Cablegate: China's Anti-Monopoly Law: A Toothless Tiger When It Comes

DE RUEHBJ #3115/01 3170958
P 130958Z NOV 09




E.O. 12958: N/A



This cable is Sensitive but Unclassified (SBU) and for official use
only. Not for transmission outside USG channels.

1. (SBU) Summary: China's antitrust authorities and courts have
been reluctant to use the country's Anti-Monopoly Law (AML) to curb
anti-competitive behavior of state-owned enterprises (SOEs),
according to a number of Chinese scholars, antitrust lawyers, and
newspapers. Speaking at a Georgetown University forum in Beijing,
one former Ministry of Commerce (MOFCOM) official compared the law
to a "toothless tiger," criticizing the law's many exemptions for
SOEs and lack of clear definitions. The AML's provisions on
intellectual property (IP) "abuse" could be broadly interpreted,
according to a Chinese scholar who is involved in drafting new AML
guidelines on IP issues. MOFCOM's merger reviews have focused on
transactions involving foreign firms, a trend that one Beijing-based
antitrust lawyer predicted would continue. Nevertheless, recent
cases involving SOEs TravelSky and China Mobile offer some
encouraging signs that SOEs are not immune from the AML. In
meetings with visiting U.S. Department of Justice (DOJ) and Federal
Trade Commission (FTC) officials, China's three antitrust agencies
expressed interest in strengthening cooperation and signing an MOU
with U.S. antitrust agencies. End Summary.

Chinese Scholar Urges Action against SOE Monopolies
--------------------------------------------- ----

2. (SBU) Some of China's largest state-owned enterprises (SOEs) are
violating the AML by abusing their dominant market position, Chinese
Academy of Social Sciences (CASS) Economic Law Department Director
Wang Xiaoye told an audience of 60 Chinese judges taking part in an
October 26-30 antitrust seminar organized by DOJ, FTC, and China's
Supreme People's Court (SPC). Wang, who was one of the legal
experts involved in the drafting of the AML, said that China's
antitrust agencies should curb the anti-competitive behavior of
SOEs. She urged the judges, who represented the IP division of
intermediate and higher courts throughout China, to take on cases
that would help put a stop to anti-competitive behavior and protect
consumer interests. Zhang Yuqing, a private lawyer and former
MOFCOM Treaty and Law Department Director General, compared China's
AML to a "toothless tiger," arguing that the law had too many
exemptions for SOEs. Speaking at an October 9 forum sponsored by
Georgetown University, Zhang said that the AML needed more detailed
implementing rules to clarify definitions of such concepts as
"national economic security."

AML Provisions on IP Abuse Remain Unclear

3. (SBU) One contentious area of the AML is Article 55, which
stipulates that "this Law shall apply to the conduct of operators to
eliminate or restrict market competition by abusing their
intellectual property rights." Speaking at the antitrust seminar
for judges, Shanghai Communication University law professor Wang
Xianlin said that that the AML, in general, was consistent with the
U.S. legal philosophy that a firm does not derive market power
merely by means of holding a patent. However, if a firm refuses to
grant a patent for the development of an "essential" national
standard, or grants the patent but then later demands "excessive"
royalties, it could be subject to the AML. Wang, who is on a task
force involved in drafting AML enforcement guidelines on IP issues,
acknowledged that the AML was not entirely clear in its definition
of "abuse" and that, as such, "abuse" could be broadly interpreted.
CASS scholar Wang Xiaoye told the judges that antitrust agencies and
courts had a responsibility to protect IPR. Noting that Microsoft's
market dominance was the result of significant investment in R&D,
Wang Xiaoye said forcing Microsoft to reduce prices for its software
would reduce incentives for companies to innovate and ultimately
hurt consumers.

Chinese Press: Competition Suffers as SOEs Advance
--------------------------------------------- ----

4. (U) A number of Chinese newspapers have also criticized China's
antitrust agencies and courts' reluctance to take on SOEs engaged in
anti-competitive behavior, echoing similar complaints reported in
reftel. An October 31 editorial in the Economic Observer, one of
China's leading independent newspapers, criticizes the government's
implementation of the AML. According to the editorial, the global
financial crisis and government stimulus package have hurt

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competition by reinforcing the trend toward "the state advancing as
the private sector retreats" (guojin mintui). The article quotes
Chinese legal expert Tong Xindi, who argues that the AML has become
a tool for the government to regulate industrial policy and foreign
investment and for interest groups to restrict competition.
Commenting on the power imbalance between China's powerful SOEs and
relatively weak antitrust agencies, an unnamed official from a
Chinese antitrust agency is quoted saying, "How can you expect a
department-level authority to regulate ministry-level SOEs?"

5. (U) An October 22 article in the state-owned Economic Information
Daily (Jingji Cankaobao) argues that AML lawsuits against large
Chinese SOEs have yet to produce results because the courts are
"extremely cautious" about these cases. Beijing lawyer Li Fangping
filed lawsuits in 2008 against oil giant Sinopec and
telecommunication service provider China Netcom for abusing their
dominant market position, but the courts have yet to place the
Sinopec case on file and have repeatedly postponed the China Netcom
case because it "has great significance and requires careful study."

MOFCOM's Merger Reviews Focus on Foreign Firms
--------------------------------------------- -

6. (U) More than 70 percent of the mergers reviewed by MOFCOM since
the AML went into effect August 1, 2008, have involved multinational
firms. MOFCOM has reviewed 49 M&A transactions, approving 43
unconditionally and five with conditions. Only one case, Coke's bid
to buy Chinese juice-maker Huiyuan, was rejected by MOFCOM. At the
end of September, MOFCOM approved with conditions two major overseas
transactions, Pfizer's acquisition of Wyeth in the pharmaceuticals
industry and General Motors' reacquisition of elements of auto parts
manufacturer Delphi. All five M&A cases approved with conditions
involved offshore transactions between foreign parties rather than
transactions between Chinese companies. MOFCOM has yet to formally
reject or clear with conditions any such transactions between
Chinese parties, although MOFCOM is reportedly reviewing the merger
of state-owned China Eastern and Shanghai Airlines.

