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DE RUEHBJ #1706/01 1600826
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FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 8237
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RUEHFR/AMEMBASSY PARIS 3816
RUEHOO/CHINA POSTS COLLECTIVE
RUEHML/AMEMBASSY MANILA 8765
RUEHBS/USEU BRUSSELS
RUEHRL/AMEMBASSY BERLIN 1353

UNCLAS SECTION 01 OF 04 BEIJING 011706 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EB/TPP/MST/IPC, EAP/CM AND EUR/ERA 
DEPT PASS TO FEDERAL TRADE COMMISSION FOR BLUMENTHAL 
DEPT PASS TO USTR FOR STRATFORD, WINTER, ESPINELL, MCCOY 
USDOJ FOR ANTITRUST DIVISION FOR DAAG MASOUDI 
PARIS PASS USOECD 
MANILA PASS USADB ED 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV KIPR PGOV CH
SUBJ: CHINA ANTI-MONOPOLY LAW ALMOST READY FOR LEGISLATIVE 
REVIEW 
 
Ref: (A) Beijing 6692, (B) Beijing 6685, (C) Beijing 6822 
 
BEIJING 00011706  001.2 OF 004 
 
 
¶1. (SBU) Summary: On May 19-21 in Hangzhou, the Chinese 
Ministry of Commerce (MOFCOM), Asian Development Bank (ADB) 
and Organization for Economic Cooperation and Development 
(OECD) jointly hosted an international seminar to discuss 
China's draft Anti-Monopoly Law (AML).  The seminar had been 
billed as an opportunity for foreign experts to provide 
comments to the State Council's (cabinet) interagency 
drafting committee on the latest draft before the bill 
advances to the National People's Congress (NPC) for final 
legislative review.  However, just one day before the 
conference, MOFCOM changed the discussion topics to focus on 
implementation issues.  MOFCOM was the only Chinese agency 
represented at the seminar and explained that the drafting 
team could not come because it was busy with final 
preparations to deliver the draft AML to the NPC in June. 
It appears that philosophical debates on how to deal with 
administrative monopolies and on how to treat intellectual 
property (IP) will likely continue during the NPC's minimum 
six-month review.  MOFCOM hinted strongly that enforcement 
powers for the AML would be decentralized among a few 
ministries and sector regulators, and predicted that the NPC 
will not likely change this.  The AML draft is vague in the 
area of IP rights and it appears that Chinese elements that 
have pushed hard to use competition law to limit the rights 
of IPR owners have continued to influence the Chinese 
Government.  End Summary. 
 
Last Minute Agenda Switch 
------------------------- 
 
¶2. (SBU) Federal Trade Commission (FTC) General Counsel 
William Blumenthal and Department of Justice (DOJ) Antitrust 
Division Deputy Assistant Attorney General Gerald Masoudi 
participated in a May 19-21 Seminar on China's Draft Anti- 
Monopoly Law (AML).  The seminar was jointly hosted by 
MOFCOM, ADB and OECD.  Representatives from competition 
authorities from the EU, Germany and one U.S. private sector 
law firm also participated.  MOFCOM and ADB invited the 
State Council Legislative Affairs Office (SCLAO), NPC staff 
and the State Administration of Industry and Commerce (SAIC) 
to join the seminar as they did in an international seminar 
SCLAO hosted in 2005 to discuss the AML.  However, none of 
the other agencies attended the conference in Hangzhou. 
MOFCOM staff explained that the SCLAO was busy finishing 
final preparations to submit the draft law to the NPC in 
June, and therefore had no time to join the seminar.  MOFCOM 
also changed the agenda just a day before the conference, 
replacing specific discussion on the draft text with 
specific implementation questions. 
 
¶3. (SBU) MOFCOM Anti-Monopoly Office Director Wang Changbin 
opened the seminar with a briefing on developments in the 
draft AML since the July 2005 version, the most recent 
officially released text.  He reported that the right of a 
victim to initiate a complaint case had been struck from the 
July 2005 version, but now has returned to the final draft. 
On exemptions for monopoly agreements, he said that the 
drafters are now considering eliminating language that 
provides for exemptions only after reporting to the Anti- 
Monopoly Enforcement Authority.  The reason for such a move 
is that the drafters now recognize the insurmountable burden 
such a reporting requirement would create for the Anti- 
Monopoly Authority.  He also pointed out that though the 
specific provisions (formerly Chapter 5) against 
administrative monopolies had been eliminated from the 
draft, heavy deate on the topic will likely continue 
through the NPC review.  Wang explained that one side 
believes that the AML needs to address government behaviors 
that reduce competition, while the opposing side argues that 
such provisions have implications for structural reform and 
should be dealt with in other laws or policies. 
 
