On June 6, 2024, Premier Li Qiang signed a State Council decree introducing the Regulation on Fair Competition Reviews (the Regulation) effective August 1. According to the Regulation, administrative agencies and organizations legally authorized to manage public affairs must conduct fair competition reviews when formulating laws, rules, and policies related to business activity.
The Regulation aims to ensure a level playing field for all market players and establish a unified domestic market free from regional protectionist practices that hinder competition from companies domiciled in other provinces and localities. Such practices have continued to deviate from competition principles despite the existing self-scrutiny system.
In other words, China's central government is now formally committed to eliminating regulations and practices that hinder a unified domestic market, ensuring that all types of enterprises can engage in fair competition, and better protecting the legitimate rights and interests of all business entities. This is so even though state-owned enterprises (SOEs) play major roles in many industries and are regarded as bulwarks of Part rule and the economy and therefore enjoy particular preferences1 compared to private counterparts in many industries including foreign-invested enterprises (FIEs) and foreign companies.
The impact of the Regulation on FIEs and foreign companies remains uncertain and will require close monitoring as the Regulation is implemented. It is worth noting that FIEs are companies registered in China but have partial or complete foreign ownership and are considered as domestic companies regardless of foreign capital percentage.2 Products manufactured by FIEs are domestic products. Foreign companies, on the other hand, refer to entities that are incorporated outside China and may or may not operate in China through representative offices, branches, or partnerships. Imported products are produced outside of China and brough into the country through international trade and thus subject to tariffs and taxes.
Even when various laws such as the Foreign Investment Law (2020) prescribe equal treatment of FIEs with domestic enterprises, FIEs continue to suffer from formal and informal restrictions in particular industries while domestic enterprises enjoy more access to preferential treatment. Foreign companies are even less protected by domestic laws than FIEs, as the equal treatment for FIEs does not extend to foreign companies, leaving them more vulnerable to regulatory and market challenges.
While the new Regulation aims to ensure a level playing field for FIEs, bringing their treatment on a par with domestic enterprises, this equal treatment does not extend to foreign companies operating without local incorporation. Even if effectively implemented, the Regulation would ideally enhance the position of FIEs relative to domestic companies, but it would not address the broader challenges faced by foreign companies.
The Regulation calls on the State Administration for Market Regulation (SAMR) to refine review standards, define behavioral rules, and ensure strict implementation to maintain a fair competition environment. Key aspects of the Regulation include:
- Market Access and Exit: Policies formulated by local governments and departments and ministries of the central government must ensure equal opportunities for all businesses. Prohibited actions include designating specific companies to provide goods and services, setting unreasonable or discriminatory market entry conditions, and unlawfully granting or restricting market access through the grant of exclusive rights. Effective implementation may curb unequal treatment of non-local domestically-invested companies and FIEs, which would be welcomed by the international business community, although the major purpose is to ensure equal treatment among domestically-invested enterprises regardless of where they are incorporated.
- Free Flow of Goods and Services: The Regulation aims to ensure free market entry and exit for products and services. It prohibits local governments from establishing local barriers to the movement of goods and services and prohibits discrimination against external or imported products. However, although the Regulation specifically prohibits measures that restrict non-local companies from participating in local government procurement or bidding in disguised forms, it does not explicitly extend this prohibition to non-domestic companies, i.e., foreign companies.
- Cost of Business Operations: According to the Regulation, policies formulated by government agencies may not provide selective tax benefits or subsidies without legal basis or State Council approval. This aims to prevent unfair competitive conditions based on special policies. This would potentially address the overcapacity issue of domestic companies by eliminating government subsidies unless authorized under law, bringing China into closer alignment with its WTO commitments. However, it is unclear how well SAMR or the central government as a whole can enforce the Regulation against local authorities, particularly as local governments rely on local enterprises for tax revenue and employment and are required by the central authorities to develop their own economies in accordance with local conditions. FIEs are also concerned about the potential removal of their investment incentives. It remains to be seen whether these requirements will have a grandfather effect, affecting the vested interests that FIEs obtained when governments sought to attract FDI.
- Autonomy in Business Operations: The Regulation protects business autonomy by forbidding forced monopolistic practices and unlawful interference in market-regulated pricing. It also restricts the imposition of government pricing beyond legal authority.
While the Regulation's purpose is broadly praiseworthy, SAMR's ability to enforce the Regulation on a nationwide basis against local interests is questionable. SAMR's resources are limited and local authorities have often succeeded in resisting central government directives which run counter to local interests.
The Regulation itself notably allows exceptions for measures that have an anti-competitive effect, provided there is no better alternative and that they meet specific criteria. These criteria include safeguarding national security and development interests, promoting scientific and technological advancement to enhance national innovation capabilities, and achieving social or public interests such as energy conservation, environmental protection, and disaster relief.
However, even when in alignment with the Anti-Monopoly Law, these conditions are broad and lacking in detail, potentially allowing local governments to continue supporting local industries under the guise of national security, technological development, environmental protection or other interests, e.g., by subsidizing local competitors despite any national concerns regarding efficiency and overproduction.
The Regulation nevertheless constitutes a significant step by the Chinese central government to eliminate practices that hinder a unified market and ensure that all types of enterprises can compete on a level playing field. By mandating that all policies undergo rigorous fair competition reviews, the Regulation aims to create a level playing field for both domestic enterprises and FIEs. However, it also allows for certain anti-competitive measures if they serve national security, technological advancement, or public interest purposes, potentially giving local governments leeway to continue supporting local industries under broad and somewhat vague criteria, potentially against the interest of FIEs.
As for FIEs themselves, this Regulation introduces both opportunities and challenges. On the one hand, it promises a more transparent and equitable business environment, reducing regional protectionism and unfair local conditions. On the other hand, the broad exceptions allowed under the Regulation may enable local governments to continue to provide preferential treatment for domestic industries, while barring FIEs because of the investment incentives which they have received. The impact on FIEs, particularly regarding the potential loss of existing tax benefits and subsidies, will need to be closely monitored as the Regulation is implemented.
Footnotes
1. See Xi Jinping's Pivot to the State-An address to the Asia Society, New York, September 8, 2021 by Kevin Rudd, available at https://asiasociety.org/policy-institute/xi-jinpings-pivot-state.
2. Historically, there was a 25% equity requirement for a company to be classified as an FIE. This 25% requirement has been abolished under the new Foreign Investment Law, which came into effect on January 1, 2020. The new law treats all businesses equally, whether they are domestic or foreign-invested, thus eliminating the minimum equity threshold for a company to qualify as an FIE.
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