China Competition & Trade Review (Issue #6 – March 2022)

O’Melveny’s China Competition and Trade Reviews offer periodic updates about important antitrust, competition, and trade developments in China. The Review is intended to help companies navigate China’s rapidly evolving regulatory landscape with practical, on-the-ground insights into the country’s competitive conditions and the laws framing them.

This installment offers a brief overview of:

• Proposed amendments to China’s Anti-Monopoly Law (AML), which significantly increase penalties for antitrust and gun jumping violations, and clarify and confirm SAMR’s powers to investigate non-notifiable mergers;
• Recent institutional changes at the State Administration for Market Regulation (SAMR), which have further elevated the importance of the Anti-Monopoly Bureau within SAMR;
• China’s continued regulatory focus on platform and internet companies, following vigorous enforcement action in the sector in 2021; 
• Revisions to China’s FDI rules, which further ease foreign investment restrictions in manufacturing and service sectors while permitting Chinese firms active in sectors generally off-limits to foreign investment to list overseas; and
• China’s 15-year plan (2021-2035) for IPR development and protection, against the backdrop of intensifying global tech rivalry.

If you have questions about these developments, or similar matters pertaining to China competition and trade topics, please contact the key contacts listed below.

1. Proposed amendments to China’s AML

On October 23, 2021, the Standing Committee of the National People’s Congress (NPC), China’s top legislative body, released a draft of its proposed amendments to the AML (Proposed AML Amendments). Following this first reading by the NPC, the Proposed AML Amendments require one or two further readings before being adopted as law.

This is the second round of public consultations that China has launched on its proposed changes to the AML. In January 2020, China’s antitrust agency—SAMR—solicited public comments on an earlier draft.

The key changes in the Proposed AML Amendments are set out below.

Stiffer Penalties

• Gun-jumping / failure to file. The Proposed AML Amendments significantly increase penalties for gun-jumping and failures-to-file notifiable transactions. At present, the maximum penalty is a fine of up to RMB 500,000—roughly US$80,000. The Proposed AML Amendments increase the maximum fine to 10% of the offending party’s turnover in the prior year. However, if a transaction does not eliminate or restrict competition, the fine will not exceed RMB 5,000,000 (US$800,000 approx.). That a lower fine is contemplated for failing to file a transaction that does not raise competition concerns is perhaps curious. Moreover, it is not always that clear to notifying parties ahead of time whether their transaction does raise concerns. 
• Aggravated penalties. The Proposed AML Amendments allow SAMR to increase a fine by a factor of up to 4, where a violation entails “especially serious circumstances”, an “especially pernicious influence” or “especially serious consequences”. However, the Proposed AML Amendments do not clarify what these formulations mean. In principle, these proposals mean that the maximum fine for cartel conduct, an abuse of dominance, or a gun-jumping could reach 50% of the offending party’s turnover in the prior year. 
• Personal liability for anticompetitive agreements. In what would be a radical change, the Proposed AML Amendments—if adopted in their current form—would introduce personal liability for monopoly agreements. This would attach to the infringing corporations legal representatives, the “persons-in-charge” or persons directly responsible for the monopoly agreement who could face fines of up to RMB1,000,000 (USD160,000).

Revamped Merger Control

• Non-notifiable mergers. The Proposed AML Amendments clarify and reinforce SAMR’s powers and obligations to investigate mergers falling below the turnover notification thresholds but which have or may have an anticompetitive effect. Although the 2008 Provisions of the State Council on Thresholds for the Notification of Concentrations¹ provided for the investigation of non-notifiable mergers, the Chinese antitrust authorities have not been very active in excising this power.² However, change now seems to be in the offing. And as an indication, Zhang Gong, SAMR Chief, vowed in an interview on October 22, 2021 to strengthen the review of mergers by SAMR so as to prevent killer acquisitions which often escape the notification requirement.³
• Stop-the-clock arrangements. The Proposed AML Amendments identify a number of circumstances where SAMR can suspend its merger review, including where parties fail to submit supplementary documents or data within a specified time limit, where SAMR needs time to further assess remedy proposals or if there is a substantial change in circumstances. The impact of such a tolling mechanism on what is already one of the more protracted review procedures in global merger control remains to be seen. Potentially, by affording some structure to delays which are presently entirely a matter of regulatory discretion, there may be some benefit for notifying parties.

Clarifying Substantive Prohibitions

• Abuse in Digital Markets. The Proposed AML Amendments make explicit provision for the possibility of an abuse of dominance involving data, algorithms, and platform rules. These changes reflect—and to some extent codify—SAMR’s ongoing enforcement focus on digital markets, and in particular platforms. 
• RPM Presumptively Illegal. RPM is presumed to be illegal by SAMR as a matter of its administrative enforcement, while China’s courts have largely adopted a ‘rule of reason’ approach to RPM in private litigation. The inconsistency has led to calls for a unified approach over the years. The Proposed AML Amendments appear to settle the debate by endorsing SAMR’s approach of placing on the parties the burden of proving a lack on harm to competition. 
• Safe harbors. The Proposed AML Amendments empower SAMR to establish market share-based safe harbors for monopoly agreements. The draft amendments do not explicitly exclude hard-core restrictions from taking the benefit of a safe harbor but the expectation is that this type of conduct would be carved out—in line with international practice.

