Introduction

On 10 April 2021, the State Administration of Market Regulation of China (the “SAMR”), imposed a highest-ever monetary penalty in an amount of over RMB18.2 billion on the Chinese e-commerce giant, Alibaba Group Holding Ltd (“Alibaba”), following an investigation on the alleged abuse of its market dominance. This is just one of the high-profile enforcement actions that have been taken by the SAMR recently. On 30 April 2021, the SAMR announced to impose administrative sanctions on a number of companies in the Internet sector for not properly reporting their past acquisitions and investments to the authorities for antitrust reviews. In view of the strengthened enforcement of the antitrust law and regulations in China, foreign investors that make investments and do business in China should ensure an adequate understanding of China’s antitrust regime and improve their antitrust compliance management.

Major aspects of antitrust law regime in China

Prohibition against monopoly agreements

Under the Anti-monopoly Law of the People’s Republic of China (the “Anti-monopoly Law”), the businesses are generally prohibited to enter into monopoly agreements, which are essentially the concerted conducts between parties to eliminate or restrict competition in relevant markets. The horizontal monopoly agreements include those agreed between competitors to fix or vary prices, limit production or sales volumes, segregate markets for sales or supply, restrict purchases or development of new technologies, or jointly boycott. The vertical monopoly agreements include those agreed with the trading partners to fix the resale prices, or set minimum resale prices to third parties.

However, the prohibition will not apply if the parties can demonstrate to the SAMR that the purpose of concluding the monopoly agreements falls under one of the exceptions under Article 15 of the Anti-monopoly Law, which include improving technologies and developing new product, improving product quality and efficiency, mitigating the sharp decreases in sales volumes or obvious overproduction caused by economic downturns, or safeguarding legitimate interests in foreign trade and cooperation.

Prohibition against abuse of dominant market position

Under Article 17 of the Anti-monopoly Law, if a business can control prices, quantities or other trading conditions in the relevant market, or to hinder market-entry for other businesses it can be considered to be in a dominant market position and prohibited from acts that may constitute abuse of such position, which include selling at unfairly high prices or buying at unfairly low prices, selling below cost without justifications, refusing to trade without justifications, or conducting tie-in sale or imposing other unreasonable trading conditions to the transactions. In determining whether a business is dominant, the authority will consider a few factors including its market shares, its capacity to control sales markets or raw material procurement, financial and technical conditions, and degree of dependence of other businesses. Article 19 further provides that the dominant position in the relevant market is presumed in respect of (i) a business has more than 1/2 market share; (ii) two businesses combined have more than 2/3 market share and each of them has more than 1/10 market share; or (iii) three businesses combined have more than 3/4 market share and each of them has more than 1/10 market share. As such, the rules regarding dominant market position can affect even small businesses if they operate in concentrated markets. 

Control over concentration of business operators

The regulations in the China’s antitrust regime on concertation of business operators are more relevant to the foreign investors, as they are applicable to any transaction that may affect competition within the PRC, including merger and acquisitions, setting up of joint ventures and contractual arrangements to obtain control, even if the transaction is offshore and none of the parties is a PRC incorporated company.  Under the Anti-monopoly Law and relevant administrative regulations issued by the State Council, parties to a proposed transaction must declare to and receive clearance from the SAMR before completing the transaction, if the business operators concerned in the transaction can satisfy that, (i) the combined worldwide turnover of all business operators in the preceding financial year is above RMB10 billion, or their combined nationwide turnover in the PRC in the preceding financial year is above RMB2 billion; and (ii) the nationwide turnover in the PRC of each of at least two business operators in the preceding financial year is above RMB400 million.

The SAMR has the powers to prohibit the proposed transaction or attach certain conditions on the proposed transaction to mitigate its effect of restricting competition. If the said thresholds are reached but the parties fail to make such declaration and proceed with the transaction without a clearance, the SAMR can still exercise its powers after the completion of the transaction.

