COMPETITION LAW DEBATE AHEAD; LIKELY FOCUS TO BE

C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 001943

SIPDIS

SIPDIS

STATE FOR EAP/CM AND EB
STATE PASS USTR
USDOC FOR 4420

E.O. 12958: DECL: 05/11/2031
TAGS: ECON ETRD PREL PGOV CH HK
SUBJECT: COMPETITION LAW DEBATE AHEAD; LIKELY FOCUS TO BE
ANTI-COMPETITIVE BEHAVIOR, NOT BREAK-UP OF DOMINANT PLAYERS

REF: 05 HONG KONG 3765

Classified By: Deputy Principal Officer Marlene Sakaue; Reasons: 1.4 (b
/d)


SUMMARY/COMMENT
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1. (C) On May 8, the Chairman of Hong Kong's Competition
Review Committee told the Deputy Principal Officer (DPO) that
his group's report on whether Hong Kong needs a competition
law should be completed in mid-June and made public in early
July. The committee's present inclination is to assess a
need for a competition law focused on anti-competitive
behaviors like price collusion rather than to target market
dominance. Two key recommendations would be that the scope
of the law not be sector-specific and that an existing
competition advisory body be made into a formal legal entity
of the Hong Kong Government (HKG). The report will be
followed by a period of public consultation. The widespread
annoyance here at high prices in the energy and consumer
product sectors, dominated by conglomerates, along with a
robust debate underway about Hong Kong's ability to remain
competitive as part of a rising China, is setting the stage
for an energetic and emotional public discussion once the
committee's report is released. Recent Legco activity
suggests that the debate over a competition law is likely to
pit directly elected legislators against those who represent
functional constituencies. END SUMMARY

BASIS FOR PRESENT FOCUS ON COMPETITION LAW
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2. (U) Hong Kong is perhaps alone among advanced economies in
lacking a comprehensive competition law. There is
sector-specific competition policy, and it is particularly
effective in the area of telecommunications. A Competition
Advisory Group (COMPAG) has issued voluntary competition
guidelines but has no power of investigation.


3. (SBU) There is widespread sentiment here that market
dominance and price collusion force consumers to pay
unjustified premiums for day-to-day expenses such as:
housing, electricity, basic foodstuffs, gasoline, laundry,
and vitamins. There are no "big box" stores in Hong Kong,
although French retailer Carrefour tried to break in a few
years ago. Carrefour's inability to sustain operations was
widely attributed to the existing 70 percent market
concentration for groceries enjoyed by Wellcome (a Li
Ka-shing holding) and Park-n-Shop (a Jardines holding).
Wholesalers reportedly pressured Carrefour not to undercut
the competition and threatened to withhold supplies from the
firm's stores. More broadly, it has been argued that Hong
Kong's overall competitiveness is compromised by small groups
of companies earning excess returns at the expense of other
firms and consumers.

NEW CHIEF EXECUTIVE, NEW FOCUS
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4. (C) When Chief Executive (CE) Donald Tsang took over in
March 2005, he faced a public and media that were
increasingly focused on questions of business-government
collusion. Shortly after Tsang became CE, Financial
Secretary Henry Tang created a Competition Policy Review

SIPDIS
Committee to assess the need for a comprehensive competition
law. Per reftel, we were told by one of the committee
members that although Tsang was no fan of a such a law, he
was far more flexible and politically savvy than his
predecessor and would not fail to realize that the political
benefits of passing such a law made it a no-brainer. Our
contact said that the HKG could use a competition law as a
shield against increasingly strident allegations that it is
in bed with leading business tycoons.

REPORT LIKELY TO PUSH COMPETITION LAW
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5. (C) On May 8, the Chairman of the Competition Review
Committee, Christopher Cheng, told the DPO that the
long-awaited review should be finished in mid-June and made
public no later than early July. Given strong opposition in
many business quarters to a competition law, Cheng gave
credit to Financial Secretary Tang for taking the initiative
in addressing this difficult issue. When the Chief Executive

HONG KONG 00001943 002 OF 002


included the competition law question in his October policy
address, Cheng,s review received a further boost. After
holding a wide range of interviews, including a quietly
conducted seminar with foreign experts invited to Hong Kong,
the overall sentiment of committee members is that Hong Kong
firms, market dominance is not a problem in itself )-
provided they do not use this dominance to carry out unfair
practices. Therefore, the committee is inclined to recommend
the need for a law whose goal would clearly not be to go
after large companies, but instead create new powers in the
HKG to take on specific behaviors deemed anti-competitive,
such as price collusion.


6. (C) Cheng envisions a competition law that is not sector
specific. COMPAG would be turned into a formal HKG entity
with limited powers to look into anti-competitive behavior.
This body would "not be a bunch of bureaucrats checking up on
all of our companies." Any sanctions levied would be
strictly civil in nature.


7. (C) Cheng said that after the committee's report is
issued, there will be a period of public consultation about
the specifics of any new proposal for a competition law. One
goal of this exercise would be "to inject grass-roots
sentiment into the process and avoid having special interests
write the law."

ATTITUDES IN FLUX
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8. (C) Cheng noted liberalizing views in the business and
political communities with regard to a competition law but
pointed out opposition in some quarters (e.g., Chinese
Manufacturers Association) based on two arguments: small- and
medium-sized enterprises would be burdened by further
regulation and competition policy is better pursued on a
sector specific basis. The Federation of Hong Kong
Industries, for example, argued on May 10 for a sector
specific approach, although comments from Deputy Chairman
Cliff Sun appeared to break new ground by suggesting
acceptance of a stronger competition watchdog role for
COMPAG. Also on May 10, the Civic Party's Ronny Tong called
for a fair competition law and establishment of an
independent competition authority with investigatory and
adjudicative powers. Previously, in 2005, the Hong Kong
General Chamber of Commerce (HKGCC) had relaxed its position
somewhat by releasing a report that did not reject the idea
of a general competition law in the long run, even describing
what such a law should look like, i.e., it ought to cover all
sectors (to avoid a hodge-podge of sector specific rules and
bureaucracies) and be administered by a small competition
agency with an appeal board and oversight body composed of
business sector and consumer body representatives. Earlier
this year, however, HKGCC Chairman David Eldon published an
opinion piece in the organization's monthly bulletin making
the case for strengthening existing pro-competition
institutions and suggesting that if there is to be a
competition law, it should be minimalist.

LOOK FOR AN ENERGETIC DEBATE
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9. (C) The follow-on dialogue among legislators, the business
community, and the public is likely to be lively. Just last
week, on May 3, legislators rejected a motion calling for a
comprehensive competition law. Their five-hour debate ended
with functional constituency legislators rejecting the motion
but directly elected legislators overwhelmingly in favor.
Given continued focus in Hong Kong on business-government
collusion issues as well as an ongoing public discussion
about competitiveness vis-a-vis the mainland, the occasion of
Cheng's report is likely to draw all sides into an emotional
discussion. At issue will be legislation that for many
symbolizes a need in Hong Kong to build a fairer society and
attain a more secure place in the global economy by
increasing competition and reducing favoritism towards what
are seen as excessively dominant business conglomerates.
Cunningham