CHINA ANTI-MONOPOLY LAW ALMOST READY FOR LEGISLATIVE REVIEW

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SUBJ: CHINA ANTI-MONOPOLY LAW ALMOST READY FOR LEGISLATIVE

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Ref: (A) Beijing 6692, (B) Beijing 6685, (C) Beijing 6822



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1. (SBU) Summary: On May 19-21 in Hangzhou, the Chinese

Ministry of Commerce (MOFCOM),Asian Development Bank (ADB)

and Organization for Economic Cooperation and Development

(OECD) jointly hosted an international seminar to discuss

China's draft Anti-Monopoly Law (AML). The seminar had been

billed as an opportunity for foreign experts to provide

comments to the State Council's (cabinet) interagency

drafting committee on the latest draft before the bill

advances to the National People's Congress (NPC) for final

legislative review. However, just one day before the

conference, MOFCOM changed the discussion topics to focus on

implementation issues. MOFCOM was the only Chinese agency

represented at the seminar and explained that the drafting

team could not come because it was busy with final

preparations to deliver the draft AML to the NPC in June.

It appears that philosophical debates on how to deal with

administrative monopolies and on how to treat intellectual

property (IP) will likely continue during the NPC's minimum

six-month review. MOFCOM hinted strongly that enforcement

powers for the AML would be decentralized among a few

ministries and sector regulators, and predicted that the NPC

will not likely change this. The AML draft is vague in the

area of IP rights and it appears that Chinese elements that

have pushed hard to use competition law to limit the rights

of IPR owners have continued to influence the Chinese

Government. End Summary.



Last Minute Agenda Switch

--------------



2. (SBU) Federal Trade Commission (FTC) General Counsel

William Blumenthal and Department of Justice (DOJ) Antitrust

Division Deputy Assistant Attorney General Gerald Masoudi

participated in a May 19-21 Seminar on China's Draft Anti-

Monopoly Law (AML). The seminar was jointly hosted by

MOFCOM, ADB and OECD. Representatives from competition

authorities from the EU, Germany and one U.S. private sector

law firm also participated. MOFCOM and ADB invited the

State Council Legislative Affairs Office (SCLAO),NPC staff

and the State Administration of Industry and Commerce (SAIC)

to join the seminar as they did in an international seminar

SCLAO hosted in 2005 to discuss the AML. However, none of

the other agencies attended the conference in Hangzhou.

MOFCOM staff explained that the SCLAO was busy finishing

final preparations to submit the draft law to the NPC in

June, and therefore had no time to join the seminar. MOFCOM

also changed the agenda just a day before the conference,

replacing specific discussion on the draft text with

specific implementation questions.



3. (SBU) MOFCOM Anti-Monopoly Office Director Wang Changbin

opened the seminar with a briefing on developments in the

draft AML since the July 2005 version, the most recent

officially released text. He reported that the right of a

victim to initiate a complaint case had been struck from the

July 2005 version, but now has returned to the final draft.

On exemptions for monopoly agreements, he said that the

drafters are now considering eliminating language that

provides for exemptions only after reporting to the Anti-

Monopoly Enforcement Authority. The reason for such a move

is that the drafters now recognize the insurmountable burden

such a reporting requirement would create for the Anti-

Monopoly Authority. He also pointed out that though the

specific provisions (formerly Chapter 5) against

administrative monopolies had been eliminated from the

draft, heavy deate on the topic will likely continue

through the NPC review. Wang explained that one side

believes that the AML needs to address government behaviors

that reduce competition, while the opposing side argues that

such provisions have implications for structural reform and

should be dealt with in other laws or policies.



4. (U) The foreign experts all had prepared to make points

keyed to major concerns over the draft text, and still made

those points at the beginning of the seminar. Generally,



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their major points conformed as follows:



-- protect the competitive process, not the competitor,

-- government restraints on competition are the most durable

and onerous of abuses and must be eliminated,

-- political and social concerns should not be part of the

competition law,

-- clear and consistent rules and application are important

for providing certainty to business,

-- adopt international norms and practices, like those of

the International Competition Network (ICN),

-- possession of intellectual property (IP) does not equal

dominance or monopoly, and

-- legitimate exercise of IP rights does not by itself

violate competition principles.