2. Institutional Change at SAMR

The State Anti-Monopoly Bureau (AMB) was inaugurated on November 18, 2021. This has the effect of elevating the original SAMR Anti-Monopoly Bureau into a deputy ministerial level office. While still housed within the SAMR, the higher institutional ranking for the AMB means better access of manpower, budget and other resources, and greater latitude or independence in terms of enforcement action. In this context, it is worth noting that in March 2022, SAMR announced an annual budget of RMB 121.4 million (US$19.1 million) for its various enforcement activities, representing an increase of some 73.43% over last year’s actual spend.

The AMB is now composed of three departments:

• Competition Policy Coordination Department: which takes the lead on promoting competition policy, formulating antitrust rules and guidance, implementing the fair competition review system, enforcement action against abuses of administrative monopoly by other public bodies, and other matters.
• Anti-Monopoly Enforcement Department I: tasked with investigating anti-monopoly agreements, and abuses of dominance.
• Anti-Monopoly Enforcement Department II: in charge of merger reviews and investigations of failures to file.

SAMR also set up a Competition Policy and Big Data Center in December 2021. The center undertakes studies and research in antitrust and competition policy and platform businesses and provides technical support for antitrust enforcement, market monitoring, big data analysis, and electronic evidence preservation.

These various institutional changes at SAMR signal a determination and commitment to strengthened antitrust supervision and enforcement by the Chinese government and are a corollary to the proposed changes to the AML discussed above.

3. Continued regulatory focus on platforms and internet companies

Platforms and other internet companies have remained in the regulatory crosshairs for the past 12 months and this is set to continue. Following the release, its Antitrust Guidelines for Platform Economies⁴ in February 2021, SAMR launched a vigorous enforcement campaign targeting the sector. Key highlights include:

• In April of last year, SAMR imposed a record RMB18.2 billion (US$2.79 billion) fine on Alibaba, the online retail platform, for abuse of dominance involving the prohibition of merchants on the Alibaba platform from operating stores or participating in promotional activities on rival platforms.⁵ 
• In July 2021, SAMR blocked a merger of Douyu and Huya, the two largest Chinese game streaming platforms.⁶ This marks only the third time that the Chinese regulator has formally blocked a transaction since the AML entered into force in 2008.
• In October, SAMR imposed a RMB3.44billion (US$527 million) fine on food delivery giant, Meituan, for an abuse of dominance which entailed forcing restaurants to sell food exclusively via the Meituan app.⁷ 
• During the course of 2021, China imposed no less than 86 gun-jumping penalties on transactions involving companies in the internet sector. Notably, in respect of a combination involving the two largest music streaming platforms in China—Tencent Music and China Music Corporation—in addition to the maximum fine allowed under the AML for gun-jumping (RMB 500,000 or roughly US$80,000), SAMR imposed additional conditions including prohibiting Tencent Music from: (1) entering into exclusive copyright agreements with upstream copyright holders; (2) seeking preferential treatment from copyright holders; (3) increasing competitors’ costs; and (4) requiring Tencent Music to formulate a ‘rectification plan’ for SAMR’s approval.⁸ This marks the first time that SAMR has imposed corrective measures in addition to the statutory fine for failure to file.

As noted above, this aggressive enforcement in respect of platform and internet companies will continue for 2022. China’s 14th Five-Year Plan for the Modernization of Market Regulation,⁹ released by the State Council on January 27, 2022, identifies ensuring ‘orderly competition’ among platforms as a key task. And in fact, as at the date of this Review, SAMR has already imposed gun-jumping fines in 13 transactions in the internet sector in 2022.

4. Shortened Negative Lists for Foreign Investment

China has operated a negative list of markets or sectors accessible to foreign investment since 2016. Under this regime, foreign investment in any sector not included on the negative list is entitled to national treatment. China has shortened the list of restricted sectors annually since the regime was introduced. On December 27, 2021, China released its 2021 edition of the national negative list and its pilot free trade zone (FTZ) negative list (which applies to foreign investments in FTZs)—both of these lists are effective as of January 1, 2022.¹⁰

The number of items on the national negative list have now been reduced from 33 in 2020 to 31. The number of items on the FTZ negative list have been reduced to 27 from 30 in the 2020.
Major changes in the 2021 negative lists include

