As China continues with its economic reform process, and with its admission into the World Trade Organization (WTO) in 2001, the call for the speedy adoption of an antimonopoly law has been stronger than ever. Although the country currently has some competition regulations in place, they are insufficient in dealing with one of the biggest threats to competition within the country – administrative monopolies.
This essay will focus on the nature of administrative monopolies in China. It shall first look at the background of Chinese regulatory structure to get an understanding as to why this particular phenomenon is so rampant. It will discuss administrative monopolies in detail – with focus on local protectionism, to get a sense of the current situation in China. Furthermore, it shall then analyse the Draft Antimonopoly Law that is currently in the final stages of deliberation before being enacted, by reviewing the scope and purpose of the law and how it tries to curtail administrative monopolies. Lastly, this paper will consider the various opinions and concerns of the specific administrative monopoly provisions within the Law as well as look at what the role of competition enforcement agencies need to be in order for the law to be effective. To conclude, I shall give some of my own insights into the law and offer some views as to what the future may hold for competition in China.
Traditionally, under the planned economy, China’s economy fell under the control of the communist regime of the central government as opposed to a market economy. Chinese Communist Party leaders neither respected the traditional court system nor considered the rule of law necessary to create a just, fair and stable society. Under the former planned economic system, "competition" was deduced as part of an evil capitalist monster and was thought to have no role to play in theory or in practice. Therefore, there was no need whatsoever for a competition policy.
Since 1978, the Chinese leadership has gradually recognized the harms of undue state interference with the economy. As a result, in addition to economic reform, China’s regulatory structure is also in the process of being transferred to one more compatible with the requirements of the market economy. China has progressively moved away from the traditional ‘planned’ economy where the economy was managed by the central government and slowly, administrative measures have been substituted for an allocation of resources and economic development based on market choices. Unfortunately, these economic reforms have not, generally, been accompanied by corresponding reforms in legal and political systems.
Since the 1980s, the State Council has promulgated many regulations prohibiting restrictions on competition. For example, the Council sought to resolve the problem of businesses misusing administrative powers by promulgating many regulations on screening and rectifying various kinds of companies. In addition, the Council has also issued other circulars prohibiting various acts of government intervention and protectionism within the economy throughout the reform process. In particular, the Regulations on Prohibition of Local Protectionism in Market Economic Activities (commonly referred to as Decree No. 303) issued by the State Council in April 2001 was promulgated specifically to curb administrative monopolies. It expressly prohibits any active or passive obstruction of or prejudice against non-local products and services from entering local markets by any unit or individual.
However, these rules and decrees were not effectively enforced, not only because they failed to deal with the problem of ownership (particularly state ownership), but also because the administrative arms at all levels held firmly that State Owned Enterprises (SOEs) should be protected from the enforcement pressure of pro-competition policy and laws.
On 1 December 1993, China enacted its first piece of "competition" or "fair trade" law – the Anti-Unfair Competition Law. The objective of competition policy is described in Article 1 as being to:
"safeguard healthy development of the socialist market economy, encourage and protect fair competition, stop acts of unfair competition and to defend the lawful rights and interests of operators and consumers."
This piece of legislation does try to counter specific acts that are to the detriment of good competition in the economy. In particular, Article 7 of the law prohibits the behavior of governments who coerce customers into buying products from designated suppliers in addition to the prohibition of regional blockades.
Although this piece of law is a good foundation for future legislation on administrative monopolies, it is too simplistic compared to the antitrust laws and competition policy guidelines in countries with more antitrust experience. It is hardly enough to deal with the broad range of competition issues (such as mergers and acquisitions, abuse of market power, monopolistic agreements etc.). To improve the Anti-Unfair Competition Law would require local governments as well as government authorities to further reform their roles in the market and separate their functions as player and regulator in order keep intervention to a minimum. Moreover, further training of law enforcement authorities and promoting the advocacy of the law so as to strengthen the legal awareness of operators and consumers, and establish a sound social ground for maintaining fair competition is required.
Currently, the sanctions within the legislation against government and administrative restrictions on competition are ineffective, as various problems such as scope and enforcement are not covered. The following section shall analyse these problems and provide some suggestions as to how the Antimonopoly Law can help solve current issues.
According to the Law against Unfair Competition, any person or entity that abuses government or administrative power to restrict competition will be ordered by administrative organs at higher levels to make corrections. This provision does not have sufficient authority as if the administrative organs at higher levels ignore abuses of power by their subordinate organs (which is common), or try to minimize the legal consequences of their abuses, the legitimate rights and interests of victims will not be protected and abuses will continue to occur. An effective competition policy must not only set out explicit provisions and consequences, but also provide an enforcement authority with sufficient jurisdiction and independence in order to oversee compliance of the law.
