China sets antitrust milestone with investigation into large SOEs

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The Chinese government’s surprise confirmation that it is investigating the country’s two state-controlled telecommunication giants indicates the country is getting more serious in its enforcement of anti-monopoly laws, various China-oriented antitrust attorneys told dealReporter.

Notably, the move indicates that no companies, even state-owned enterprises (SOEs), are exempt from antitrust scrutiny going forward, antitrust attorneys said.

China adopted its antitrust law in 2008, but has been criticized for the law’s uneven implementation. The country’s antitrust enforcement has been directed primarily at foreign companies that are trying to acquire native Chinese businesses as well as mergers of multinational companies that have a presence in China.

Enforcers seldom pursued local companies, particularly large, SOEs. In fact, US companies’ concerns that China is using its anti-monopoly law as a tool to discriminate against foreign companies is so strong that the sentiment prompted a Congressional hearing on the matter in July 2010.

“There have been questions all along whether this law will be applied to SOEs,” said William Vigdor, a partner at Vinson & Elkins. “That question is partially answered now.”

“A powerful government agency taking action against two huge SOEs clearly demonstrates the Chinese government is getting serious about the anti-monopoly law (AML),” said Frank Schoneveld, a partner at McDermott Will & Emery. “SOEs were never immune from the AML, although many assumed they would be, so this is a big wake-up alarm to those who thought it would be much longer before the AML would be enforced vigorously by China’s antitrust agencies.”

Hanhong Wu, a professor of economics at People’s University of China and a member of China’s Anti-monopoly Law Review and Revision Group, said SOEs should study AML closely to avoid monopolistic behaviors or to properly defend themselves when accused of such behaviors. “China’s anti-monopoly law is no longer a sleeping lion,” he said. “People used to think the anti-monopoly law is not applicable to SOEs. But it is not true.”

In an interview with state-owned CCTV on 9 November, Li Qing, deputy director of the price supervision and antimonopoly department of the National Development and Reform Commission (NDRC), said the agency “immediately launched” an antitrust investigation against China Telecom (HKSE:0728, NYSE:CHA) and China Unicom (HKSE:0762, NYSE:CHU) after receiving complaints in the first half of this year about their pricing practice.

Li said the two companies hold about two-thirds of the broadband internet connection market and “clearly occupy a dominant position in the market.”

“They use this dominant position to charge their rivals higher fees while offering favorable prices to companies that are not competing with them. According to antitrust law, we call such behavior price discrimination,” she said on the TV interview.

Li also said if the allegations prove to be true, the two companies are liable to a fine 1% to 10% of their revenue of the previous year, which could amount to hundreds of millions to billions of Chinese yuan. China Telecom reported a revenue of CNY 219.9bn (USD 34.7bn) and China Unicom CNY 171.3bn for 2010.

China Telecom said in a 9 November statement “it has always been providing its broadband services strictly in accordance with the relevant laws and regulations” and that it will cooperate with relevant authorities on the investigation.

While it has been rumored for months that China’s regulators are conducting an antitrust investigation into the two companies, Schoneveld said it is surprising that NDRC chose a rather high-profile way to disclose the investigation and acknowledged it is willing to slap a huge fine on the two companies.

“The NDRC has for some time been privately saying that, when it has more resources it will be more vigorous about enforcing the anti-monopoly law and most thought there would be another year or two before the NDRC would be ready to do a big case,” he said. “Clearly, however, the NDRC is ready.”

Schoneveld also noted, “The next target could be anybody, but particularly bigger companies. The NDRC just declared open season on any company involved in anti-competitive conduct in China. Large foreign companies in particular, had better make sure their China operations are compliant with the AML.”

Shanker Singham, a partner at Squire Sanders who testified in the Congressional hearing last year, said the NDRC investigation into China Telecom and China Unicom could be a significant milestone in China’s implementation of its antitrust law.

“The US government has been pressing the Chinese competition agencies to apply their law equally to SOEs and Chinese companies with equal vigor as the law is applied to foreign enterprises,” said Singham. “Certainly anti-competitive practices in these sectors do have a major impact on competition in China as well as globally. Anything that removes these distortions will help both the Chinese economy and the global economy, as well as Chinese consumers.”

But whether China is really getting serious about the antitrust law will depend on the outcome of this investigation.

“If the investigation proceeds along ordinary economic lines, and is allowed to proceed to its logical conclusion, whatever that is, then it is a positive sign that China’s competition agencies recognize that anti-competitive practices do in fact damage its key economic sectors, harm its consumers and lead to welfare losses. This would be a positive development.”

Among China’s recent antitrust investigations are Ministry of Commerce’s antitrust clearance on Applied Materials’ (NASDAQ:AMAT) acquisition of Varian Semiconductor Equipment Associates (NASDAQ:VSEA) and Yum! Brands’ (NYSE: YUM) acquisition of Chinese hot pot restaurant chain Little Sheep (HKSE: 0968) earlier this month. In March, 2009, MOFCOM blocked Coca-Cola’s (NYSE: KO) acquisition of Chinese beverage company China Huiyuan Juice Group (HKSE: 1886) on anti-monopoly concerns.

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