Landmark China antitrust settlement opposed by adviser

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State-controlled China Telecom (HKSE: 0728; NYSE: CHA) and China Unicom (HKSE: 0762; NYSE: CHU) “clearly and seriously” violated the law, an advisor to China’s antitrust regulators told dealReporter.

Wang Xiaoye, a member of China’s newly-formed expert consultation group to the Antimonopoly Committee of the State Council, told this news service the landmark probe into alleged price manipulation by the giants should not result in a settlement, explaining that the commitments made by the two companies are too vague. The firms’ promises to lower internet prices and improve connection speed came last month following the National Development and Reform Commission’s (NDRC) surprise confirmation that it’s investigating the two companies.

The case is being closely watched because it’s the first time China launched an antitrust investigation into large state-owned enterprises, indicating Beijing may be ready to show their teeth to all antimonopoly law violators regardless of their identity. Previously, 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.

“(The two companies) have no deep understanding of this case,” Wang said, pointing to China Telecom’s promise to lower internet access prices by about 35% in five years. “This kind of commitment is akin to no commitments at all. I believe decreasing prices is a trend due to technology developments. I wonder what the connection between this 35% and the case itself is?”

The 21-person expert consultation group consists of law professors at China’s top universities as well as scholars in government think tanks and agencies. It can influence China’s antitrust enforcement bodies such as NDRC and the Ministry of Commerce (MOFCOM), but the antitrust enforcers still have the full discretion on deciding the outcome of their investigations, China-based attorneys said.

Wang is a professor at the state-run think tank Chinese Academy of Social Science and was involved in drafting China’s antimonopoly law that came into effect in 2008.

Wang’s comments represent some of the harshest criticism of Chinese state-owned companies’ antimonopolistic behavior.

“Many people in China believe it’s useless to punish state-owned companies with a fine because it merely shifts money from one’s left pocket to a right pocket,” Wang said. “But I think that view is not correct, is inconsistent with the law, and is not in line with China’s structural reform. Furthermore, that is not the reality, because these two companies are very afraid of a fine, because such a fine will damage their image.”

As this news service previously reported, Li Qing, deputy director of the price supervision and antimonopoly department of the NDRC, in an interview with state-owned CCTV, said China Telecom and China Unicom use their dominant market position to charge rivals higher fees while offering favorable prices to companies that are not competing with them. She said if the allegation of price discrimination proves to be true, the two companies may be liable for a fine of 1% to 10% of their revenue of the previous year, which could amount to hundreds of millions to billions of Chinese yuan.

Many attorneys, however, believe NDRC in the end will settle the case with the two telecom companies. This would make the case not only the first time China launches an antitrust investigation into large state-owned companies, but the first time China ends an investigation through a settlement.

“I consider that there is a big chance for China Telecom and China Unicom to file applications [to suspend the investigation] successfully, given that NDRC required China Telecom to resubmit better proposed measures,” said Susan Ning, a partner at King & Wood. “Though NDRC expressed its dissatisfaction with China Telecom’s current proposed measures, China Telecom and China Unicom still have a big chance to settle the case as long as they resubmit better proposed measures following NDRC’s instruction.”

Violation ruling would have far-reaching legal ramifications

Zhan Hao, executive partner at Beijing-based Grandall Law Firm, also believes the case most likely will be settled because a decision finding China Telecom and China Unicom violated antitrust law will have far-reaching legal consequences, including a massive load of investigation into other state-owned companies and potentially a flood of lawsuits.

“The conclusion of abuse of a dominant position requires a huge amount of rigorous and elaborate economic data, analysis and even economic modeling to support, which correspondingly requires enough experienced professionals or experts in relevant fields to back them up,” Zhan said. “NDRC has not adequately prepared yet.”

“If China Unicom and China Telecom are strictly punished according to AML, then how about the treatment of other giants in national monopoly industries, such as China Petroleum & Chemical (Sinopec) (HKSE: 0386; NYSE: SNP; Shanghai Stock Exchange: 600028), China Railway Group (HKSE: 0390; Shanghai Stock Exchange: 601390)?” Zhan asked. “Furthermore, if all giants in a national monopoly industry are on the punishment list of NDRC in the future, it would be of great detriment to the vitality of China’s economy, let alone the huge workload to NDRC.”

There is no deadline for NRDC to release its decision on whether or not it will accept the two telecom giants’ settlement proposal.

Attorneys outsides China are also eagerly awaiting NDRC’s decisions on clues of what direction China is taking in its antitrust law implementation.

“The mere fact that the case may be settled doesn’t necessarily mean that they are not particularly interested in the state-controlled companies,” said Shanker Singham, a partner at Squire Sanders. “The terms of the settlement will be pretty critical in understanding where the power lies. The more the settlement focuses on pricing issue, the interconnection fee, predatory pricings . . . the more it’s an indication that the Chinese agencies are taking seriously the notion that SOEs should be on the same competitive playing field as every other private service and that would be a very positive sign.”

“If it’s merely about improving their quality, then I think it falls into the other category that the Chinese government is trying to achieve a regulatory goal,” said Singham.

China is conscious of such a global spotlight on the case.

“This case will show China’s antitrust law enforcement isn’t discriminating based on how companies are formed or which countries the companies are from,” Wang said. “The investigation and handling of the case shows the effectiveness of China’s antitrust law and the power and deterrent of China’s antitrust agencies. To a degree, it also reflects China as a market economy.”

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