As we can see, there have been many attempts to put into place a competition policy within China. Unfortunately, due to the legacy of the old economic system, many government agencies still treat specific enterprises differently or practice a high degree of departmental or market division. Often, government intervention ends up favoring politically influential groups and undermining any laws that have been put into place. As a result, many low-efficiency enterprises are kept in existence through government subsidies. Moreover, it also means that many high-efficiency enterprises are unable to compete effectively in the market due to these administrative ‘favours’. Thus, at the current stage of economic development in China, there lacks sufficient authority to create a market where competition is not seriously distorted.
In order for the full benefit of the market economy to translate to higher economic welfare, China must enact a law with sufficient scope and authority to regulate restrain and safeguard the socialist market economy. The purpose of the law should be to protect fair and free competition – in China, this means controlling administrative monopolies, widely considered as the biggest factor in undermining competition policy today.
Despite the positive developments in China’s regulatory reforms, the systems are still plagued by abuses of the government’s regulatory power through administrative restrictions. Administrative restrictions on competition refer to the acts of the Chinese government and its subordinate organs that abuse administrative power to restrict competition. China is currently transitioning from a planned economy to a market economy and the transformation of the government’s function of economic administration is not yet complete. Consequently, administrative monopolies coming from the old economic system represent a very serious problem and large obstacle to the establishment of effective competition policy in China.
A common form of administrative monopoly occurs in China when SOEs have direct affiliation with a regulatory ministry that receives preferential treatment. Since those companies possess governmental authorization, they have competitive advantages that other companies do not possess and thus enjoy monopolistic conditions for the sole reason of government interference in the market.
Another particularly damaging form of administrative monopoly occurs when administrative regions or localities enact protectionist measures by creating barriers for entrance of goods, services, raw materials or technology into their regions. These administrative monopolies (known as local protectionism) damage the economy through welfare-reduction, as due to government intervention, there is not an efficient allocation of resources.
In the current Chinese economy, all kinds of monopolies possess a certain administrative colour, and the government, to a certain extent, supports enterprises’ acts that restrict competition. Therefore, the problem of administrative monopolies should be the focal point in the drafting of antimonopoly legislation in China – however, it is likely that it will also be the most difficult. The key to China’s economic reform is the reform of state-owned enterprises, promoting competition and the reduction of government intervention in the market.
Many scholars believe that the priority in China is to discourage these anticompetitive acts as supported by the government, involving enterprises or assisted by industry associations. Administrative monopolies are rooted in the traditional central planning system and are difficult to tackle. To deal with the administrative conduct the right way is to deepen and further promote the economic and administrative reforms, including continuing to separate the Government’s regulatory and ownership functions.
Breaking departmental monopolies is of special importance to the establishment of an open, competitive, and unified market structure in China because doing so represents the only effective way to implement competition mechanisms. It is hoped that any future legislation will have sufficient authority and scope to eradicate to at least minimalize administrative interventions and allow enterprises to improve their economic efficiency through competition, expand their scope of production and operation and realise economies of scale.
Local protectionism is one of the most serious forms of administrative monopoly in China. It consists of acts of local governments that either prohibit certain foreign products from entering the local market or preventing local raw materials from flowing into other regions – thereby dividing the originally unified national market into many narrow local markets. This particular type of protectionism harms consumer interests by restricting their rights to select commodities, restricting the production of scale of enterprises and impeding the development of industry in China.
This kind of administrative intervention can have large negative effects on the healthy operation of the national economy. Because goods are not being traded nationally on the basis of supply and demand, protectionism affects the optimal allocation of resources and thus brings about a nation-wide dysfunction of the market.
There are of course reasons as to why this kind of protectionism is so rampant in the Chinese economy. Local governments have long had a strong incentive to shield local firms and protect their tax base. The wish to guarantee local employment is one of many economic and political incentives for local government officials to carry on with this practice.
It should be pointed out that local governments in every country, whether it is economically developed or still developing, have the incentive to protect their local industries. This is because local governments rely on their local industries for tax revenue. In addition, local industries offer stable employment opportunities for the local people, which is critical for social stability. The prevalence of local protectionism is a direct result of the governments’ incentive to boost their local economies and increase the living standards of the residents.
