China must rein in its state-owned monopolies

Hu Shuli says for the antitrust law to really have bite, the NDRC must throw the book at the state giants that block market development

PUBLISHED : Thursday, 29 August, 2013, 12:00am
UPDATED : Thursday, 29 August, 2013, 3:24am

China's anti-monopoly law is five years old this month, but ensuring that it truly bites is still a work in progress.

The government has stepped up its enforcement action of late, led by the National Development and Reform Commission (NDRC). In a crackdown on price-fixing, the NDRC not only slapped record fines on six producers of infant milk formula, targeting major multinationals, but also penalised five Shanghai-based gold retailers and a local trade association.

The law’s limitations means it has not been strong enough to take on the state firms

Antitrust laws are complex. So it is all to the good that, five years after its enactment in China, the authorities have become more confident in its execution. But for the law to be really credible, all before it must be equal. Thus, the regulator must confront the biggest monopolists in China - state-owned enterprises and the government-business hybrids such as profit-making government agencies.

To be fair, the lapses in implementation are understandable. In an advanced economy, an anti-monopoly law is built on sound market principles and targeted at market excess. But China today is still in transition from a centrally planned economy to a market economy, and enacting such a law can only be - in the words of one scholar - "a symbolic act in the creation of a legal framework for a market economy". The law's limitations mean it has not been strong enough to take on the state behemoths.

For one, in an early draft of the law, the entire chapter on abuse of administrative power was initially struck out except for Article 37, which says "administrative organs may not abuse their administrative power to formulate regulations with the contents of eliminating or restricting competition".

In the provisions on oversight, Article 51 states that government officials found to have abused the law may face sanctions ordered by the "the department at a higher level", while the "authority for enforcement of the law" may only "submit a proposal to the relevant department at a higher level for handling the matter according to law".

Another point of contention was whether, in cases of abuse, the anti-monopoly law or the laws regulating various professions should take priority.

In the end, the law's Article 7 states: "With respect to the industries which are under the control of the state-owned economic sector and have a bearing on the lifeline of the national economy or national security and the industries which exercise monopoly … the state shall protect the lawful business operations of undertakings in these industries, and shall, in accordance with law, supervise and regulate their business operations". This blurs the lines of oversight.

Even so, state-owned enterprises are not immune from the law, as the article also says they "shall not harm the consumers' interest by taking advantage of their position of control or their monopolistic production and sale of certain commodities". Even if the existing laws confer advantages on these state enterprises, the regulator may still haul them up for monopolistic conduct.

But the reality is, in the five years since the law's enactment, only two enforcement actions can be said to have targeted state-owned enterprises. One was the 2009 investigation by the NDRC into suspected price-fixing by TravelSky, a provider of IT solutions to the tourism industry, that went nowhere. The second was the 2011 investigation into the broadband business of the telecommunications giants China Unicom and China Telecom, which again the NDRC suspended after the two companies applied to have the case dropped.

Such "enforcement" is disappointing, to say the least. It also reflects the scale of the challenge.

It's clear that a basis for the law's proper enforcement is a healthy, functioning market. Market reforms undertaken first in civil aviation then in the telecommunications industry were precisely what gave the regulator some room to move in the first place.

The energy sector should be next. Through their stranglehold on oil and gas exploration, imports and exports, PetroChina and Sinopec often deny supply to smaller private-sector players. So far, the regulator has been silent on such flagrant misconduct, because of government control on the trade and pricing of gas and oil. But the NDRC should throw the book at the two energy giants, thereby forcing market reforms on the sector.

The problems of the law's implementation is a microcosm of the larger problems of China's economic reform. Government leaders must lead by initiating comprehensive reform.

The State Council should strengthen its oversight of the so-called "administrative monopoly", dismantling it where it is found and compensating those harmed by it. After all, the government's job is to regulate competition, not join in; it should deter unfair competition, not block fair access.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine.