China set to give anti-trust watchdog more teeth
Companies with business in China are recommended to heed the risks and take compliance measures accordingly.
The National People’s Congress (NPC), China’s top legislature, will convene a bi-monthly session of its Standing Committee (henceforth NPCSC) from Tuesday to Friday.
On the agenda is deliberations on bills including draft laws regarding issues such as anti-telecom and cyber fraud, civil compulsory enforcement, and our focus today – the draft amendment to the country’s Anti-Monopoly Law (AML).
The amendment work for the AML started around 2017, and many believe that the draft amendments - after five years of work of deliberations and opinion solicitations among others - are likely to be passed by the bi-monthly session of the NPCSC.
Dubbed by some the “economic Constitution,” the anti-monopoly law plays a crucial role in the economy, and the influence of its amendments is not to be underestimated, especially in China which is facing mounting downward pressure in the economy in the first half of 2022.
So today GRR presents you with a newsletter that can be divided into three parts about China's anti-trust actions:
1. A brief overview of China’s current anti-trust regulations and practices
2. Select anti-trust cases cited by China’s anti-trust authorities last year
3. Likely amendments to China’s AML
Part I：A brief overview of China’s current anti-trust regulations and practices
China’s current AML came into effect in 2008. But few back then could foresee the rapid development of new business models such as the platform economy in today’s China, nor the unruliness of large platform enterprises that “abused their data and algorithms, technological and capital advantages and platform rules” to implement monopolistic behaviors and conduct disorderly expansion.
In response to emerging anti-competitive practices, particularly against the backdrop of a rapidly sprawling internet industry, China has been mulling amendments to the law.
According to a news readout of a meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee on Dec. 11, 2020, the Chinese leadership demanded to 强化反垄断和防止资本无序扩张 reinforce anti-monopoly and prevent capital from expanding in a disorderly fashion.
Albeit brief, it is an unprecedented, strongly-worded, and pointed statement that has never been seen from such a high-level political platform.
A few days later, the 2020 Central Economic Work Conference, convened on Dec. 16-18 in Beijing, provided a similar market-moving signal:
6. Strengthening anti-monopoly efforts and prevent disorderly capital expansion. Preventing monopolistic practices and unfair competition is an inherent requirement for improving the system of socialist market economy and advancing high-quality development. The state supports platform businesses in pursuing innovation-driven development and enhancing their international competitiveness, and encourages common development of the public and private economic sectors. In the meantime, efforts will be made to promote law-based development and improve digital rules. Laws and regulations concerning the identification of platform monopolies, management of data collection and use, and protection of consumers’ rights and interests will be improved. Regulation and capacity for regulation will be enhanced, and resolute efforts will be made to stop monopolistic behaviors and unfair competition. Financial innovation should be carried out on the premise of prudent regulation.
Over the past two years, stopping monopolistic practices in the rapidly expanding internet industry has become a focus of law enforcement as the industry is penetrating into every aspect of people’s daily life from shopping to food ordering, taxi hailing, payment making and socializing.
Anti-trust was cited again as a priority during the 2021 Central Economic Work Conference a year later, at which the Chinese leadership stressed 要深入推进公平竞争政策实施，加强反垄断，以公正监管保障公平竞争 or “boosting market confidence, advancing policies for a level playing field, intensifying fight against monopolistic behaviors and unfair competition, and ensuring fair competition with impartial regulation.”
Official papers and documents aside, China also took concrete measures to counter market monopoly.
A national anti-monopoly bureau was set up in November 2021, in the same building of 国家市场监督管理总局 the State Administration for Market Regulation (SAMR).
Other supporting regulations were also introduced amid the country’s efforts in devising a policy framework to provide clear guidance on business compliance. A special antitrust committee under the State Council released anti-monopoly guidelines in the platform economy sector in February 2021. The State Administration for Market Regulation unveiled guidelines on anti-monopoly compliance for businesses operating overseas《企业境外反垄断合规指引》 in November 2021.
Some official figures may give you a rough idea of recent antitrust law enforcement in China. According to an annual report on antitrust law enforcement for the year of 2021 《中国反垄断执法年度报告（2021）》published by the national anti-monopoly bureau on June 8, 2022 :
1. Chinese authorities handled 175 antitrust cases, a year-on-year increase of 61.5 percent; fines and confiscated assets amounted to 23.59 billion yuan (about 2.52 billion U.S. dollars), around 52 times more than the 2020 figure of 450 million yuan.