AML Enforcement: Lots of Hands in the Kitchen

--------------



5. (SBU) MOFCOM Director General of Treaty and Law Shang

Ming implied that the structure of the AML Authority has

been decided and would fit within the "current government

structure in China." Merger control would go to MOFCOM,

abuse of dominance and cartels would fall under "another

agency," and sector regulators would handle sector specific

competition issues. Shang said the Anti-Monopoly Commission

of the State Council, first described in one of the interim

drafts after July 2005, would consist of representatives

from a multitude of agencies. He said the commission would

take one of three possible forms: 1) just a forum to discuss

issues; 2) a commission that could make formal

recommendations to the relevant competition agency; or 3) a

commission that has the power to order ministries and

regulators to take specific corrective measures. Shang

noted that the third possibility is not likely. Instead, he

predicts that China will adopt an ineffective implementation

system and learn over time that it must change, and then

create a more efficient system. All foreign experts

expressed the same opinion that a single, independent

competition authority that could rule on all competition

matters is the best approach. They pointed out that the

decentralized system Shang described required clear

delineation of jurisdictions between different competition

authorities within China and consistent application of

general competition principles across industries.



Proper Nexus with China for Pre-Merger Notification

-------------- --------------



6. (SBU) Foreign experts and MOFCOM discussed numerous

examples and hypothetical cases to clarify pre-merger

notification principles. Foreign experts presented the

rationale behind international standards of merger

notification. They emphasized the importance of objective

standards that reduce burden on companies, thereby

increasing compliance. In light of limited resources and

the inexperience of China's future AML authority, OECD's

Bernard Phillips suggested that the merger review process

allow for follow-up of the initial report submission so that

reporting requirements could be basic. FTC Blumenthal

recommended adoption of the well-developed recommendations

of the International Competition Network (ICN). In response

to MOFCOM questions, the foreign experts discussed specific

situations concerning venture capital companies, exemptions

for "normal course of business," financial investments that

result in a change of control and passive investors.



7. (SBU) Noting that the current draft law requires pre-

merger notification based on the assets or sales of the

acquiring party, DOJ Masoudi warned that such provisions

would capture too many transactions that have no nexus with

China. He recommended that China instead revise the draft

to focus on the assets and sales of the target company. He

also recommended that China establish a sales or asset

threshold, under which no reporting is required. He

explained that the U.S. threshold is USD 56 million because

no cases of antitrust concern have been found below that



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level. In a follow-up side conversation with a MOFCOM

official, DOJ Masoudi drew a decision tree diagram to

illustrate the requirements and process of the U.S. pre-

merger notification system. (Note: On June 5, the same

MOFCOM official called ECONoff asking for clarification of

the U.S. threshold and rationale in order to convince the

State Council drafters, who had been pushing for an

immediate explanation, to change the pre-merger provisions

in the draft law. End Note.)



Does IP = Monopoly?

--------------



8. (SBU) DG Shang inquired about how to handle companies who

use intellectual property rights (IPR) in violation of

competition principles. He said that IPR is a top concern

in the AML. He referred to the WTO Trade Related

Intellectual Property Rights (TRIPS) Agreement's mention of

three categories of abuses of intellectual property. He

asked whether or not intellectual property automatically

conferred dominant position or monopoly power. He cited, as

an example, foreign patents to illustrate his general point.

Specifically, he said that DVD patent holders (all foreign)

initially charged a low fee for its license, but a few years

afterwards raised the license fee twenty times. He called

this an "obvious abuse" of dominant position based on DVD

intellectual property, and noted that the he often received

complaints from Chinese companies regarding patent licensing

abuse of this type.



