After more than 13 years of discussion and a procession of failed drafts, China has finally enacted a comprehensive competition law that will take effect in August 2008. The question is whether this represents China's continued march toward a modern rules-based society, one that respects equality of participation in a market-focused economy, or merely reinforces state power.
Optimists will say that the development of China's legal system, which now includes a comprehensive property law and a contract code as well as the new antitrust law, is evidence of China's gradual transformation into a market-based economy. The analogue, they maintain, is the transitional process that occurred in eastern Europe after the demise of the Soviet Union. The fact that the Chinese Communist party remains firmly in power, and that state orthodoxy on economic affairs is constitutionally enshrined as the enhancement of the socialist market economy, is seen as a mere fig leaf to hide the embarrassing truth that China's future is really a raw form of capitalism.
Pessimists will argue that the Chinese leadership has no intention of following the fatal trajectory of their former communist brethren in eastern Europe. The leaders have concluded that the Marxist-Leninist economic prescription failed to provide the basic consumer necessities of modern life. Neither did it allow for technological development or the hoarding of foreign exchange. Hence the policy of first allowing overseas Chinese and foreign investors to establish export processing operations in special economic zones and then to enter the domestic market for consumer and capital goods. This culminated in the accession concessions to the World Trade Organisation in 2001 on foreign participation in the domestic economy. China privatised most small-scale state companies in many sectors and allowed the creation of private enterprises. The state largely withdrew from direct provision of housing and limited its commitment to social services in health and education. But as regards capital-intensive strategic industries, the policy was different.
Airlines, banks, gas and electricity supply, metallurgical production, railways, financial services, telecommunications, the petrochemical sector and many others were corporatised in the 1990s, with most listed on the state- owned Shanghai or Shenzhen bourses, or overseas in Hong Kong or New York. But only minority stakes were sold. The state remained the dominant owner of all these industrial sectors. The government wanted the benefits of commercial discipline while retaining control of these pillar industries. The process of restructuring these sectors is now under way. Beijing announced in 2006 that it wanted to create 60 to 80 national champions to take on world-class multinational companies.
Realists or pessimists would contend that the true purpose of the anti- monopoly law is to reassert control over the private sector and enable the government to oversee foreign-invested enterprises as they expand operations in China. One of the voices calling for swift enactment of a new law was the state administration of industry and commerce, which cited growing foreign domination in the supermarket sector among others. These claims are not borne out by the facts.
The provisions of the anti-monopoly law appear to confirm a policy of state protection for public sector monopolies and dominant companies, tacit approval of industrial consolidation and promotion of industry associations to strengthen self-discipline and enhance market order, though – due to a cartel-inspired price rise in the sensitive noodle market – a late amendment strengthened the penalties against price-fixing. Mergers may have to undergo a double examination process; one on competition grounds and a second if they involve foreign capital and raise undefined national security concerns. Industrial policy appears to be at least as important to lawmakers as competition. Abuse of government power to distort competition, a big issue in China, is mentioned but the enforcement powers are very weak.