2. Monopolistic practices in the internet industry and platform economy being a focus. The amount of fines and confiscated assets meted out in these two sectors reached 21.74 billion yuan, more than 92 percent of the total.
3. Some businesses in these two sectors were found of market dominance abuse or illegal concentrations between undertakings. Big tech giants investigated by antitrust authorities in 2021 include e-commerce conglomerate Alibaba Inc., on-demand delivery platform Meituan, game streaming platforms of Huya and Douyu, and Tencent. These cases will be detailed separately.
4. Competition order improved. Thanks to market regulation, businesses in the platform economy sector had stopped using the anti-competitive tactic known as “choosing one of two,” which required business partners to sign exclusive agreements and avoid dealing with competitors. With competition order rectified, businesses, particularly medium and small-sized businesses, gained broader room for development and exhibited exuberant vitalities.
5. Eyeing for a policy framework for market competition. Antitrust authorities will focus on improving mechanisms and systems for preventing monopolistic practices and building more competent and stronger in-house teams.
Part II ：Select anti-trust cases cited by China’s anti-trust authorities last year
The annual report on antitrust law enforcement for the year of 2021 also listed several cases antitrust authorities investigated in 2021, to “serve as a warning” for big techs.
GGR has translated a selected four of those cases：
Case: Alibaba Inc. fined 18.2 billion yuan for abusing market dominance
Investigation into Alibaba started in December 2020 on suspicion of abusing market dominant position. The investigation found the e-commerce giant guilty. Starting from 2015, Alibaba used an anti-competitive tactic known as “choosing one from two,” which forbade vendors from selling or promoting their products and services on its competitors’ platforms. Alibaba also abused its market force, platform rules, and technical advantages in data and algorithm to enforce the tactic, thus gaining edges in competition. Its practice excluded other online retailing platform from competition and harmed consumers’ interests. The company violated article 17 of China’s Anti-Monopoly Law, which prohibits businesses from limiting business partners to exclusive cooperation. The fine was meted out in April 2021, with the amount equal to 4 percent of Alibaba’s 2019 sales on the Chinese mainland. The authorities also ordered Alibaba to rectify its wrongdoings regarding business compliance and the protection of consumer rights and interests.
Case: Meituan punished for abusing market dominance
China’s State Administration for Market Regulation started an investigation into Meituan in April 2021 and found the on-demand service provider guilty. Meituan used similar “choosing one from two” anti-competition tactic to force business partners to stay loyal to it. In October 2021, the market regulator ordered Meituan to stop its law-violating practice and return 1.289 billion yuan in deposits paid by merchants to partner exclusively with its platform. Meanwhile, a fine of 3.442 billion yuan was meted out, or an equivalent of 3 percent of the company’s 2020 total sales on the Chinese mainland.
Case: Merger of game streaming platforms Huya and Douyu halted
2020年11月，市场监管总局收到腾讯控股有限公司（以下简称腾讯）提交的虎牙公司与斗鱼国际控股有限公司合并案经营者集中反垄断申报。2021年1月， 市场监管总局予以立案审查。2021年6月24日，进一步审查延长阶段届满前，申报方申请撤回案件并得到市场监管总局同意。2021年6月，市场监管总局对申报方的再次申报予以立案审查。经审查，本案涉及中国境内网络游戏运营服务市场和游戏直播市场。集中完成后将进一步强化腾讯在游戏直播市场的支配地位，可能对消费者造成不利影响，可能损害游戏直播从业者利益。集中完成后，腾讯在上下游均拥有较强的市场控制力，有能力和动机对下游游戏直播市场的竞争对手实施网络游戏著作权许可封锁，对上游网络游戏运营服务市场的竞争对手实施直播推广渠道封锁，在上下游市场形成闭环，排挤现有竞争对手，扼杀潜在竞争对手。集中具有或者可能具有排除、限制竞争效果。审查过程中，市场监管总局与申报方就如何减少该经营者集中对竞争产生的 不利影响等有关问题进行了多轮商谈，并对申报方提交的承诺方案进行了评估。经评估，市场监管总局认定，申报方提交的承诺方案不能有效减少集中对中国境 内游戏直播市场和网络游戏运营服务市场竞争的不利影响。2021年7月，市场监管总局决定依法禁止此项经营者集中。
Huya and Douyu provide videogame livestreaming services akin to Twitch in the United States. Both financed by Tencent, both take up a substantial market share in the sector.
