CHINA ANTI-MONOPOLY LAW ALMOST READY FOR LEGISLATIVE REVIEW

UNCLAS SECTION 01 OF 04 BEIJING 011706

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E.O. 12958: N/A
TAGS: ECON, ETRD, EINV, KIPR, PGOV, CH
SUBJ: CHINA ANTI-MONOPOLY LAW ALMOST READY FOR LEGISLATIVE
REVIEW

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