REN Li: Trends and Developments of Cartels in China in 2024
Release time：2024-08-02 14:24
Legislation
In 2023, China’s State Administration for Market Regulation (SAMR)issued the Regulations on Prohibition of Monopoly Agreements (the“Regulations”), which replaced the 2022 “Interim Regulations on the Prohibition of Monopoly Agreements” (the “Interim Regulations”). The following provisions have been added to the Regulations:
Addition of the definition of relevant markets
In China’s antitrust law enforcement practice, when investigating cartel cases, it is generally not necessary to define the relevant market. However, in certain exceptional cases, such as when determining whether the respondent is a competitor, or when the need to calculate market share occurs, it may be necessary to define the relevant market. Thus, Article 7 of the Regulations adds the principles for defining relevant markets (including relevant product markets and relevant geographical markets).
Enhancing of cartel regulations in the digital economy field
Article 13 of the Regulations stipulates that competing operators shall not use data, algorithms, technology, platform rules, etc, to engage in cartel behaviour through communication of intentions, exchanging of sensitive information, co-ordinated behavior, etc. Article 8 includes a new item, namely that to “agree to adopt standard formulas, algorithms, platform rules, etc, on the basis of which prices are calculated”, constitutes a monopoly agreement to fix or change commodity prices. Paragraph 2 of Article 10 also specifically stipulates that the “data” element applies to the regulations regarding division of the sales market and raw material procurement market, which means that data has been included in the scope of China’s antitrust supervision as an important commodity.
Refining of relevant provisions of the hub and spoken agreement
The Anti-monopoly Law (AML), revised in 2022, adds provisions for “hub and spoke agreements” (Article 19). That is, if any operator organises other operators in the reaching of a monopoly agreementor provides substantial assistance to others in reaching such agreement, then this operator may violate the AML and be punished even if it does not directly participate in the monopoly agreement itself. The Regulations further clarifies the relevant provisions of hub and spoke agreements, including the following two main aspects.
Elaborating the composition standards of the hub and spokeagreement
Article 18 of the Regulations enumerates the illegal circumstances and specific identification standards pertaining to “organisation” and “substantial assistance”, providing a certain basis for the legal constitution of the hub-and-spoke agreements.
Clarifying that the leniency programme can be extended to organisers of hub-and-spoke agreements
Article 37 of the Regulation clearly stipulates that operators who organise and help reach a monopoly agreement can apply for reduced penalties according to the leniency programme for monopoly agreements. Thus, the leniency programme may also apply to an organiser of a hub-and-spoke agreement.
Personnel Changes
In November 2023, Lin Gan, the first head of the State Anti-Monopoly Bureau, as well as the former Deputy Administrator of the SAMR, retired. In December of the same year, Zhenguo Wu, Director General of Department I of Anti-monopoly Enforcement, responsible forcartel and abuse investigations, also retired. Yang Meng serves as the new Deputy Administrator of the SAMR in charge of anti-monopoly, while the post of head of the State Anti-Monopoly Bureau iscurrently vacant. The post of Director General of Department I of Anti-monopoly Enforcement is also vacant (Deputy Director General Lu Yu is currently the acting Director General).
Cartel Enforcement
An overall introduction to cartel administrative enforcement
In 2023, China’s antitrust enforcement intensity was comparatively low. Throughout the year, penalties were imposed in a total of 14 cartel cases, involving nine enterprises and five industry associations. There were two investigations into the pharmaceutical industry, two investigations into the natural gas industry, one investigation into aninsurance company, three investigations into the building materials industry, and one investigation into the tourism industry. The largest penalty was imposed on a pharmaceutical company. In this case, illegal gains of approximately RMB150 million were confiscated and a fine of approximately RMB140 million was imposed. The lowest penalty was against a brick-making company, which was only about RMB100,000.
All of the aforementioned cases were investigated by provincial antitrust authorities. To our knowledge, the SAMR will be primarily in charge of investigating foreign companies or cases that may affect the national interests of China. Domestic cases will predominantly be handled by provincial anti-monopoly authorities, although they may receive legal guidance and suggestions from the SAMR.