Anti-monopoly guidelines

In 2020 and 2021, SAMR has also published guidelines and guidelines (draft for comments), including Anti-monopoly Guidelines for Automobile Industry, Guidelines for Application of the Leniency Regime to Cases of Horizontal Monopoly Agreements, Guidelines on Commitments Made by Undertakings in Antitrust Cases, the Antitrust Guidelines for the Platform Economic Industry (“Platform Guidelines”) and the Antitrust Guidelines for Active Pharmaceutical Ingredients (draft for comments), in order to prevent and stop monopolistic behaviour and help businesses to operate in compliance with laws and regulations. In particular, the Platform Guidelines promulgated on 7 February 2021 has attracted wide attention as it pays particular attention to specific business models and possible anti-monopoly behaviours in the platform economy. It is reasonably expected that the Platform Guidelines will have a significant impact on foreign investments in China, particularly in the following aspects:

1.            The Platform Guidelines provides clarifications on the characteristics of the platform economy, namely, the involvement of multiple parties, the complexity of business types and the dynamic competition. It also clarifies the role of definition of “relevant market” in the enforcement of antitrust regulations for businesses in the platform economy. It is particularly pointed out that under certain circumstances where it is difficult to accurately define the relevant market, anti-competitive conduct can be directly identified without defining the relevant market.

2.            The Platform Guidelines recognizes that businesses in the platform economy may reach a monopoly agreement through algorithms and technical methods, and refines relevant rules to identify typical practices abuse of dominant market position with regard to the characteristics of the platform economy. Certain hot and cutting-edge topics are also discussed, such as the algorithm conspiracy, hub and spoke conspiracy, “Either-or Choice” and Big Data Discrimination.

3.            The Platform Guidelines expressly provides that the concentration of business operators involving the variable interest enterprise (“VIE”) structure falls within the scope of merger control review and are subject to the clearance from the SAMR. A VIE structure is commonly adopted by companies in the Internet sector in China, under which the foreign investors can circumvent the foreign ownership restrictions by entering into a series of contracts with the Chinese shareholders to operate business and the Chinese shareholders will act as nominee of the foreign investors. Such provisions in the Platform Guidelines can be viewed as putting an end to the SAMR’s long established practice of not accepting merger control applications involve the VIE structure.

Enforcement perspective

Being found to have abused its dominant market position and hence breached the Anti-monopoly Law, Alibaba received record high RMB18.23 billion fine on 10 April 2021, which comes close to the amount of Google’s first antitrust ticket in the European Union for abusing its market dominance of the search engine market in 2017 (​please refer to our April 2021 competition law newsletter for more details). Chinese regulators are tightening scrutiny over the market monopolistic conduct in recent years. On 14 April 2020, SAMR released its sanction decision against three Shandong-based suppliers of calcium gluconate API, Shandong Kanghui Pharmaceutical Co., Ltd., Weifang Puyunhui Pharmaceutical Co., Ltd. and Weifang Apollo Pharmaceutical Co., Ltd. The three API distributors were respectively fined 10%, 9%, and 7% of their turnover in the preceding year and the illegal gains were confiscated. The total amount of fines and confiscations is RMB325.5 million. SAMR found that the three companies had abused their dominant position in the sales market of calcium gluconate API for injection in China by charging unfairly high prices and imposing unreasonable trading conditions. In addition to fining the involved enterprises, the authorities also imposed penalties on the main personnel in charge of the decision-making and those who refused to assist or even obstructed the investigation. In the above case, the authority also imposed a fine of RMB100,000 on the respective legal representatives of the two of the three companies.

Takeaway

Looking forward, it is expected that the SAMR will continue to actively enforce the Anti-monopoly Law and joint enforcement by various government departments in respect of the antitrust laws and regulations may become more commonplace. It is important for foreign investors to understand the key aspects of the antitrust legal regime in China and observe the relevant guidelines to ensure their compliance when making investments in China.