Taming the Chinese leviathan: is antitrust regulation a false hope?

• Author: Zhang, Angela Huyue

To many it seems anomalous that a communist regime like China would adopt an antitrust law. It seems even more bizarre that China would apply its antitrust provisions to regulate its state-owned enterprises (SOEs). This simplistic view, however, fails to reflect the complexity of the Chinese political economy today. To provide a more nuanced understanding of how China's Anti-Monopoly Law (AML) could be applied to SOEs, this Article analyzes the factors bearing on the demand and supply of antitrust regulation of SOEs. Demand to regulate SOEs arises in both competitive and regulated sectors. After several rounds of market reform, Chinese SOEs now enjoy significant operational autonomy. Although competitive SOEs lack monopoly power, local protectionism can foster market conditions conducive for cartels to arise at the regional level. Within the regulated sectors, the limited competition orchestrated by the Chinese government creates competitive tension among SOEs, leading powerful SOEs to demand regulation of their state-owned rivals. On the supply side, the main supplier of antitrust enforcement has so far been the administrative enforcement agencies. Contrary to popular perception, these agencies are motivated to bring cases against SOEs because it helps them to expand their policy control in regulated sectors. But their efforts are largely unobservable due to opacity of enforcement and a near absence of judicial supervision. At the same time, they face constraints imposed by the hierarchical bureaucracy. As a consequence, the main battle these agencies face in tackling SOE cases is fought within the bureaucratic hierarchy rather than in courts. As the Chinese government continues to deepen market reform and grants more autonomy to SOEs, demand for antitrust regulation will increase. However, without effective judicial oversight, antitrust regulation of SOEs is likely to be arbitrary and opportunistic. This Article therefore predicts that China is unlikely to have an effective antitrust policy to regulate SOEs.

1. INTRODUCTION II. THE DEMAND FOR ANTITRUST REGULATION OF SOES A. Increased Autonomy for SOEs B. How State-Owned Monopolies Arise C. SOEs in Competitive Sectors D. SOEs in Regulated Sectors III. THE SUPPLY OF ANTITRUST REGULATION OF SOES A. The Utility Function of Administrative Agencies B. Enforcement against Central SOEs C. The China Telecom and China Unicom Case D. Enforcement Against Local SOEs E. Shanghai Gold Retailer Case IV. CONCLUSION AND IMPLICATIONS I. INTRODUCTION

   After fourteen years of wrangling and debate, China finally promulgated the Anti-Monopoly Law (AML) on August 30, 2007. (1) To many it seems anomalous that a communist regime like China would adopt an antitrust law. It seems even more bizarre that China would apply its antitrust law to regulate its state-owned enterprises (SOEs). Indeed, antitrust law itself grew from the soil of the western democracy and free market economy. Its creation is predicated on the recognition that the market cannot always self-correct, and thus government must intervene when the market fails. But the Chinese economy is run by a single ruling party--the Chinese Communist Party (CCP). Communist ideology is based on the notion that public ownership and state control are inherently superior to private ownership and free market competition. (2) Thus the attempt to regulate Chinese SOEs through antitrust law seems paradoxical. Since SOEs are created and sanctioned by the State, the State as owner can directly give instructions to the SOEs as to how they should behave. (3) Alternatively, the State can establish the performance targets and criteria through ex ante regulation. (4) If either means proved effective in controlling the SOEs, the anti-competitive behavior of SOEs should never have occurred in the first place. So why would the State ever intervene as an antitrust regulator? (5)

   Indeed, during the drafting of the AML, scholars, government officials, and interest groups disagreed fiercely as to whether antitrust law should be applied to SOEs. (6) The upshot is Article 7 of the AML, which sets the ambiguous tone that SOEs could be subject to antitrust regulation but leaves room for speculation that they could be largely exempt from the AML. (7) Meanwhile, the fantasy that public ownership is a superior form of organizing economic activities has long ended in China. (8) Rather, SOEs are now viewed as a significant distortion of the Chinese economy. After several rounds of privatization, the state sector still looms large in the Chinese economy and SOEs are still the leviathan in the business sphere. (9) Despite various rounds of enterprise reforms, many SOEs remain underperforming, inefficient, and corrupt. (10) The numerous benefits and privileges they enjoy, whether formal or tacit, have afforded many of them the monopolistic status to crowd out more efficient and competitive non-state actors.