9. (SBU) His comments ignited a series of vehement arguments

from the seminar participants who explained that the problem

described was a problem of contract law and negotiation

skill as opposed to an abuse of dominance. (Comment: the

problems of fixed fee DVD licenses has been repeatedly

mentioned by Chinese companies and government officials for

several years. However a critical problem with the argument

remains that China has benefited enormously by being able to

manufacture optical media readers under license without

having contributed any key technologies to their

development. At the same time, China seems to be intent on

taking a generous view of TRIPS Article 40, which authorizes

Control of Anti-Competitive Practices in Contractual

Licenses. End Comment.)



10. (SBU) DOJ Masoudi and FTC Blumenthal defended the right

of IP holders to charge whatever price and to choose with

whom to deal, and described the very narrow and specific

instances in that would qualify as a competition abuse

involving intellectual property. At the end of this

discussion, DG Shang reiterated China's resolve to protect

intellectual property rights as put forth in Chinese laws.

(Comment: However, he appeared unconvinced and clearly

reflects the continued pressure from those who push for

limiting the protection of foreign intellectual property

rights. End Comment.)



Big Retailers are Not Bad

--------------



11. (SBU) Also noteworthy, DG Shang pointed out that there

have been many complaints in China over the pricing power of

large retailers. He pointed out that large retailers in

general do not have more than 10 percent market share, but

appear to be able to set the prices at which they buy from

suppliers. OECD Bernard Phillips responded that each

jurisdiction also received similar complaints from small

retailers who compete with large retailers. Phillips

suggested that China ignore all the complaints. He pointed

out the efficiency of large retailers to push supplier

prices down and, due to fierce competition in the retail

sector, pass on those savings to consumers. Walmart, he

said, has the same profit margin that it had 20 years ago

before its large expansion in the retail sector.



12. (SBU) During informal discussions with ECONoff, OECD

Phillips agreed that the philosophical debate over



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administrative monopolies and government abuse had risen to

a high level in China and likely involved other agencies

like the National Development and Reform Commission and

others. Phillips offered to provide comparative country

studies that the OECD conducted that illustrate how

economies that embraced competition grew at higher rates

than economies that did not.



13. (SBU) The rest of the program covered specific

implementation issues related to investigation procedures

and powers, fees, confidentiality of information, penalties

for non-compliance with reporting requirements and leniency

strategies for battling cartels. ECONoff asked a MOFCOM

official during an informal break about the progress on

drafting implementing regulations for the AML and for other

laws and regulations under the purview of MOFCOM. That

official revealed that MOFCOM's Anti-Monopoly Office had

already drafted a large set of such regulations, but would

not release them until after the AML formally grants MOFCOM

specific responsibilities.



14. (SBU) At the close of the seminar, MOFCOM officials and

participants agreed technical exchanges and discussions

should continue in the coming months as the Chinese

Government initiates the final stage of review and begins

drafting implementing regulations for the AML. ADB

representatives mentioned that they have a standing

agreement to work with the NPC Legislative Affairs

Commission and would suggest another seminar on the AML Law

in the near future.



Embassy Comment

--------------



15. (SBU) The draft AML appears to be nearly finalized with

little room left for change before legislative review. On

June 8, Chinese media reported that the State Council has

approved the draft AML in principle for submission to the

NPC in late June, and is working on a few final revisions.

The State Council has not released the text to the public.

History does not bode well for radical change to State

Council-submitted draft laws, but many academics and

observers note that the NPC may go beyond its traditional

"rubber stamping" role. We shall see.



16. (SBU) According to MOFCOM comments in Hangzhou, it

appears that multiple agencies may need to be engaged in the

future to ensure sound and consistent application of

competition law. Intellectual property rights protection

also continues to be a major concern, despite the noticeable

quieter voices of those in China who seek to limit

protections for foreign intellectual property. Finally,

given fierce philosophical debate over government abuses of

competition that MOFCOM illustrated, more work needs to be

done to convince the Chinese Government toadopt more

competition tools instead of fallig back on the old habits

of regulatory rigidity to reform and further develop its

economy.



17. (U) FTC General Counsel William Blumenthal and DOJ

Deputy Assistant Attorney General Gerald Masoudi cleared

this cable, including the Embassy Comment.



Randt