VZCZCXRO7018
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3115/01 3170958
ZNR UUUUU ZZH
P 130958Z NOV 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 6839
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEAWJA/DEPT OF JUSTICE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 BEIJING 003115 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR TIM STRATFORD AND AUDREY WINTER 
STATE PASS FTC FOR RUSSELL DAMTOFT, ANDREW HEIMERT, AND RANDY 
TRITELL 
STATE PASS DOJ FOR STUART CHEMTOB 
DOC FOR LU NING AND JOEL BLANK 
 
E.O. 12958:  N/A 
TAGS: ECON EIND EINV ETRD KIPR CH
 
SUBJECT: CHINA'S ANTI-MONOPOLY LAW: A TOOTHLESS TIGER WHEN IT COMES 
TO SOES? 
 
REF: BEIJING 02527 
 
This cable is Sensitive but Unclassified (SBU) and for official use 
only.  Not for transmission outside USG channels. 
 
¶1. (SBU) Summary:  China's antitrust authorities and courts have 
been reluctant to use the country's Anti-Monopoly Law (AML) to curb 
anti-competitive behavior of state-owned enterprises (SOEs), 
according to a number of Chinese scholars, antitrust lawyers, and 
newspapers.  Speaking at a Georgetown University forum in Beijing, 
one former Ministry of Commerce (MOFCOM) official compared the law 
to a "toothless tiger," criticizing the law's many exemptions for 
SOEs and lack of clear definitions.  The AML's provisions on 
intellectual property (IP) "abuse" could be broadly interpreted, 
according to a Chinese scholar who is involved in drafting new AML 
guidelines on IP issues.  MOFCOM's merger reviews have focused on 
transactions involving foreign firms, a trend that one Beijing-based 
antitrust lawyer predicted would continue.  Nevertheless, recent 
cases involving SOEs TravelSky and China Mobile offer some 
encouraging signs that SOEs are not immune from the AML.  In 
meetings with visiting U.S. Department of Justice (DOJ) and Federal 
Trade Commission (FTC) officials, China's three antitrust agencies 
expressed interest in strengthening cooperation and signing an MOU 
with U.S. antitrust agencies.  End Summary. 
 
Chinese Scholar Urges Action against SOE Monopolies 
--------------------------------------------- ---- 
 
¶2. (SBU) Some of China's largest state-owned enterprises (SOEs) are 
violating the AML by abusing their dominant market position, Chinese 
Academy of Social Sciences (CASS) Economic Law Department Director 
Wang Xiaoye told an audience of 60 Chinese judges taking part in an 
October 26-30 antitrust seminar organized by DOJ, FTC, and China's 
Supreme People's Court (SPC).  Wang, who was one of the legal 
experts involved in the drafting of the AML, said that China's 
antitrust agencies should curb the anti-competitive behavior of 
SOEs.  She urged the judges, who represented the IP division of 
intermediate and higher courts throughout China, to take on cases 
that would help put a stop to anti-competitive behavior and protect 
consumer interests.  Zhang Yuqing, a private lawyer and former 
MOFCOM Treaty and Law Department Director General, compared China's 
AML to a "toothless tiger," arguing that the law had too many 
exemptions for SOEs.  Speaking at an October 9 forum sponsored by 
Georgetown University, Zhang said that the AML needed more detailed 
implementing rules to clarify definitions of such concepts as 
"national economic security." 
 
AML Provisions on IP Abuse Remain Unclear 
----------------------------------------- 
 
¶3. (SBU) One contentious area of the AML is Article 55, which 
stipulates that "this Law shall apply to the conduct of operators to 
eliminate or restrict market competition by abusing their 
intellectual property rights."  Speaking at the antitrust seminar 
for judges, Shanghai Communication University law professor Wang 
Xianlin said that that the AML, in general, was consistent with the 
U.S. legal philosophy that a firm does not derive market power 
merely by means of holding a patent.  However, if a firm refuses to 
grant a patent for the development of an "essential" national 
standard, or grants the patent but then later demands "excessive" 
royalties, it could be subject to the AML.  Wang, who is on a task 
force involved in drafting AML enforcement guidelines on IP issues, 
acknowledged that the AML was not entirely clear in its definition 
of "abuse" and that, as such, "abuse" could be broadly interpreted. 
CASS scholar Wang Xiaoye told the judges that antitrust agencies and 
courts had a responsibility to protect IPR.  Noting that Microsoft's 
market dominance was the result of significant investment in R&D, 
Wang Xiaoye said forcing Microsoft to reduce prices for its software 
would reduce incentives for companies to innovate and ultimately 
hurt consumers. 
 