   Policymakers have high hopes that the AML could tame the leviathan by breaking the barriers of entry for nonstate firms and enhancing competition between state-owned and private firms. (11) This has been deemed crucial for the next stage of enterprise reform and the improvement of allocative efficiency in the Chinese economy. (12) But conventional analysis predicts that the AML is unlikely to be enforced against SOEs. True, there have been perennial complaints among Chinese consumers and private businesses about the monopolistic behavior of SOEs. But these entities are widely dispersed and lack the incentive to bring cases against SOEs. (13) Even if they were to seek action, their voices would likely be suppressed by powerful interest groups representing large SOEs. Therefore, private enforcement is unlikely to be effective in tackling the anti-competitive behavior of SOEs. Similarly, public enforcement against SOEs also seems unlikely, given the significant opposition antitrust enforcement agencies could face.

   Currently, power to enforce the AML is fragmented. The main responsibilities are split among three administrative agencies--namely, the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC) and State Administration for Industry and Commerce (SAIC). Contrary to the predictions of conventional analysis, these agencies frequently bring actions against SOEs under the AML. On November 9, 2011, NDRC announced on state-owned television network CCTV that it had been investigating two large telecommunication firms--China Telecom and China Unicom--for allegedly conducting price discrimination against rival companies (China Telecom and China Unicom case). (14) As the first antitrust investigation of Chinese SOEs, this high-profile case marked a turning point in Chinese antitrust enforcement. Since then, SOEs have been subjected to frequent antitrust investigations. So far, the NDRC has investigated a number of high profile cases and imposed remedies and hefty fines on a variety of state-owned actors. These include large, powerful, centralized SOEs such as China Telecom and China Unicom, as well as local SOEs such as premium white liquor manufacturers Maotai and Wuliangye, (15) gold retailers in Shanghai, (16) a salt manufacturer in Wuchang, (17) large cement manufacturers, (18) auto insurance companies, (19) and auto manufacturers. (20) The SAIC has also investigated a cartel involving a number of locally state-owned cement manufacturers in Liaoning province (21) and abusive behavior by tobacco companies in Neimeng and Jiangsu provinces. (22) Within the realm of merger review, more than twenty-seven mergers involving SOEs have been notified; (23) subsequently, conditions were imposed on General Electric/China Shenhua. (24) In addition, the NDRC publicly vowed to prioritize their enforcement efforts in a number of areas that are dominated by large state-owned monopolies, such as the oil, banking, and telecommunication industries. (25) Insiders working at the NDRC and SAIC indicate that they have investigated more cases involving SOEs beyond those announced in public. (26) Due to a variety of reasons, many cases were not disclosed and thus we are unable to verify the exact number of SOE cases that have been investigated by Chinese antitrust enforcement agencies. (27)

   While information about the actual antitrust enforcement against SOEs is incomplete, the public enforcement record already has yielded a far higher enforcement level than the conventional analysis predicts. This disparity demands a more nuanced understanding of antitrust intervention in the state-owned sectors. In his groundbreaking article The Theory of Economic Regulation, George Stigler sought to explain the pattem of industry regulation by viewing it as a good whose output is determined by demand and supply. (28) He challenged the conventional wisdom that regulation of industry is instituted primarily for the protection and benefit of the public at large. (29) Stigler further dismissed the idea that regulation is an outcome of a political process that "defies rational explanation." (30) Rather, he argues that regulation is demanded by economic groups seeking protection, and that democratic political processes supply the regulation that industry desires. (31)

   Stigler's article "forces a fundamental change" in the way we examine regulation. (32) Instead of treating regulation as a free good whose demand is generated by market failures, Stigler sees it as "the outcome of the forces of demand and supply. (33) Inspired by Stigler, this Article directs attention to factors bearing on the demand and supply of antitrust regulation of SOEs in China. It finds that demand to regulate SOEs arises in both the competitive and regulated sectors. Contrary to conventional analysis, Chinese enforcement agencies are motivated to bring actions against SOEs in order to expand their policy control. However, due to the opacity of enforcement and a near absence of judicial...