating to circumstances of national security and public interests may be implemented, even if they contain provisions that eliminate or restrict competition.

Observers have criticised these exceptions for creating a significant loophole in the review system, since notions such as “public interests” and “national security” tend to be broadly interpretable and thus provide expansive leeway for rule-makers.

However, the review system requires that policy-making agencies explain why the proposed restrictive contents are indispensable for achieving policy goals, ensure that the policies will not significantly eliminate or restrict competition, and specify the duration of the proposed policies. This represents the first time China articulated a criterion of “indispensability” in its competition rules.

In addition, the policy-making agencies are required to evaluate the effects of the policies annually. When policy objectives are not achieved, or when the implementation period expires, the relevant policy measures must be terminated or revised.

Looking ahead: Enforcement matters and global cooperation

The review system is a landmark in China’s long search for a good governance system that both meets its indigenous needs and is in tune with global best practices. To clarify substantial and procedural issues and to ensure vigorous enforcement, the NDRC is working with the State Council Office of Legislative Affairs, the State Administration of Industry and Commerce, and the Ministry of Commerce to draft a tailor-made comprehensive package for nationwide implementation.

As the E15 policy options paper Competition Policy and Trade in the Global Economy: Towards an Integrated Approach indicates, the establishment of a level playing field between SOEs and private businesses is a core challenge for international trade and investment policy in the 21st century. Given that SOEs and the state have played significant roles in the Chinese economy and that Chinese enterprises are becoming increasingly globalised, the need for cross-border cooperation on competitive neutrality issues, both under free trade agreements and under the WTO, warrants further exploration.

Jessica Su is an Associate Professor at the Institute of American Studies, Chinese Academy of Social Sciences (CASS).She is a member of the E15 Expert Group on Competition Policy.