¶4. (U) The foreign experts all had prepared to make points 
keyed to major concerns over the draft text, and still made 
those points at the beginning of the seminar.  Generally, 
 
BEIJING 00011706  002.2 OF 004 
 
 
their major points conformed as follows: 
 
-- protect the competitive process, not the competitor, 
-- government restraints on competition are the most durable 
and onerous of abuses and must be eliminated, 
-- political and social concerns should not be part of the 
competition law, 
-- clear and consistent rules and application are important 
for providing certainty to business, 
-- adopt international norms and practices, like those of 
the International Competition Network (ICN), 
-- possession of intellectual property (IP) does not equal 
dominance or monopoly, and 
-- legitimate exercise of IP rights does not by itself 
violate competition principles. 
 
AML Enforcement: Lots of Hands in the Kitchen 
--------------------------------------------- 
 
¶5. (SBU) MOFCOM Director General of Treaty and Law Shang 
Ming implied that the structure of the AML Authority has 
been decided and would fit within the "current government 
structure in China."  Merger control would go to MOFCOM, 
abuse of dominance and cartels would fall under "another 
agency," and sector regulators would handle sector specific 
competition issues.  Shang said the Anti-Monopoly Commission 
of the State Council, first described in one of the interim 
drafts after July 2005, would consist of representatives 
from a multitude of agencies.  He said the commission would 
take one of three possible forms: 1) just a forum to discuss 
issues; 2) a commission that could make formal 
recommendations to the relevant competition agency; or 3) a 
commission that has the power to order ministries and 
regulators to take specific corrective measures.  Shang 
noted that the third possibility is not likely.  Instead, he 
predicts that China will adopt an ineffective implementation 
system and learn over time that it must change, and then 
create a more efficient system.  All foreign experts 
expressed the same opinion that a single, independent 
competition authority that could rule on all competition 
matters is the best approach.  They pointed out that the 
decentralized system Shang described required clear 
delineation of jurisdictions between different competition 
authorities within China and consistent application of 
general competition principles across industries. 
 
Proper Nexus with China for Pre-Merger Notification 
--------------------------------------------- ------ 
 
¶6. (SBU) Foreign experts and MOFCOM discussed numerous 
examples and hypothetical cases to clarify pre-merger 
notification principles.  Foreign experts presented the 
rationale behind international standards of merger 
notification.  They emphasized the importance of objective 
standards that reduce burden on companies, thereby 
increasing compliance.  In light of limited resources and 
the inexperience of China's future AML authority, OECD's 
Bernard Phillips suggested that the merger review process 
allow for follow-up of the initial report submission so that 
reporting requirements could be basic.  FTC Blumenthal 
recommended adoption of the well-developed recommendations 
of the International Competition Network (ICN).  In response 
to MOFCOM questions, the foreign experts discussed specific 
situations concerning venture capital companies, exemptions 
for "normal course of business," financial investments that 
result in a change of control and passive investors. 
 
¶7. (SBU) Noting that the current draft law requires pre- 
merger notification based on the assets or sales of the 
acquiring party, DOJ Masoudi warned that such provisions 
would capture too many transactions that have no nexus with 
China.  He recommended that China instead revise the draft 
to focus on the assets and sales of the target company.  He 
also recommended that China establish a sales or asset 
threshold, under which no reporting is required.  He 
explained that the U.S. threshold is USD 56 million because 
no cases of antitrust concern have been found below that 
 
BEIJING 00011706  003.2 OF 004 
 
 
level.  In a follow-up side conversation with a MOFCOM 
official, DOJ Masoudi drew a decision tree diagram to 
illustrate the requirements and process of the U.S. pre- 
merger notification system.  (Note: On June 5, the same 
MOFCOM official called ECONoff asking for clarification of 
the U.S. threshold and rationale in order to convince the 
State Council drafters, who had been pushing for an 
immediate explanation, to change the pre-merger provisions 
in the draft law.  End Note.) 
 
Does IP = Monopoly? 
------------------- 
 
¶8. (SBU) DG Shang inquired about how to handle companies who 
use intellectual property rights (IPR) in violation of 
competition principles.  He said that IPR is a top concern 
in the AML.  He referred to the WTO Trade Related 
Intellectual Property Rights (TRIPS) Agreement's mention of 
three categories of abuses of intellectual property.  He 
asked whether or not intellectual property automatically 
conferred dominant position or monopoly power. He cited, as 
an example, foreign patents to illustrate his general point. 
Specifically, he said that DVD patent holders (all foreign) 
initially charged a low fee for its license, but a few years 
afterwards raised the license fee twenty times.  He called 
this an "obvious abuse" of dominant position based on DVD 
intellectual property, and noted that the he often received 
complaints from Chinese companies regarding patent licensing 
abuse of this type. 
 
