The Story So Far
Competition policy promotes rivalry among firms to maximize societal and economic welfare. In advanced economies, competition policy includes antitrust laws that protect consumer welfare from monopolistic behavior and other rules to prevent collusion, unfair practices that restrict competition and other abuses, and barriers to market entry and exit. As China has reached a more advanced development stage, it has ratcheted up its competition policy objectives. Beijing passed a long-awaited antitrust law in 2008 after 13 years of discussion. The 2013 Third Plenum plan declared “developing an environment for fair competition” a priority. However, long-standing instincts favoring the interests of state-owned enterprises (SOEs) over consumers—and domestic firms over foreign ones—are still embedded in the Chinese system, with little regard for consumer welfare or fair competition.
- Since May 2013, the State Council has streamlined a wide range of administrative procedures related to business registration and taxation. New business registrations have risen steadily in recent years as a result, and in 2018, the World Bank recognized progress by substantially increasing its scoring of China’s “ease of doing business” compared with other countries. The State Council has promised to similarly reduce barriers to market exit, but progress has been much more limited.
- In June 2016, the State Council launched a “fair competition review mechanism” to clean up anticompetitive policies issued by government agencies at all levels. However, the mechanism did not clarify whether industrial policies should be considered anticompetitive, did not establish a transparent process to identify which current policies were anticompetitive, and did not prevent new anticompetitive policies from being implemented.
- Beijing has updated several competition-related laws since 2013 to reflect changing market conditions. In November 2017, China revised its 24-year-old Anti-Unfair Competition Law to cover emerging issues, such as commercial bribery and competition in new technologies like software and networks. In August 2018, the government also passed a new E-commerce Law to govern competition between internet companies. And it is in the process of revising patent and antitrust laws, ostensibly to strengthen legal protections for companies, although unequal enforcement between state and private firms and between domestic and foreign firms remains a major concern.
- In March 2018, China’s National People’s Congress (NPC) approved a government restructuring plan that merged functions from various agencies responsible for enforcing competition policy. The new agency, named the State Administration for Market Regulation (SAMR), now oversees all aspects of China’s competition policy regime, including business registration, mergers and acquisitions (M&A) reviews, pricing policy, food security, consumer protection, and intellectual property protection. On paper, the SAMR’s creation reduced the influence of industrial policy regulators, but these bureaucratic changes have yet to drive any real improvement in China’s competition regime as measured in our indicators.
Quarterly Assessment and Outlook
Reform progressed – a little: Beijing reviewed more domestic mergers than foreign-involved mergers for the first time. However, this reflected a falling number of foreign-involved mergers rather than a change in policy.
For domestic companies, new business registration and pricing power improved slightly this quarter, likely because of more closures by inefficient firms in recent years.
The government promised to improve China’s business environment and treat all market entities equally during the resumed trade talks with the United States. How well this will be implemented remains a question.
This Quarter’s Numbers
Our competition policy reform indicator suggests slight progress: in 2Q2019, the government reviewed 32 foreign-involved mergers, fewer than domestic mergers (33) for the first quarter on record (see Merger Reviews). Proportionally, 23% of foreign-involved mergers were reviewed, down from 27% in 1Q2019. However, foreign-involved mergers are still reviewed three times more often than the 8% of domestic mergers reviewed. Moreover, no domestic mergers have ever been restricted, while 14 foreign-involved mergers have been approved only after agreeing to restrictive conditions. In late October, Beijing combined China’s two largest shipbuilding companies into an even larger national champion. Two regulators approved the merger, but approval from the state market regulator is still outstanding; we expect the deal to be approved without any conditional requirements, similar to the combination of China’s two national rail manufacturers in 2015.
There were fewer foreign-involved deals for authorities to review this quarter: the number of foreign-involved deals decreased to 138, the largest year-on-year (yoy) drop (−26%) since 2012. With growth expectations falling and lingering concerns about China’s business environment, China will need to do more to attract stable foreign investment inflows.