Chinese Press:  Competition Suffers as SOEs Advance 
--------------------------------------------- ---- 
 
¶4. (U) A number of Chinese newspapers have also criticized China's 
antitrust agencies and courts' reluctance to take on SOEs engaged in 
anti-competitive behavior, echoing similar complaints reported in 
reftel.  An October 31 editorial in the Economic Observer, one of 
China's leading independent newspapers, criticizes the government's 
implementation of the AML.  According to the editorial, the global 
financial crisis and government stimulus package have hurt 
 
BEIJING 00003115  002 OF 003 
 
 
competition by reinforcing the trend toward "the state advancing as 
the private sector retreats" (guojin mintui).  The article quotes 
Chinese legal expert Tong Xindi, who argues that the AML has become 
a tool for the government to regulate industrial policy and foreign 
investment and for interest groups to restrict competition. 
Commenting on the power imbalance between China's powerful SOEs and 
relatively weak antitrust agencies, an unnamed official from a 
Chinese antitrust agency is quoted saying, "How can you expect a 
department-level authority to regulate ministry-level SOEs?" 
 
¶5. (U) An October 22 article in the state-owned Economic Information 
Daily (Jingji Cankaobao) argues that AML lawsuits against large 
Chinese SOEs have yet to produce results because the courts are 
"extremely cautious" about these cases.  Beijing lawyer Li Fangping 
filed lawsuits in 2008 against oil giant Sinopec and 
telecommunication service provider China Netcom for abusing their 
dominant market position, but the courts have yet to place the 
Sinopec case on file and have repeatedly postponed the China Netcom 
case because it "has great significance and requires careful study." 
 
 
MOFCOM's Merger Reviews Focus on Foreign Firms 
--------------------------------------------- - 
 
¶6. (U) More than 70 percent of the mergers reviewed by MOFCOM since 
the AML went into effect August 1, 2008, have involved multinational 
firms.  MOFCOM has reviewed 49 M&A transactions, approving 43 
unconditionally and five with conditions.  Only one case, Coke's bid 
to buy Chinese juice-maker Huiyuan, was rejected by MOFCOM.  At the 
end of September, MOFCOM approved with conditions two major overseas 
transactions, Pfizer's acquisition of Wyeth in the pharmaceuticals 
industry and General Motors' reacquisition of elements of auto parts 
manufacturer Delphi.  All five M&A cases approved with conditions 
involved offshore transactions between foreign parties rather than 
transactions between Chinese companies.  MOFCOM has yet to formally 
reject or clear with conditions any such transactions between 
Chinese parties, although MOFCOM is reportedly reviewing the merger 
of state-owned China Eastern and Shanghai Airlines. 
 
¶7. (SBU) MOFCOM's Anti-Monopoly Bureau is reportedly delaying action 
on Walmart's application to merge with Trustmart, a Taiwan-invested 
retail store.  The basis of the delay is that Trustmart is currently 
operating as a domestic Chinese company, and MOFCOM is apparently 
requiring that Trustmart first be converted to a wholly 
foreign-owned company prior to the conclusion of the AML review. 
 
Antitrust Lawyers Expect Focus to Remain on Foreign Firms 
--------------------------------------------- ---- 
 
¶8. (SBU) Faced with limited staffing to investigate M&A cases and 
domestic pressure to protect Chinese companies, China's antitrust 
agencies were more likely to focus on transactions involving foreign 
companies, an antitrust lawyer at one of Beijing's leading law firms 
told EconOff October 29.  She predicted that software companies like 
Microsoft would be a relatively easy target of China's antitrust 
agencies, given the fact that the Microsoft had already faced 
antitrust lawsuits in the United States and Europe.  In an October 
23 meeting, a Microsoft lawyer expressed concern about a possible 
antitrust investigation of "excessive pricing" of its software. 
However, he predicted that Microsoft was relatively safe for the 
next year, arguing that China's antitrust agencies would adopt a 
cautious approach and seek to avoid the international scrutiny that 
a case against Microsoft would attract. 
 
