China Presses Ahead With Fair Competition Market Reforms
- China’s anti-monopoly campaign shows no sign of slowing, and big tech remains in the crosshairs as the government levels the playing field for small private firms, the backbone of China’s economy.
- The government is professionalizing its anti-trust environment. The Anti-Monopoly Law was updated, more regulators with expertise are getting hired; and new enforcement policies are being piloted.
- The updates to the law will expand the scope of transactions subject to review – including international transactions. The state of geopolitics will be a factor in sensitive reviews, but the changes could improve regulatory efficiency.
China’s campaign to tackle unfair competition continues as the government strengthens the powers of the State Administration for Market Regulation (SAMR), especially its Anti-Monopoly Bureau, and moves to improve market conditions for small- and medium-sized business (SMEs). These firms are the backbone of the Chinese economy, making up 90 percent of all businesses, 50 percent of taxation, 60 percent of GDP and 80 percent of jobs—a major issue when youth unemployment is almost 20 percent. These businesses have been hardest hit by the ongoing Covid lockdowns.
The government revised the Anti-Monopoly Law (AML) to focus on enforcement for smaller players and developed nine AML pilot programs to test ways to improve enforcement. It is no surprise they selected Zhejiang province as one of the first pilot zones, given its large percentage of private business, home to tech giants like Alibaba, and a province that President Xi knows well from his time as Party Secretary.
Big tech, and big enterprise, will continue to be a target. Alibaba and Tencent recently received additional fines for failing to comply with rules on the disclosure of transactions. But ‘small tech’ will increasingly come under scrutiny.
The geopolitical landscape will inevitably have an impact on foreign transactions, especially for M&As in sensitive high-tech areas such as semiconductors. But new leadership and an increased staff address one of the greatest hurdles foreign firms previously faced, which was the small, overworked, and inexperienced staff.
The Chinese government has been taking steps to centralize and professionalize market regulation since the 2018 creation of a new super regulator, SAMR. Their remit is broad, spanning anti-monopoly regulation and licensing, to food safety and product quality, but AML enforcement is a priority.
Last year, China elevated the stature of the Anti-Monopoly Bureau and recently appointed SAMR’s deputy, Gan Lin, to lead the bureau. She oversaw a series of high-profile anti-monopoly cases focused on the tech industry that dominated international headlines throughout 2021. Of the 33 civil servants SAMR is hiring, over half will be designated for the Anti-Monopoly Bureau to support increased workload stemming from actions at home, as well as reviews of international mergers and acquisitions.
In June, SAMR got a new Party Chief, Luo Wen, who previously served as Vice Minister of China’s Ministry of Industry and Information Technology, to provide needed technical expertise.
New amendments to the Anti-Monopoly Law (AML), also passed in June, specifically target monopolistic use of “data, algorithms, technology, capital advantages and platform rules.” They notably allow regulators to investigate smaller deals, and make fair competition review a requirement for local governments to implement.
To test these new concepts, SAMR launched pilot zones in nine eastern provinces. The pilots will digitize the review process, implement a cross-agency review process, establish a complaint mechanism, and link fair competition to officials’ performance assessments—an essential step for adoption. Zhejiang will pilot a cross-agency review process and intelligent monitoring system.
What does it mean?
Amid the Communist Party and government’s broader push to address economic and social inequality, more regulatory tightening particularly around anti-trust should be expected. Action will move from targeting a few high-profile companies to ensuring more regulation and enforcement at the local level, where private companies often run into anti-monopolistic behaviors.
Linking local officials’ promotions to enforcement of these new regulations will ensure a highlevel of attention to all cases—even those that previously did not warrant review—and help weed out corruption. One of the greatest challenges to rolling out new policies in China is getting the local levels to enforce it.
Zhejiang is a logical province to test these ideas as it is home to internet behemoths including Alibaba and NetEase and has fostered innovation among smaller tech firms. The province was also tasked with piloting the Common Prosperity initiative in June 2021—a campaign targeting rampant social inequality and economic disparity that resulted in regulatory tightening on the tech industry alongside real estate and financial sectors.
Priority sectors will include the digital economy, life sciences, new materials, the platform economy, public utilities and other areas that have seen “frequent disorderly competition and risk.” Several of these sectors also top the list of industries China is prioritizing for domestic development as it prepares its economy for the future
Why does is matter?
As smaller deals come under scrutiny and officials are held to higher standards, companies will need to ensure compliance with disclosure requirements, and maintain close coordination with all levels of regulators, particularly at the local level.
There is also potential for increased Party involvement in review of transactions, which may increase the scope for politicization of the M&A review process. Politics have an impact, but even with the tense geopolitical backdrop China faces, SAMR has moved forward with global mergers, including in sensitive industries.
Where is it going?
As with most new policies, the specifics have yet to be worked out. The pilots will be used to develop clearer guidance for enforcement and will likely be refined and rolled out nationwide. As such, it will be important to monitor the pilots, the types of enforcement tools developed and employed, and how regulators respond to different cases, for cues on what will emerge as the new AML regime.