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China's anti-trust law

The IPR article in China's Anti-Monopoly Law, effective August 1, does not challenge either the possession of an IPR or the legitimate use of an IPR. Instead, it works with the existing IPR legal framework to protect and encourage innovation.

China’s Anti-Trust Law, which was enacted on August 1, 2008, is expected to change China’s competition landscape.

For quite some time, the Chinese state dominated the economy, determining what to produce at what quantity and what to sell at what price.  Even with the reform, the state still “monopolizes” such sectors as telecommunications, utilities, and petroleum with state-owned enterprises (SOEs) in the name of protecting the nation’s strategic interests.  The protectionist policy has been criticized for behaviors such as charging excessively high prices, providing low-quality services, and receiving excessive profits and eroded the competitiveness of these companies as well.

 

It remains to be seen whether the new law would curb the monopolistic behaviors of SOEs holding lawful monopoly positions rather than on protecting those SOEs.  But Li Rongrong, head of the State-owned Assets Supervision and Administration Commission (SASAC), unequivocally indicated that reorganization of SOEs, especially those administrated by SASAC, deems to be beneficial to the national economy and will be exempt from anti-trust examination.  Apparently, the ongoing reorganization in China’s telecommunications sector falls into this category.

Foreign Investment Laws and Regulations

China's WTO commitments make specific and detailed stipulations on the time and extent of opening of secondary and tertiary industries to foreign investors, while access to traditional industries such as farming, forestry, animal husbandry, fishery, mining, quarrying and manufacturing are stipulated in detail in the Foreign Investment Industrial Guidance Catalogue.

Some regulations issued by MOFTEC (now the Ministry of Commerce) and other government departments set restrictions on the equity interest held by foreign investors. For example, the equity by foreign investors in FIEs engaged in international logistics businesses shall not exceed 50% and in Chinese-foreign contractual joint ventures for audio-visual product distribution, the rights and benefits enjoyed by foreign investors shall not be exceed 49%.

Other than the above, some regulations also stipulate restrictions on the term of certain FIEs. For instance, the term of Chinese-foreign contractual joint ventures for audio-visual products distribution shall be no longer than 15 years and the term of FIEs engaged in road transportation shall generally not exceed 12 years.

Anti-trust Provisions in Relevant M&A Regulations

Currently the regulations governing M&A by foreign investors in China mainly consist of the Transfer of State Shares and Legal Person Shares in Listed Companies to Foreign Investors Circular, the Use of Foreign Investment to Restructure State-owned Enterprises Tentative Procedures and the Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions (the Tentative Provisions). The first two only offer some details regarding anti-trust, while the Tentative Provisions regulate anti-trust activities in more detail. They include stipulations that a foreign investor must make a report to MOFTEC and the SAIC if (a) the foreign investor involved in the acquisition has a turnover in the Chinese market during the current year that exceeds Rmb1.5 billion; (b) the foreign investor has acquired 10 or more enterprises in related industries in China within one year; (c) the foreign investor in the acquisition already has a market share of 20% in China; or (d) the acquisition will cause the foreign investor to have a market share of 25% in China.

Anti-trust Laws

China has not yet enacted a formal anti-trust law. So far, there are only some rules and regulations concerning restriction of competition in specific fields, such as the Restriction of Competition of Utility Enterprises Provisions and the PRC Pricing Law. In the latter, monopoly pricing determined through negotiations between enterprises or trade associations is regarded as a violation of law. Generally speaking, the legal framework to regulate monopoly activities in M&A by foreign investors has not been established. In our opinion it is vital that China enacts a formal anti-trust law as soon as possible to regulate issues on anti-trust in relation to M&A by foreign investors, especially given China's accession to WTO and the national treatment conditions for foreign investors that must be met.

 
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