Furthermore, economic development has become a criterion for assessing local officials. The current assessment criterion overstresses the economic growth of the region led by the local officials. In addition, the criteria for assessing economic growth are essentially superficial: the number of projects and enterprises established, and the growth rate of the local economy. At the same time, as the general public plays an important role in local elections, local officials are pressured to focus their efforts on the local economy and welfare. Thus, it is no surprise that local governments will do everything they can to promote and protect resources in their region.
Like protectionism in international markets, this phenomenon can be dealt with through interregional collaboration to abolish trade barriers and more effective implementation of existing laws prohibiting regional blockades and protectionism. It is also hoped that the proposed Antimonopoly Law will help deal with this major issue by establishing a new competition authority and create further prohibitions on administrative intervention of local governments. Thus, in order to combat local protectionism, China needs to engage in further economic and legal reform. Local governments must educated that in the long run, the inefficient allocation of resources will reduce the welfare of the people and protectionism is not optimal economic solution.
In the next section, some case studies of administrative restrictions are presented to display a picture of how government intervention adversely affects the market.
Xiao Hu Tu Xian Liquors (local protectionism)
Hanchuan Municipal government in Hubei province issued an official document in March 2006 requiring all government institutions to consume Xiao Hu Tu Xian Liquors, a liquor brand of Hubei Yunfeng Brewery Co., Ltd., one of the largest taxpayers in Hanchuan. The document set the total annual consumption of the Xiao Hu Tu Xian liquors by municipal government institutions at 2 million yuan’s worth and provided a detailed breakdown of consumption amounts for different branches and levels of government. The document further set forth corresponding rewards and punishment measures to ensure compliance.
A government official was quoted as saying that the government was obligated to promote local products and that the document did not close the local market to non-local products.
The Hanchuan municipal government was later forced to issue a new document repealing the previous one due to strong public criticism.
Telecommunications (sectoral monopoly)
Telecommunications services were once provided by one giant monopoly, the Ministry of Posts and Telecommunications, until the early 1990s. In 1994, China Unicom, a new service provider entered the telecommunications markets. To industry thus became a duopoly between China Unicom and the dominant incumbent, which also happened to be the industry regulator.
The ministry of Posts and Telecommunications adopted several anticompetitive practices shortly after the entry of China Unicom in order to defend its monopoly position. The new entrant was required to apply to the ministry for permission to operate in any of the PRC’s many geographic markets. By delaying consideration of the applications, the ministry could ensure that China Unicom’s newly developed infrastructure would not be put to use for some time. The ministry also set up administrative barriers, and charged unreasonable interconnect rates for access to its network. It made it extremely difficult for the new entrant to obtain critical resources such as telephone numbers, airwave frequencies, and satellite channels, occasionally disconnected services to China Unicom’s customers, and employed other restrictive business practices such as predatory pricing and cross-subsidization.
Fertilizer (local protectionism)
In 1997, the government of Guxi County in Henan Province issued a special order to prevent chemical fertilizer originating in other regions from flowing into the country. The order stipulated:
"In order to protect the production of chemical fertilizer in the county, the county government prohibits any units or individual (including the supply and marketing cooperative) from purchasing carbonic ammonia produced in other areas. Those who violate this prohibition shall, apart from confiscation of the goods and illegal income, be imposed severe sanctions according to the relevant regulations. The leaders of the relevant county people’s governments and of the relevant administrative departments also shall be investigated for administrative or economic responsibilities."
This is clearly a case of local protectionism, where the local government is protecting the industry within its own region from competition from what may be more economically efficient importers.
Although legislation such as the Law Against Unfair Competition and various State Council Decrees are currently in place, as the above cases show, local governments fail to consistently follow the law against administrative monopolies. This suggests that the current competition policy is ineffective at preventing these types of practices from occurring and thus better enforcement measures are necessarily for China to enhance its competition policy and move forward in its economic reform process. Perhaps the passage of the Antimonopoly Law, especially the provisions on administrative monopolies, will allow regional and administrative barriers to trade and competition be torn down more effectively.
From the starting point of eliminating corruption and creating a market environment of fair competition, emphasis must be laid on standardizing administrative monopoly. The ultimate objective of any competition policy should be to increase economic efficiency and consumer welfare. Competition is not an end in itself, but a means to achieve these objectives. The goal should remain to protect competition, to keep markets competitive, to achieve efficiency in the economy for the ultimate benefit of the public.
Many believe that the most important section of the AML is Chapter 5, which covers anticompetitive acts engaged in by governmental authorities (Abuse of Administrative Powers to Exclude, Restrict Competition). It is probably fair to say that it is concern over this phenomenon, not monopolies obtained simply through economic power, that has been the driving force behind the formulation of the AML. However, it has been this exact purpose that has also been the cause of major opposition and delays of the Law over the years.