China’s judicial system remains too opaque to verify Beijing’s claims that intellectual property protections have materially improved. Chinese courts did publish many more competition-related cases this quarter, increasing the proportion of cases published from 5% of total cases handled by the courts in 1Q2019 to 15% in 2Q2019 (see Judicial System Transparency). Most newly published cases are concentrated in the copyright area, likely related to the government’s plan to revise the Copyright Law this year. However, the courts erased hundreds of other competition-related cases involving the Anti-unfair Competition Law and the Patent Law, showing continued limits to judicial transparency.
New World Bank data show that market entry barriers in China have fallen significantly. On October 24, the World Bank published its 2020 Doing Business report, ranking China 31 out of 190 economies in ease of doing business, up 15 spots from last year. The upgrade was mostly the result of simplified procedures to obtain construction permits, consistent with our observation of China’s continuous efforts to streamline administrative procedures in the past few years. Thanks to these efforts, growth of new business registrations accelerated to 9.4% yoy in 2Q2019 (see Market Entry and Exit), its strongest growth in more than a year.
More interesting, the World Bank also upgraded China’s scores in resolving insolvency and protecting minority investors. We have also observed rising bankruptcy fillings over the past two years (see Spring 2019 edition), indicating lower market exit barriers and better competition conditions. For years, government subsidies and soft budget constraint guidance to banks have kept inefficient firms alive, enabling them to operate with very low costs or risk, to the detriment of others. Allowing inefficient firms to exit has helped support firm pricing power, which improved for both listed state-owned enterprises (SOEs) and private firms this quarter (see Pricing Power Index). While these are positive developments, it is important to note that indicators remain at historical lows.
"The business environment in China can only be improved if the government truly tackles anticompetitive practices rather than protecting local champions.”
Policy Analysis
Beijing seeks to portray a fair Chinese operating environment. On October 24, the State Council published an “Ordinance on Optimizing the Business Environment” with the aim to “provide institutional protection for all market entities’ investments and business operations through legislation,” effective January 1, 2020. The Ordinance was first circulated in draft form and reportedly shared with U.S. negotiators during trade talks earlier in October. The Ordinance is a high-level declaration of intent, but its substance is not new, raising questions about how enforcement of commitments will change.
The Ordinance restates the 2013 Third Plenum Reform Decisions pledge to “reduce government intervention in the market to the greatest extent” and protect the “autonomy, property rights and other legitimate interests of businesses.” It promises to continuously lower market entry barriers, step up antitrust enforcement, protect intellectual property, lower taxes, regulate government fees and funding, promote lending to private and small- and medium-sized enterprises, and more. These goals are familiar to close observers and have been covered in previous Dashboard editions: past campaigns have come up short due to lack of enforcement (see, e.g., Merger Reviews).
Two measures on enforcement are found in the Ordinance, though neither is likely to be effective by itself. First, the State Council details rules on administrative procedures and government transparency but does not provide new incentives for officials to implement them. Improving transparency appears a stretch even for the Supreme People’s Court (see Judicial Transparency). Second, the Ordinance relies upon the “fair competition review” mechanism to reduce government intervention launched in 2016. This mechanism requires all government bodies to “self-review” their policies, clean up anticompetitive policies, and report back to the central government periodically. The mechanism has already led to amendments to at least 20,000 local-level policies throughout 2018 but has not significantly improved our indicators.
Local government antitrust enforcement bears monitoring over the coming months. As discussed in the Summer 2019 edition, the State Administration for Market Regulation (SAMR) authorized local governments to enforce antitrust rules in their own jurisdictions starting September 1. State news outlet Xinhua reported on September 23 that the central government and at least six provinces (Jilin, Hebei, Jiangxi, Yunnan, Hunan, Henan) are planning to investigate anticompetitive behaviors in sectors including drugs and internet-based services. These investigations could either sow or dispel cynicism: the business environment in China can only be improved if the government truly tackles anticompetitive practices rather than protecting local champions.
Methodology
Competition policy is an amalgam of law, economic analysis, and politics, and gauging outcomes is challenging. Our primary indicator looks for convergence in reviews of foreign versus domestic mergers conducted by the SAMR. Supplemental data look at the number of merger cases reviewed, disclosure of results of competition-related court cases, new business starts and closures (market entries and exits), and the ability of firms to obtain viable profits in healthy markets.