• Further easing of foreign investment restrictions in manufacturing. The foreign ownership cap (set at 50%) in the passenger car manufacturing sector has been removed. The previous restriction that a foreign investor may establish no more than two JVs for the manufacture of the same type of vehicle has been removed. The manufacture of satellite TV broadcast ground receiving facilities and critical components has also been delisted. 
• Further opening of service sectors in FTZs. Restrictions on foreign ownership in the market survey sector in FTZs have been lifted. Foreign investment has also been allowed in the social survey sector, although ownership is to be capped at 33% while legal representatives must be Chinese nationals.
• Permitting domestic companies active in sectors generally off-limits to foreign investment to list overseas. The two 2021 negative lists clearly allow domestic corporations active in sectors otherwise closed to foreign investment to list overseas, subject to certain conditions. 
• First, the Chinese domestic company needs to receive a regulatory approval before listing. Details on the regulatory clearance process and the requirements remain to be fleshed out.
• Second, foreign investors are not allowed to participate in the management of the Chinese company.
• Third, total foreign ownership in the domestic company is capped at 30% with no single foreign investor holding more than 10% of the company’s shareholding.

5. 15-Year Plan for IPR Development and Protection

Technology and innovation have become a focal point of interstate rivalry—and in particular of rivalry between the U.S. and China. Against this backdrop, China released its Outline for Building a Powerful Intellectual Property Nation (2021-2035) (IP Nation Outline) in September 2021.¹¹

The IP Nation Outline sets out both short term and long term goals for the development of Chinese intellectual property. The short-term goals are to be achieved by 2025; these include better IPR protection, a substantial improvement of the ability of Chinese brands to compete internationally, and that patent-intensive industries and copyright industries account for 13% and 7.5% of China national GDP respectively. The long term goal—to be achieved by 2035—is for China to be ranked in first tier globally in terms of IPR competitiveness.

The IP Nation Outline also charts a course for achieving its goals. These involve building IPR protection systems which support a world-class business environment, building IPR market mechanisms that encourage innovation and encouraging participation in global IPR governance.

In October 2021, China also released a five-year plan for the period of 2021 to 2025, providing further detail and guidance on the short-term goals explained in the IP Nation Outline. Thereafter in January 2022, China released a detailed annual plan for IPR development and protection.¹² This plan lists 115 action items, including further amendments to IPR protection-related laws and regulations, notably the AML, the Patent Law Implementation Regulations, the introduction of rules for IPR protection in big data, AI, blockchain, and gene technologies, the formulation of judicial interpretations on punitive damages for infringements of IPR, and the ramping up of judicial enforcement of the AML and China’s Anti-Unfair Competition Law.

¹ https://gkml.samr.gov.cn/nsjg/fldj/202005/t20200526_315561.html

² Based on publicly available information, the Chinese antitrust authorities are believed to have investigated only one non-notifiable merger to date—the 2016 acquisition of Uber by Chinese competitor Didi. The investigation was opened in 2016. It remains unclear whether this investigation is still ongoing.

³ https://finance.sina.com.cn/tech/2021-10-22/doc-iktzqtyu2840272.shtml?cre=tianyi&mod=pcpager_tech&loc=28&r=0&rfunc=2&tj=cxvertical_pc_pager_spt&tr=12

⁴ https://gkml.samr.gov.cn/nsjg/fldj/202102/t20210207_325967.html

⁵ https://www.samr.gov.cn/fldj/tzgg/xzcf/202104/t20210409_327698.html

⁶ https://www.samr.gov.cn/fldj/tzgg/ftjpz/202107/t20210708_332421.html

⁷ https://www.samr.gov.cn/fldj/tzgg/xzcf/202110/t20211008_335367.html

⁸ https://www.samr.gov.cn/fldj/tzgg/xzcf/202107/t20210724_333020.html

⁹ http://www.gov.cn/zhengce/content/2022-01/27/content_5670717.htm

¹⁰ https://www.ndrc.gov.cn/xxgk/zcfb/fzggwl/202112/t20211227_1310020.html?code=&state=123;https://www.ndrc.gov.cn/xxgk/zcfb/fzggwl/202112/t20211227_1310019.html?code=&state=123

¹¹ http://www.gov.cn/xinwen/2021-09/22/content_5638761.htm

¹² http://www.gov.cn/xinwen/2022-01/07/content_5666903.htm

O’Melveny & Myers LLP is a foreign law firm registered with the Ministry of Justice of the People's Republic of China. Under current Chinese regulations, we are allowed to provide information concerning the effects of the Chinese legal environment, but we are not authorized to practice Chinese law or to render legal opinions in respect of Chinese law. We work in cooperation with a number of Chinese law firms. Should you require a legal opinion in respect of any Chinese law matter, we would be happy to assist you in obtaining one from a Chinese firm.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Philip Monaghan, an O'Melveny partner licensed to practice law in England & Wales, Ireland, and Hong Kong, Lining Shan, an O'Melveny counsel in the firm's Beijing office, and Vivian Wang, an O'Melveny associate licensed to practice law in China, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

© 2022 O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, T: +1 212 326 2000.