Barring a few exceptions, economic monopolies are currently not of prime concern to those promoting the AML. Political monopolies, including local trade barriers, are at least at present a far more serious problem for the Chinese economy. Chapter 5 of the AML specifically addresses these problems and it is hoped that with sufficient scope and jurisdiction of enforcement authorities, these practices can be eliminated in the coming years. Without provisions prohibiting these types of public restraints on competition, the Law would probably only cover a fraction of practices that appreciably eliminate or restrict competition.
The major issues that remain subjects of vigorous debate are the enforcement structure for the Law and the treatment of administrative monopolies. These debates reflect the major interests that may be affected by the AML. The controversy over the enforcement structure reflects the competing jurisdictional interests of competing government departments, especially sectoral regulators and regulated sectors.
Those firms that are currently under governmental protection will of course be fighting against any proposals that would mean taking benefits or favours away from them. Similarly, local governments, with incentives to protect their own regions will be opposing any laws that would decrease the profitability of their own enterprises.
The discussion regarding the treatment of administrative monopolies reflect the reality that such of the distortions in the Chinese economy result from local governmental actions that favour local activity and are inconsistent with central government policy. Adding to the tension is a lack of consensus between the parties on both the desirability and feasibility of prohibiting and sanctioning against the local protectionism that motivates many administrative monopolies.
The major question is whether the government will apply the antimonopoly laws to SOEs, which are primary characteristics of a communist economic system. An analogy that is particularly illustrative of the conflicts involved is that of self-amputation. Self-amputation is a difficult proposition to face and occurs only when the interest in preserving the appendage is severely outweighed by the probability that removing the appendage would be necessarily for the long-term benefit of the individual. Thus, applied to China’s situation, the governments controlling SOEs must make the decision that while it may be painful to cut off SOEs at first, if it is not done then there will be further consequences down the road. It is better to suffer some loss in the short run to gain the benefits in the future.
As we have discussed above, in China the priority is to discourage acts aimed at anti-competitive practices as supported by the government, involving enterprises or assisted by industry associations, especially those induced by local governments. While there is a general consensus as to the harm administrative monopoly has done to the economic welfare of the country, there has been much disagreement as to how to regulate this special type of monopoly.
The genuine difficulty that the AML faces comes form the China’s current economic system. Since China is still in a transitional period between a planned economy and a market economy, enterprises only recently have started to adopt market-orientated management systems. Many of these enterprises, especially large enterprises and enterprises in monopolized industries, are still government authority. Thus, China still has a way to go in separating government functions from business management.
As administrative monopolies are at the core of monopolies in China, whether or not the Law should regulate them has become highly controversial among scholars and legislators. There have been differing views on the scope of any provisions in the AML that would cover administrative monopoly.
Those who favor adoption of strong prohibitions against administrative monopolies argue that the greatest impediment to a competitive economy in China is local protectionism. Therefore, it should be the central target of any meaningful Chinese competition law. This view holds that administrative monopoly is so central to the overall objective of the AML (to promote competition and prohibit anticompetitive acts), the law will not conform to China’s reality if it does not directly address the problem of administrative monopoly.
Others argue that while administrative monopolies are a major problem, it is one that needs to be addressed outside of a competition law. A much more powerful remedy is needed to counter the forces that advocate the maintenance of the status quo. That is, local protectionism has been a part of China’s economic system; a competition will not have sufficient scope to stop what local governments have been practicing for many years. It is only through further economic and political reform in the years to come can the culture of local protectionism be extinguished.
Supporters of this view argue that administrative monopoly is the specific aspect in the process of transformation of China’s economy and will gradually decrease with the gradual deepening of economic and political reform. That is, only through transforming the functions of governments and deregulation of industries can administrative monopolies be broken. If specific rules are compulsorily included in the AML to try and curtail the issue, it will be difficult to design technical and enforcement measures.
Chapter 6 of the AML sets out the provisions for the creation of an Anti-Monopoly Commission under the State Council. Article 32 states that its rules of procedures and work are to be stipulated by the State Council. This is good news, as it would mean the Commission would have the real authority to challenge administrative monopolies.
With the Law likely to be promulgated in the very near future, the PRC will soon have a fairly complete set of competition laws. Law enforcement will then be the biggest challenge facing the country. It is crucial for China to set up a powerful and independent competition authority. Below are some basic conditions that must be met in order for the competition authority to be both effective and credible in implementing its tasks.