Encouraging Signs: China Mobile and TravelSky Cases 
--------------------------------------------- ---- 
 
¶9. (SBU) Recent cases involving SOEs TravelSky and China Mobile 
offer some encouraging signs that SOEs will not continue to enjoy 
immunity from AML enforcement.  In September, just six months after 
the state-owned airline ticketing website TravelSky introduced a 
controversial new air ticket pricing system, all of China's major 
airlines abandoned the TravelSky program and reverted back to the 
original pricing system.  Criticized as an attempt among the major 
airlines to fix prices in China's domestic civilian aviation market, 
TravelSky's pricing system was under investigation by the National 
Development and Reform Commission (NDRC)'s Department of Pricing 
Supervision.  Chinese independent weekly Economic Observer reported 
that NDRC was behind the demise of the pricing system.  China's 
largest mobile phone operator, China Mobile, recently settled an 
anti-monopoly lawsuit filed by Beijing lawyer Zhou Ze, who accused 
 
BEIJING 00003115  003 OF 003 
 
 
the state-owned telecom operator of abusing market dominance in 
imposing a rental charge for its mobile service.  China Mobile 
agreed to drop the monthly rental charge and provide a USD 150 
"award" to the plaintiff, who in turn agreed to withdraw the suit on 
October 23.  A Beijing-based antitrust lawyer told EconOff that 
China Mobile's decision to settle outside of court was a sign that 
the company expected to lose the case and wanted to avoid 
establishing a precedent that would trigger a flood of lawsuits. 
Nevertheless, she predicted that the case would likely lead to more 
lawsuits against the company. 
 
FTC/DOJ Discuss Cooperation with China's Antitrust Agencies 
--------------------------------------------- ------ 
 
¶10. (SBU) In their October 23 meetings with DOJ Special Counsel for 
International Trade Stuart Chemtob and FTC Office of International 
Affairs Associate Director Russell Damtoft, officials from China's 
three antitrust agencies - MOFCOM, NDRC and the State Administration 
of Industry and Commerce (SAIC) - all expressed interest in 
strengthening cooperation and signing an MOU between U.S. and 
Chinese antitrust agencies.  Damtoft informed MOFCOM Anti-Monopoly 
Bureau Division Directors Ye Jun and Yin Yanling that FTC would be 
happy to host a MOFCOM official for a 3-6 month internship in 2010. 
MOFCOM, NDRC and SAIC officials expressed appreciation for the U.S. 
Trade and Development Agency (TDA)-funded antitrust workshops held 
earlier this year and suggested that the next workshops on the 
concept of relevant market and IP and competition be held in China 
in early 2010.  MOFCOM's Ye Jun said they did not want to hold the 
next TDA workshop until after the Chinese New Year and probably not 
until March 2010. 
 
AML Implementing Regulations Still Being Drafted 
--------------------------------------------- --- 
 
¶11. (SBU) NDRC Price Supervision Department Law and Regulations 
Division Director Luo Zeheng told Damtoft and Chemtob that NDRC was 
in the process of developing procedural rules for AML implementation 
and hoped to announce those rules by the end of December.  SAIC 
Legal Division Director Zhao Guobin said SAIC was still working on 
guidelines for AML enforcement in the area of IPR enforcement.  He 
indicated that the fourth revision of the IP guidelines was still 
going through internal deliberations and was not ready for public 
comments.  Zhao said SAIC would share the draft guidelines and 
welcome USG comments after the Anti-Monopoly Commission finished its 
review. 
 
Comment 
------- 
 
¶12. (SBU) As we reported in reftel, the first 15 months of AML 
implementation offer some worrying signs.  China's courts have been 
reluctant to take AML cases involving China's largest SOEs, while 
MOFCOM's Anti-Monopoly Bureau seems more focused on scrutinizing 
mergers involving foreign companies than those involving Chinese 
SOEs.  Nevertheless, there are some encouraging new signs, such as 
the TravelSky and China Mobile cases and MOFCOM's decision to review 
the China Eastern and Shanghai airlines merger, that SOEs are not 
completely immune from the AML.  Another positive sign is Chinese 
antitrust lawyers and scholars' willingness to criticize the 
government's AML implementation and their public calls for antitrust 
agencies to investigate SOEs' anti-competitive behavior. 
Ultimately, it is this domestic pressure that will compel antitrust 
authorities to make the AML a more effective tool for protecting 
competitive markets and consumer interests. 
 
HUNTSMAN