Confiscation of illegal gains and imposition of fines
Article 56 of the AML stipulates that if an operator engages in cartel behaviour, the illegal gains must be confiscated and a fine equal to 1%-10% of its revenue from the previous year must be imposed. That is, the fine and the confiscation of illicit gains must be imposed simultaneously.
It is still unclear how illegal gains are confiscated:
Uncertainty exists in the definition of illegal gains. In the cases published in 2023, there was no explicit definition provided as to whether illegal gains relate to the profits from the sales of relevant products, or the entire sales of the operator investigated.
Illegal gains have been confiscated in some cases but not in others, and no specific reasons were given. For instance, there were two cases in which pharmaceutical companies were punished for their cartel behaviour in 2023. In one case, illegal gains were confiscated and fines were imposed at the same time. However, in the other case, only a fine was imposed, without illegal gains being confiscated, and no reasons were given for not confiscating the illegal gains.
No standards have been given on how to calculate illegal gains. According to the main formula for calculating illegal gains, illegal gains are calculated by subtracting the gains earned under a competition scenario from the gains earned under a cartel scenario. In practice, however, there are instances where operators’ whole income was considered illegal gains without distinguishing the cartel scenario and the competition scenario.
Fines calculated based on the total sales of the investigated operator
Generally speaking, when a fine is imposed, the base of the fine is calculated based on the total sales of the operator rather than sales from the relevant product.
Both aggravating and mitigating circumstances taken into consideration when confiscating illegal gains and imposing fines
According to Chinese anti-monopoly laws, the first operator to admit involvement in a cartel is entitled to a reduction in both confiscation and fines, serving as a mitigating factor in cartel punishment.Conversely, taking a leading role in a cartel is recognised as anaggravating factor. In practice, enforcement authorities occasionally provide detailed explanations of these mitigating and aggravating factors. For instance, in a case involving tourism operators, one participant not only assumed a leading role in the cartel but also was the first to report the cartel to the authorities. Taking into account both the aggravating and mitigating circumstances, the authorities decided to confiscate only 20% of the illegal gains and reduce the imposed fine by 80%, thereby significantly lessening the penalty.
Trends in 2024
In 2024, China’s antitrust enforcement will still largely focus on the building materials and pharmaceuticals industries, as well as industry associations.
Building materials industry
Cartels, including those involving forced trading, are particularly prevalent in the concrete sector due to intense homogeneous competition, a low entry threshold, and relatively small geographic markets. In 2023, some cartel cases were transferred from criminal courts to antitrust authorities when relevant evidence emerged during criminal proceedings. It is anticipated that antitrust enforcement will remain focused on the construction materialsin dustry in 2024.
Pharmaceuticals industry
In China, the number of producers for certain pharmaceuticals is limited, partly because obtaining production certificates from the government for pharmaceuticals (including raw materials) is challenging. This regulatory barrier facilitates cartel formation among the few existing producers. In 2024, antitrust authorities are expected to maintain their scrutiny of the pharmaceutical industry. This focus is driven by the industry’s direct impact on public health and safety, the potential for public outrage, and the significant financial implications for the national medical insurance system due to cartel-induced price increases.
Trade association
As China transitions from a planned economy to a market economy,numerous government departments have been replaced by trade associations, some of which have also inherited certain governmental functions. Additionally, many trade associations are organised by market participants themselves. These associations, particularly the latter type, may either inadvertently or intentionally engage in cartel behaviours due to a lack of awareness of antitrust regulations or in pursuit of monopoly profits, respectively.
In 2023, of the 14 cartel cases resolved, five involved penalties against trade associations. To address this issue and regulate industry associations more effectively, the State Council’s Anti-Monopoly and Anti-Unfair Competition Commission published the Anti-Monopoly Guidelines for trade associations in January 2024. This initiative underscores the ongoing focus on trade associations, which are expected to remain a primary target of antitrust enforcement in 2024.
