SOE Trim-down Collides With Antitrust Law

By Wang Biqiang
Published: 2008-08-06

From News, page 3 issue 379 Aug 4 2008
Translated by Zuo Maohong
Original article:

A wave of consolidation among Chinese state-owned firms (SOEs) have collided with the tide of antirust exercises as China's first ever Anti-monopoly Law came into effect on Aug 1.

The Law has come two years ahead of the targeted deadline for 149 SOEs to be consolidated into between 80 and 100 firms.

Some held that since the SOEs intergration was government-driven, the firms would be exempted from antitrust review by the Ministry of Commerce; while others held that the Law had clearly stipulated when corporate consolidation reached a certain scale, antitrust assessment must set in.

By the new law, corporate restructuring which involves a certain level of capital should receive antitrust assessment from the Ministry of Commerce (MOC). Mostly known as giants, SOEs would apparently have to go through such assessments if they were to be reorganized.

The Tide of SOE Restructuring
"We'll take action after the Olympics. [SOEs] will have to be restructured in batches," State-owned Assets Supervision Administration Commission (SASAC) chairman Li Rongrong reiterated the government's resolution in reforming SOEs on July 22.

Previously, Li declared that SOEs which failed to gain dominance in their fields within three years should be eliminated. "Three years have passed. Now I've raised the threshold to the top six. Those that can't meet the requirement must be reorganized," Li added.

According to previous plans, SASAC would reduce the number of SOEs to between 80 and 100 by 2010. Meanwhile, state-owned assets should focus on key industries that dominate these areas.

Major SOE industries included military, electricity, petrochemical, telecommunication, coal, civil aviation, and shipping.

The latest SOEs intergration was the merger of China International Enterprises Cooperative Corporation (CIECC) with China Chengtong Group, a logistics and delievry conglomerate, according to a notice issued on July 3 on the official website of the SASAC. Following that, China's state-owned firms totaled 149.

The Antitrust Paradox
The new Law and a supplement ruling dated Aug 3 from the State Council required imminent mergers of a certain scale to voluntarily file for antitrust assessment prior to consolidation.

The thresholds for antitrust investigations are: if the total global turnover of all parties involved in the merger exceeded 10 billion yuan, and at least two of the parties had a domestic turnover of more than 400 million yuan in the previous fiscal year; if the total domestic turnover of all parties involved exceeded two billion yuan, and at least two of them had a domestic turnover of over 400 million yuan in the previous fiscal year.

For the state-owned giants, these thresholds were easy to cross.

"Monopolies are necessary for certain public services, for example, all power grid companies in the world are monopolized to some extend.

"We shouldn't simply draw a conclusion that SOEs have broken the Anti-monopoly Law just because they have undergone restructuring and consolidation," said one source from the SASAC research center.

The source added that certain clauses in the Law indicated that government-driven SOEs consolidations were not required to file for antitrust review.

However, legal scholar Shi Jianzong disagreed. The professor from China University of Political Science and Law was engaged in the drafting and assessment of the Law.

He said: "Even SOEs consolidations ordered by the SASAC should conform to the Law. The same standard applies to all corporate intergration."

Shi added that when a consolidation application came under antitrust review and investigation, it didn't necessarily mean the merger would be prohibited. He said the 27th article of the Law prescribed six factors in deciding if a merger would be permitted, including the companies' market share and dominance in the industry.

Shi said one should not view the Law as standing in the way of SOEs restructuring, though antitrust review could incur extra procedures in the reorganization of these firms.

He added previously, SASAC only needed to consider factors related to the administration of state-owned assets when restructuring SOEs, yet in the future, it would have to take into account market behavior, and that, he said, would be beneficial for the entire market economy operation.

However, the Law itself has some controversial elements. Its 7th article goes: "for the undertaking in the state-owned economy and controlled industries which are tied to the national economic lifeline and state security, and in industries to which the state grants special or exclusive rights, the state protects their lawful operation."

Many legal experts had generally interpreted this article as a green light for state-owned companies to continue their dominance.

In response, Shi said merger assessment had nothing to do with this article, stressing the same review thresholds for "concentration of businesses" applied to all.

However, he admitted the effectiveness of the Law depended largely on wheter or not it was properly enforced.