China legislature passes anti-monopoly law

The official Xinhua News Agency said the Standing Committee of the National People’s Congress “adopted the anti-monopoly law to ensure fair competition and regulate market order.”

The law will come into effect on Aug. 1, 2008.

With eight chapters and 57 provisions, the new law bans monopolistic agreements and practices such as cartels and price-fixing but allows for monopolies “that promote innovation and technological advance,” Xinhua said without giving specifics.

It also provides for investigation and prosecution of monopolistic practices, Xinhua said. China began drafting the law in 1994 and a first draft was completed in 2003.

But progress was stymied by controversy over how to carry out enforcement, given the prevalence of state-owned monopolies or semi monopolies in many industries.

Analysts have said the law could help China protect its fledgling domestic industries from multinational competition, while others said it would curtail the power of state-owned enterprises.

State-run companies have retained control over sectors that Beijing deems crucial for economic security, such as telecommunications, energy, and railways.

Beijing officials have said the legislation would not discriminate between domestic and foreign companies.

“The law requires foreign purchases of Chinese companies to go through national security checks,” Xinhua said without providing further details.

Both the American and EU chambers of commerce in China issued statements Thursday welcoming the goal of preventing anti-competitive practices.

The American Chamber of Commerce in Beijing issued a statement saying it welcomed the law “as a positive step in China’s ongoing development of a market-based economy.”

The law is a “defining moment in the development of China’s legal system, which establishes a basic framework to build a fair, uniform, and national competition law system that benefits consumers by recognizing and preserving the incentives to compete,” chamber chairman James Zimmerman said in the statement. “The European Chamber welcomes a more open economy and a level playing field for business in China. We hope the anti-monopoly law will contribute to this,” the EU statement said.

But both chambers also expressed misgivings about potentially unfair application of the requirements.

“The European Chamber’s members are concerned about the national security review to which foreign investors may be subjected if they acquire domestic enterprises,” its statement said.

“It is not clear how such a national security review will be applied.”

The American Chamber’s statement urged the government to provide more details on what constitutes anti competitive conduct and the procedures for reviewing proposed acquisitions.

In 2006, China issued a list of sectors where the state will retain control, including military manufacturing, power production and grids, petroleum, gas and petrochemicals, telecom manufacturing, coal, civil aviation and shipping.

“Preferential treatment for foreigners and aggressively bringing in foreign investment will decrease gradually and finally domestic and foreign companies will receive almost equal treatment,” Shen Minggao, an economist with Citigroup in Beijing, said of the law’s effect, while adding that he doesn’t expect a sharp impact on foreign investment.

But he also said an anti-monopoly law was necessary now as China seeks to reduce the size of the state-owned industries that once monopolized the entire national economy.

“We can’t simply take it as being against foreign investors. It’s being done now mainly because the authorities have been thinking over how to deal with monopolies by state-owned companies,” he said.

Shen said he expects China will use the law to retain tight state control over key sectors but added, “if the government opens up a few sectors, that would be good news for (foreign investors).”

Experts also believe the laws reflects the fact that an increasingly prosperous China no longer needs foreign investment as badly as before.

Besides fuelling the asset bubble, surging foreign fund inflows drive up the value of the Chinese yuan currency, hurting the competitiveness of China’s vital export sector.

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