In 2023, China’s State Administration for Market Regulation (SAMR)issued the Regulations on Prohibition of Monopoly Agreements (the“Regulations”), which replaced the 2022 “Interim Regulations on the Prohibition of Monopoly Agreements” (the “Interim Regulations”). The following provisions have been added to the Regulations:
Addition of the definition of relevant markets
In China’s antitrust law enforcement practice, when investigating cartel cases, it is generally not necessary to define the relevant market. However, in certain exceptional cases, such as when determining whether the respondent is a competitor, or when the need to calculate market share occurs, it may be necessary to define the relevant market. Thus, Article 7 of the Regulations adds the principles for defining relevant markets (including relevant product markets and relevant geographical markets).
Enhancing of cartel regulations in the digital economy field
Article 13 of the Regulations stipulates that competing operators shall not use data, algorithms, technology, platform rules, etc, to engage in cartel behaviour through communication of intentions, exchanging of sensitive information, co-ordinated behavior, etc. Article 8 includes a new item, namely that to “agree to adopt standard formulas, algorithms, platform rules, etc, on the basis of which prices are calculated”, constitutes a monopoly agreement to fix or change commodity prices. Paragraph 2 of Article 10 also specifically stipulates that the “data” element applies to the regulations regarding division of the sales market and raw material procurement market, which means that data has been included in the scope of China’s antitrust supervision as an important commodity.
Refining of relevant provisions of the hub and spoken agreement
The Anti-monopoly Law (AML), revised in 2022, adds provisions for “hub and spoke agreements” (Article 19). That is, if any operator organises other operators in the reaching of a monopoly agreementor provides substantial assistance to others in reaching such agreement, then this operator may violate the AML and be punished even if it does not directly participate in the monopoly agreement itself. The Regulations further clarifies the relevant provisions of hub and spoke agreements, including the following two main aspects.
Elaborating the composition standards of the hub and spokeagreement
Article 18 of the Regulations enumerates the illegal circumstances and specific identification standards pertaining to “organisation” and “substantial assistance”, providing a certain basis for the legal constitution of the hub-and-spoke agreements.
Clarifying that the leniency programme can be extended to organisers of hub-and-spoke agreements
Article 37 of the Regulation clearly stipulates that operators who organise and help reach a monopoly agreement can apply for reduced penalties according to the leniency programme for monopoly agreements. Thus, the leniency programme may also apply to an organiser of a hub-and-spoke agreement.
Personnel Changes
In November 2023, Lin Gan, the first head of the State Anti-Monopoly Bureau, as well as the former Deputy Administrator of the SAMR, retired. In December of the same year, Zhenguo Wu, Director General of Department I of Anti-monopoly Enforcement, responsible forcartel and abuse investigations, also retired. Yang Meng serves as the new Deputy Administrator of the SAMR in charge of anti-monopoly, while the post of head of the State Anti-Monopoly Bureau iscurrently vacant. The post of Director General of Department I of Anti-monopoly Enforcement is also vacant (Deputy Director General Lu Yu is currently the acting Director General).
Cartel Enforcement
An overall introduction to cartel administrative enforcement
In 2023, China’s antitrust enforcement intensity was comparatively low. Throughout the year, penalties were imposed in a total of 14 cartel cases, involving nine enterprises and five industry associations. There were two investigations into the pharmaceutical industry, two investigations into the natural gas industry, one investigation into aninsurance company, three investigations into the building materials industry, and one investigation into the tourism industry. The largest penalty was imposed on a pharmaceutical company. In this case, illegal gains of approximately RMB150 million were confiscated and a fine of approximately RMB140 million was imposed. The lowest penalty was against a brick-making company, which was only about RMB100,000.
All of the aforementioned cases were investigated by provincial antitrust authorities. To our knowledge, the SAMR will be primarily in charge of investigating foreign companies or cases that may affect the national interests of China. Domestic cases will predominantly be handled by provincial anti-monopoly authorities, although they may receive legal guidance and suggestions from the SAMR.