In November 2020, the State Administration for Market Regulation received an application for a merger of the two companies from Tencent. The market regulator started reviewing the case in January 2021. On July 24, Tencent revoked the case and its application was approved. The market regulator restarted the reviewing in July and found that the merger would give Tencent control over the videogame livestreaming market and be detrimental to consumers, and those working in the sector. In July 2021, the administration announced the decision of halting the merger.
It is the first merger case Chinese authorities halted to prevent concentration of undertakings in the platform economy sector.
Case: Tencent penalized for failing to report its purchase of China Music Corp stocks
China’s State Administration for Market Regulation began an investigation into the case in January 2021. The investigation found that Tencent acquired 61.64 percent of the stocks of China Music Corp (CMC), once a leading music-streaming company in China, in July 2016. After the acquisition, CMC was restructured as Tencent Music Entertainment Group later that year in December. The company didn’t report the merger until December 6, 2017 when it finished the registration procedure for the change of the company’s shareholding.
The antitrust regulator found that Tencent’s acquisitions restricted or would restrict new entrants to online music streaming market on the Chinese mainland. There are three reasons. First, the concentration enabled Tencent Music Entertainment Group to hold a majority market share. second, the concentration eliminated major rivals in the market. Third, the concentration might lead to higher market access thresholds. Tencent’s practices violated article 21 of China’s Anti-Monopoly Law, which requires businesses to report concentration of undertakings in accordance with the law.
The regulator ordered Tencent and its affiliated companies to take necessary measures to restore competition order. They must not engage in exclusive copyright agreements with upstream owners of such rights, while existing agreements must be terminated within 30 days of regulatory notice. With no good reasons, they must not require directly or indirectly upstream copyright owners to give more attractive offers to creators than that of competitors. Offers made by Tencent and its affiliated companies should be based on the actual use of the copyright, subscriptions, rate of musical pieces, scenes of application and contract period, and they must not increase competition cost by paying a high advance to exclude and restrict competition.
Tencent was also ordered to pay a fine of 500,000 yuan.
The case was the first of its kind in which Chinese authorities rectified an unfiled merger and restored market competition order.
Part III : Likely amendments to China’s AML
In October 2021, the first draft amendment to the AML was submitted to the NPCSC, stipulating that business operators shall not exclude or limit competition by abusing data, algorithms, technology, capital advantages as well as platform rules, among others.
Later in the same month, NPCSC published that draft amendment online, to solicit public comments and suggestions for further revisions. Compared to previously released draft versions, the new draft did not make substantial changes of its articles, yet the liabilities for all types of illegal practice are largely increased.
Stopping monopolistic practices in the platform economy sector is also a highlight of the draft amendment. A revised version of the general provisions submitted to lawmakers for deliberation at the upcoming meeting reads, 经营者不得滥用数据和算法、技术、资本优势以及平台规则等排除限制竞争, or “business operators shall not abuse data and algorithms, technological and capital advantages and platform rules to exclude or limit competition.”
Law firm the Dentons combed through the major changes of the draft as compared to the current AML as follows:
Hub-and-spoke cartel: The Draft Amendment expressly prohibit hub-and-spoke cartel and provide for the same legal liabilities for both the hub and spoke. In some previous cases, the hub was not penalized due to lack of clear rules in the AML.
Safe harbors for monopoly agreements: All types of monopoly agreements can be exempted if the market share threshold is met, which will be stipulated by the authority in separate regulations.
Highlight on the tech industry: Abuse of data, algorithm, technologies, and platform rules that leading to imposition of unfair restrictions on undertakings is expressly listed as abuse of dominant market position.
“Stopping the clock” introduced for merger review: The timeframes of merger review can be suspended under three specific circumstances, including the filing parties’ failure to submit materials as required, occurrence of major situation changes, and, with the consent of the filing parties, necessity for further review of the remedy proposal.
Public interest lawsuit for monopoly practice: If certain monopolistic behaviors caused detriment to public interests, the procuratorates can bring a civil litigation against it.
The most significant amendment lies on the legal liabilities. Not only the penalty for existing liabilities rises sharply but includes new liabilities including penalties on individuals.
It is not clear whether there would be more changes to the final version of the amended AML at the end of this week’s NPCSC session, but it is clear that China is determined to strengthen enforcement against monopolistic practices in all industries, and companies with business in China are recommended to heed the risks and take compliance measures accordingly.
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