China’s New Fair Competition Review Regulation

On June 6, 2024, Premier Li Qiang signed a decree of the State Council introducing the Regulation on the Supervision of Fair Competition (the Regulation) with effect from August 1. Under the Regulation, administrative agencies and organizations legally authorized to manage public affairs are required to conduct fair competition supervision when formulating laws, regulations and policies related to economic activities.

The regulation aims to ensure a level playing field for all market participants and to establish a single national market free from regional protectionist practices that hinder competition from companies based in other provinces and localities. Despite the existing self-monitoring system, such practices still deviate from competition rules.

In other words, China’s central government is now formally committed to eliminating regulations and practices that impede the domestic single market, ensuring that all types of enterprises can participate in fair competition and better protecting the legitimate rights and interests of all economic actors. This is despite the fact that state-owned enterprises (SOEs) play an important role in many industries and are considered bastions of Party rule and the economy, and therefore enjoy special 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 incorporated in China but with partial or full foreign ownership and are considered domestic companies regardless of the percentage of foreign capital.² The products manufactured by FIE are domestic products. Foreign companies, on the other hand, refer to entities registered outside China and may or may not conduct business in China through representative offices, branches or partnerships. Imported products are manufactured outside China and enter the country through international trade and are therefore subject to duties and taxes.

Even though various laws, such as the Foreign Investment Act (2020), mandate equal treatment of FIEs with domestic enterprises, FIEs continue to face formal and informal industry-specific restrictions, while domestic enterprises enjoy greater access to preferential treatment. Foreign companies are even less protected under domestic law than FIEs because equal treatment for FIEs does not extend to foreign companies, making them more vulnerable to regulatory and market challenges.

While the new regulation aims to provide FIEs with a level playing field, treating them in the same way as domestic companies, this equal treatment does not extend to foreign companies operating without a local seat. Even if effectively implemented, the regulation would ideally strengthen the position of FIEs vis-à-vis domestic companies, but it would not address the broader challenges facing foreign companies.

The regulation calls on the State Administration for Market Regulation (SAMR) to improve review standards, define rules of conduct 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 central government departments and ministries must ensure a level playing field for all businesses. Prohibited activities include appointing specific companies to supply goods and services, imposing unreasonable or discriminatory market entry conditions, and unlawfully granting or restricting market access by granting exclusive rights. Effective implementation could reduce the unequal treatment of non-local domestically invested companies and FIEs, which would be welcomed by the international business community, although the main aim is to ensure equal treatment of domestically invested companies regardless of where they are incorporated.
• Free movement of goods and servicess: The regulation aims to ensure the free entry and exit of products and services from the market. It prohibits local governments from establishing local barriers to the flow of goods and services and prohibits discrimination against foreign or imported products. However, while the Regulation expressly prohibits measures restricting foreign enterprises from participating in local government procurement or from submitting bids in a disguised form, it does not expressly extend this prohibition to foreign enterprises, i.e. foreign enterprises.
• Cost of business operations: According to the regulation, policies formulated by government agencies cannot provide selective tax breaks or subsidies without a legal basis or the consent of the State Council. This is to prevent unfair competition conditions based on special policies. This would potentially address the problem of overcapacity among domestic companies by eliminating government subsidies unless permitted by law, leading China to better comply with its WTO obligations. However, it is unclear to what extent SAMR or the central government as a whole can enforce the regulation against local authorities, especially since local governments rely on local businesses for tax revenue and employment, and central authorities require them to develop their own economy in accordance with local conditions. FIEs are also concerned about the potential removal of their investment incentives. Time will tell whether these requirements will have a grandfather effect, affecting the vested interests that FIEs have acquired as governments seek to attract FDI.
• Autonomy in business operations: The regulation protects the autonomy of companies by prohibiting forced monopolistic practices and unlawful interference with regulated prices in the market. It also limits government pricing beyond its legal authority.

While the purpose of the regulation is generally laudable, SAMR’s ability to enforce the regulation on a nationwide basis against local interests is questionable. SAMR resources are limited, and local authorities often succeed in defying central government directives that are contrary to local interests.

The regulation itself allows in particular exceptions for measures having an anti-competitive effect, provided that there is no better alternative and they meet certain criteria. These criteria include protecting national security and development interests, promoting scientific and technological progress to enhance national innovation capacity, and achieving social or public interests such as energy conservation, environmental protection and disaster relief.

However, even if they comply with antitrust laws, these terms are broad and vague, potentially allowing local governments to continue to support 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 about productivity and overproduction.

Nevertheless, the regulation represents a significant step by the Chinese central government to eliminate practices that hinder the functioning of the single market and ensure that all types of businesses can compete on equal terms. By requiring all policies to 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 the freedom to continue supporting local industries based on broad and somewhat vague criteria that may conflict with FIE interests.

As for FIEs themselves, this Regulation introduces both opportunities and challenges. On the one hand, it promises a more transparent and fair business environment, reducing regional protectionism and unfair local conditions. On the other hand, the broad exceptions allowed under the regulation may allow local governments to continue to give preferential treatment to domestic industries while excluding FIEs due to the investment incentives they receive. The impact on FIEs, especially in relation to the potential loss of existing tax benefits and subsidies, will need to be closely monitored during the implementation of the Regulation.