¶9. (SBU) His comments ignited a series of vehement arguments 
from the seminar participants who explained that the problem 
described was a problem of contract law and negotiation 
skill as opposed to an abuse of dominance.  (Comment: the 
problems of fixed fee DVD licenses has been repeatedly 
mentioned by Chinese companies and government officials for 
several years.  However a critical problem with the argument 
remains that China has benefited enormously by being able to 
manufacture optical media readers under license without 
having contributed any key technologies to their 
development.  At the same time, China seems to be intent on 
taking a generous view of TRIPS Article 40, which authorizes 
Control of Anti-Competitive Practices in Contractual 
Licenses.  End Comment.) 
 
¶10. (SBU) DOJ Masoudi and FTC Blumenthal defended the right 
of IP holders to charge whatever price and to choose with 
whom to deal, and described the very narrow and specific 
instances in that would qualify as a competition abuse 
involving intellectual property.  At the end of this 
discussion, DG Shang reiterated China's resolve to protect 
intellectual property rights as put forth in Chinese laws. 
(Comment: However, he appeared unconvinced and clearly 
reflects the continued pressure from those who push for 
limiting the protection of foreign intellectual property 
rights.  End Comment.) 
 
Big Retailers are Not Bad 
------------------------- 
 
¶11. (SBU) Also noteworthy, DG Shang pointed out that there 
have been many complaints in China over the pricing power of 
large retailers.  He pointed out that large retailers in 
general do not have more than 10 percent market share, but 
appear to be able to set the prices at which they buy from 
suppliers.  OECD Bernard Phillips responded that each 
jurisdiction also received similar complaints from small 
retailers who compete with large retailers.  Phillips 
suggested that China ignore all the complaints.  He pointed 
out the efficiency of large retailers to push supplier 
prices down and, due to fierce competition in the retail 
sector, pass on those savings to consumers.  Walmart, he 
said, has the same profit margin that it had 20 years ago 
before its large expansion in the retail sector. 
 
¶12. (SBU) During informal discussions with ECONoff, OECD 
Phillips agreed that the philosophical debate over 
 
BEIJING 00011706  004.2 OF 004 
 
 
administrative monopolies and government abuse had risen to 
a high level in China and likely involved other agencies 
like the National Development and Reform Commission and 
others.  Phillips offered to provide comparative country 
studies that the OECD conducted that illustrate how 
economies that embraced competition grew at higher rates 
than economies that did not. 
 
¶13. (SBU) The rest of the program covered specific 
implementation issues related to investigation procedures 
and powers, fees, confidentiality of information, penalties 
for non-compliance with reporting requirements and leniency 
strategies for battling cartels.  ECONoff asked a MOFCOM 
official during an informal break about the progress on 
drafting implementing regulations for the AML and for other 
laws and regulations under the purview of MOFCOM.  That 
official revealed that MOFCOM's Anti-Monopoly Office had 
already drafted a large set of such regulations, but would 
not release them until after the AML formally grants MOFCOM 
specific responsibilities. 
 
¶14. (SBU) At the close of the seminar, MOFCOM officials and 
participants agreed technical exchanges and discussions 
should continue in the coming months as the Chinese 
Government initiates the final stage of review and begins 
drafting implementing regulations for the AML.  ADB 
representatives mentioned that they have a standing 
agreement to work with the NPC Legislative Affairs 
Commission and would suggest another seminar on the AML Law 
in the near future. 
 
Embassy Comment 
--------------- 
 
¶15. (SBU) The draft AML appears to be nearly finalized with 
little room left for change before legislative review.  On 
June 8, Chinese media reported that the State Council has 
approved the draft AML in principle for submission to the 
NPC in late June, and is working on a few final revisions. 
The State Council has not released the text to the public. 
History does not bode well for radical change to State 
Council-submitted draft laws, but many academics and 
observers note that the NPC may go beyond its traditional 
"rubber stamping" role.  We shall see. 
 
¶16. (SBU) According to MOFCOM comments in Hangzhou, it 
appears that multiple agencies may need to be engaged in the 
future to ensure sound and consistent application of 
competition law.  Intellectual property rights protection 
also continues to be a major concern, despite the noticeable 
quieter voices of those in China who seek to limit 
protections for foreign intellectual property.  Finally, 
given fierce philosophical debate over government abuses of 
competition that MOFCOM illustrated, more work needs to be 
done to convince the Chinese Government toadopt more 
competition tools instead of fallig back on the old habits 
of regulatory rigidity to reform and further develop its 
economy. 
 
¶17. (U) FTC General Counsel William Blumenthal and DOJ 
Deputy Assistant Attorney General Gerald Masoudi cleared 
this cable, including the Embassy Comment. 
 
Randt