It's no contest as HK trails Beijing on competition law

PUBLISHED : Thursday, 19 January, 2006, 12:00am
UPDATED : Thursday, 19 January, 2006, 12:00am

As government officials dither over whether Hong Kong needs a competition law, they risk the embarrassment of flailing in the wake of Beijing which plans to introduce its own legislation next year.

Talk of a competition law is nothing new on the mainland. The subject has been batted around for at least 10 years and the proposed legislation has been through innumerable drafts. Now, however, it appears the mainland authorities are finally getting serious.

The latest draft was completed at the end of September and although it is not yet publicly available, the document has been praised for incorporating sizable chunks of European and US best practice. 'It is a draft with real substance,' Wang Xiaoye, law professor at the Chinese Academy of Social Sciences, told a conference last month.

International observers agree. 'The latest draft looks like a real, modern competition law,' says Nathan Bush, a specialist in competition law at the Beijing office of US legal firm O'Melveny & Myers.

Beijing's recent spurt of progress in drafting a law has been partly spurred by China's growing need to tackle anti-competitive but perfectly legal practices by foreign companies. Swedish drink-packaging giant Tetra Pak, for example, insists that customers who buy its machinery also buy its packaging materials, even though cheaper Chinese versions are available.

But the proposed legislation promises to go far beyond simply cracking down on dodgy business practices by dominant multi-nationals. Along with setting rules governing mergers and acquisitions, outlawing agreements between competitors and banning abuses of dominant market positions, the draft law also tackles anti-competitive practices by government bodies and state-backed enterprises.

China is riddled with administrative monopolies established to protect state-owned companies. The Shanghai government, for example, has long enforced a rule permitting only certain engine sizes in taxis. The only car that fits the bill is the Volkswagen Santana which just happens to be manufactured by the local government-owned Shanghai Automotive Industry Corp.

Meanwhile, the Hubei government slaps a 70,000 yuan duty on each Shanghai-built Santana, protecting the market for locally built Citroens.

A law dismantling these and similar fiefdoms could bring enormous gains in economic efficiency. 'The potential impact on the way China does business is huge,' says Ian McEwin, a member of the International Bar Association committee that advised the Chinese government on the draft legislation.

But, warns Professor McEwin, everything hinges on who gets entrusted to enforce the new law and how much political clout they wield. Not surprisingly, given the high stakes, numerous government bodies are fighting a vigorous rear-guard action to protect their own interests.

An earlier draft of the law envisaged the creation of a single anti-monopoly authority deriving comprehensive powers directly from the State Council.

In the latest version, however, the wording has been watered down, leaving room for locally run branches answerable to provincial governments, as well as for conflict with separately mandated regulators in the banking, telecommunications and electricity sectors, among others. In the worst case, according to Mr Bush, the result could be selective enforcement of the new law by local officials in order to defend uneconomic local enterprises against competition from more efficient companies based elsewhere in China or abroad.

The current draft is not final, however. Intense lobbying is going on aimed at tightening up the clauses dealing with enforcement before the legislation is presented to the National People's Congress later this year.

Knowledgeable observers remain optimistic China can enact a world-class competition law as early as next year.

At the current rate of progress, that will be years ahead of Hong Kong.