Confiscation of illegal gains and imposition of fines
Article 56 of the AML stipulates that if an operator engages in cartel behaviour, the illegal gains must be confiscated and a fine equal to 1%-10% of its revenue from the previous year must be imposed. That is, the fine and the confiscation of illicit gains must be imposed simultaneously.
It is still unclear how illegal gains are confiscated:
Uncertainty exists in the definition of illegal gains. In the cases published in 2023, there was no explicit definition provided as to whether illegal gains relate to the profits from the sales of relevant products, or the entire sales of the operator investigated.
Illegal gains have been confiscated in some cases but not in others, and no specific reasons were given. For instance, there were two cases in which pharmaceutical companies were punished for their cartel behaviour in 2023. In one case, illegal gains were confiscated and fines were imposed at the same time. However, in the other case, only a fine was imposed, without illegal gains being confiscated, and no reasons were given for not confiscating the illegal gains.
No standards have been given on how to calculate illegal gains. According to the main formula for calculating illegal gains, illegal gains are calculated by subtracting the gains earned under a competition scenario from the gains earned under a cartel scenario. In practice, however, there are instances where operators’ whole income was considered illegal gains without distinguishing the cartel scenario and the competition scenario.
Fines calculated based on the total sales of the investigated operator
Generally speaking, when a fine is imposed, the base of the fine is calculated based on the total sales of the operator rather than sales from the relevant product.
Both aggravating and mitigating circumstances taken into consideration when confiscating illegal gains and imposing fines
According to Chinese anti-monopoly laws, the first operator to admit involvement in a cartel is entitled to a reduction in both confiscation and fines, serving as a mitigating factor in cartel punishment.Conversely, taking a leading role in a cartel is recognised as anaggravating factor. In practice, enforcement authorities occasionally provide detailed explanations of these mitigating and aggravating factors. For instance, in a case involving tourism operators, one participant not only assumed a leading role in the cartel but also was the first to report the cartel to the authorities. Taking into account both the aggravating and mitigating circumstances, the authorities decided to confiscate only 20% of the illegal gains and reduce the imposed fine by 80%, thereby significantly lessening the penalty.
Trends in 2024
In 2024, China’s antitrust enforcement will still largely focus on the building materials and pharmaceuticals industries, as well as industry associations.
Building materials industry
Cartels, including those involving forced trading, are particularly prevalent in the concrete sector due to intense homogeneous competition, a low entry threshold, and relatively small geographic markets. In 2023, some cartel cases were transferred from criminal courts to antitrust authorities when relevant evidence emerged during criminal proceedings. It is anticipated that antitrust enforcement will remain focused on the construction materialsin dustry in 2024.
Pharmaceuticals industry
In China, the number of producers for certain pharmaceuticals is limited, partly because obtaining production certificates from the government for pharmaceuticals (including raw materials) is challenging. This regulatory barrier facilitates cartel formation among the few existing producers. In 2024, antitrust authorities are expected to maintain their scrutiny of the pharmaceutical industry. This focus is driven by the industry’s direct impact on public health and safety, the potential for public outrage, and the significant financial implications for the national medical insurance system due to cartel-induced price increases.
Trade association
As China transitions from a planned economy to a market economy,numerous government departments have been replaced by trade associations, some of which have also inherited certain governmental functions. Additionally, many trade associations are organised by market participants themselves. These associations, particularly the latter type, may either inadvertently or intentionally engage in cartel behaviours due to a lack of awareness of antitrust regulations or in pursuit of monopoly profits, respectively.
In 2023, of the 14 cartel cases resolved, five involved penalties against trade associations. To address this issue and regulate industry associations more effectively, the State Council’s Anti-Monopoly and Anti-Unfair Competition Commission published the Anti-Monopoly Guidelines for trade associations in January 2024. This initiative underscores the ongoing focus on trade associations, which are expected to remain a primary target of antitrust enforcement in 2024.
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