7. (SBU) MOFCOM's Anti-Monopoly Bureau is reportedly delaying action
on Walmart's application to merge with Trustmart, a Taiwan-invested
retail store. The basis of the delay is that Trustmart is currently
operating as a domestic Chinese company, and MOFCOM is apparently
requiring that Trustmart first be converted to a wholly
foreign-owned company prior to the conclusion of the AML review.

Antitrust Lawyers Expect Focus to Remain on Foreign Firms
--------------------------------------------- ----

8. (SBU) Faced with limited staffing to investigate M&A cases and
domestic pressure to protect Chinese companies, China's antitrust
agencies were more likely to focus on transactions involving foreign
companies, an antitrust lawyer at one of Beijing's leading law firms
told EconOff October 29. She predicted that software companies like
Microsoft would be a relatively easy target of China's antitrust
agencies, given the fact that the Microsoft had already faced
antitrust lawsuits in the United States and Europe. In an October
23 meeting, a Microsoft lawyer expressed concern about a possible
antitrust investigation of "excessive pricing" of its software.
However, he predicted that Microsoft was relatively safe for the
next year, arguing that China's antitrust agencies would adopt a
cautious approach and seek to avoid the international scrutiny that
a case against Microsoft would attract.

Encouraging Signs: China Mobile and TravelSky Cases
--------------------------------------------- ----

9. (SBU) Recent cases involving SOEs TravelSky and China Mobile
offer some encouraging signs that SOEs will not continue to enjoy
immunity from AML enforcement. In September, just six months after
the state-owned airline ticketing website TravelSky introduced a
controversial new air ticket pricing system, all of China's major
airlines abandoned the TravelSky program and reverted back to the
original pricing system. Criticized as an attempt among the major
airlines to fix prices in China's domestic civilian aviation market,
TravelSky's pricing system was under investigation by the National
Development and Reform Commission (NDRC)'s Department of Pricing
Supervision. Chinese independent weekly Economic Observer reported
that NDRC was behind the demise of the pricing system. China's
largest mobile phone operator, China Mobile, recently settled an
anti-monopoly lawsuit filed by Beijing lawyer Zhou Ze, who accused

BEIJING 00003115 003 OF 003

the state-owned telecom operator of abusing market dominance in
imposing a rental charge for its mobile service. China Mobile
agreed to drop the monthly rental charge and provide a USD 150
"award" to the plaintiff, who in turn agreed to withdraw the suit on
October 23. A Beijing-based antitrust lawyer told EconOff that
China Mobile's decision to settle outside of court was a sign that
the company expected to lose the case and wanted to avoid
establishing a precedent that would trigger a flood of lawsuits.
Nevertheless, she predicted that the case would likely lead to more
lawsuits against the company.

FTC/DOJ Discuss Cooperation with China's Antitrust Agencies
--------------------------------------------- ------

10. (SBU) In their October 23 meetings with DOJ Special Counsel for
International Trade Stuart Chemtob and FTC Office of International
Affairs Associate Director Russell Damtoft, officials from China's
three antitrust agencies - MOFCOM, NDRC and the State Administration
of Industry and Commerce (SAIC) - all expressed interest in
strengthening cooperation and signing an MOU between U.S. and
Chinese antitrust agencies. Damtoft informed MOFCOM Anti-Monopoly
Bureau Division Directors Ye Jun and Yin Yanling that FTC would be
happy to host a MOFCOM official for a 3-6 month internship in 2010.
MOFCOM, NDRC and SAIC officials expressed appreciation for the U.S.
Trade and Development Agency (TDA)-funded antitrust workshops held
earlier this year and suggested that the next workshops on the
concept of relevant market and IP and competition be held in China
in early 2010. MOFCOM's Ye Jun said they did not want to hold the
next TDA workshop until after the Chinese New Year and probably not
until March 2010.

AML Implementing Regulations Still Being Drafted
--------------------------------------------- ---

11. (SBU) NDRC Price Supervision Department Law and Regulations
Division Director Luo Zeheng told Damtoft and Chemtob that NDRC was
in the process of developing procedural rules for AML implementation
and hoped to announce those rules by the end of December. SAIC
Legal Division Director Zhao Guobin said SAIC was still working on
guidelines for AML enforcement in the area of IPR enforcement. He
indicated that the fourth revision of the IP guidelines was still
going through internal deliberations and was not ready for public
comments. Zhao said SAIC would share the draft guidelines and
welcome USG comments after the Anti-Monopoly Commission finished its


12. (SBU) As we reported in reftel, the first 15 months of AML
implementation offer some worrying signs. China's courts have been
reluctant to take AML cases involving China's largest SOEs, while
MOFCOM's Anti-Monopoly Bureau seems more focused on scrutinizing
mergers involving foreign companies than those involving Chinese
SOEs. Nevertheless, there are some encouraging new signs, such as
the TravelSky and China Mobile cases and MOFCOM's decision to review
the China Eastern and Shanghai airlines merger, that SOEs are not
completely immune from the AML. Another positive sign is Chinese
antitrust lawyers and scholars' willingness to criticize the
government's AML implementation and their public calls for antitrust
agencies to investigate SOEs' anti-competitive behavior.
Ultimately, it is this domestic pressure that will compel antitrust
authorities to make the AML a more effective tool for protecting
competitive markets and consumer interests.


© Scoop Media

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