The most important condition is independence. A competition authority needs to be explicitly entrusted with independently enforcing competition law in individual cases and it should be independently set its law enforcement objectives. Independence in this context means that other branches of government should not be allowed to interfere in the decision-making process of individual cases. Furthermore, when the state should have not have influence of the competition authority concerning activities in which they are involved.
In addition, non-discriminatory application of the law is required. The authority should apply competition rules equally to all undertakings irrespective of their origin or status. That is, governmental bodies should receive the same treatment as any other enterprise that falls within the jurisdiction of the authority.
As history has shown, previous efforts to counteract administrative monopolies have only met mediocre results, so failed efforts to police this kind of behaviour may discredit the new Anti-monopoly Authority (while diluting its mission). China’s antitrust authorities will have to contend with local protectionism and contrary policy goals through China’s fluid political process. Thus, although the AML will be promulgated in the near future, the long-term impact of the law will depend on the credibility, competence, and stature of antitrust authorities.
For all the above reasons, it is of utmost importance for China to set up a powerful and independent competition authority to combat administrative monopolies, and therefore should not be affiliated to any existing government ministry or agency. While it may be costly to set up a new competition agency, legislators must realise that competition laws are fundamental for the development of a market economy and the benefits of investing in such an institution should not be underestimated. If the AML is not properly enforced or if the competition authority does not have sufficient jurisdiction to carry out its role, then the AML will become a toothless and ineffective law.
The aim of the WTO is to create a fair and reasonable environment for competition and promote the development of international trade through the adoption of a series of effective legal principles.
Joining the WTO means opening national markets to the outside world, thereby requiring further introduction of a competition mechanism in every industry and economics sector. Under those circumstances, China must improve its competition laws and enact a concise and effective antimonopoly law as soon as possible – which will hopefully create a level environment for free and fair competition.
The new Law will hopefully enhance the market competitiveness of Chinese enterprises. According to the basic principles of economics, it is only under the pressure of market competition that enterprises will attempt to reduce costs, improve the quality of products and services, continuously develop new technology and products and improve operations management. For the purposes of this essay, if the Antimonopoly Law were successful at abolishing administrative restrictions on competition in China, Chinese firms would then need to learn to be more efficient. Without the protection of the government, firms would be exposed to the pressures of the market economy and efficiency is required for their survival. This result, as well as other measures contained in the Antimonopoly Law should ensure China’s further progression towards a true market economy.
Antimonopoly Law should apply equally to both public and private sectors. The government should enjoy no privileges before competition law. If the government improperly affects market competition and violates the Law, it should bear legal liabilities as if it were a citizen or juristic person.
The AML contains an entire chapter of prohibitions on anticompetitive activity by government agencies and for the reasons explained in this essay; these may well be the most important provisions in the law. However, if the past is any guide, there may be some skepticism as to the effectiveness of the law. There are already explicit provisions in the Law against Unfair Competition prohibiting administrative monopolies in place, complete with a definition of legal liabilities – but the effect was undesirable. If China is serious about breaking up administrative monopolies and creating a truly open and competitive market, then this process has to be in tandem with economic and bureaucratic reform. A law cannot solve all problems
There are many questions that are still lingering over proposed Law. Most importantly, will China resolve the tension between central and provincial governments? This issue is of concern for many foreign enterprises that are familiar with China’s regulatory structure. Because so much power is bestowed upon local governments, it does seem difficult for a single piece of legislation to conquer protectionist traditions that have long been in place.
In fact, well-connected provincial leaders have thwarted central government initiatives in the past. What will prevent them from thwarting the central government’s antitrust initiatives in the future? The answer to this question is not clear, but what is clear is that the country’s antitrust law will never achieve its goals if the provincial governments are allowed to act as a barrier to change, as many enterprises fear they will.
Over the last few decades, China has gradually moved from a planned economy into a market driven economy. It is now time for China to accelerate this process with the introduction of a detailed competition law. While there are existing competition principles in place, they are current ineffective in controlling what is thought to be the largest barrier to effective competition – administrative monopolies.
The prominent feature of China’s antitrust law is that it is designed to reduce the anticompetitive conduct of government agencies. Given China’s present economic structure and its ambition to rely on competitive markets for future economic growth, this is a valuable feature of the proposed law. The market mechanism is widely thought as the most efficient way to meet the demand of consumers for goods and services and will bring companies to increase productivity, to expand output and to create new jobs. However, the benefits of an open market cannot be fully realised unless public restraints to competition are removed. Hence, it is critical that China ensures that the AML has proper scope and enforcement measures with respect to all its provisions – but most importantly, the provisions concerning administrative monopolies.