Bank Mergers in China: What Role for Competition?

Deborah J. HEALEY; Zhang CHENYING

doi:10.1017/asjcl.2017.2

Bank Mergers in China: What Role for Competition?

Published online by Cambridge University Press: 10 April 2017

Deborah J. HEALEY and

Zhang CHENYING

Show author details

Deborah J. HEALEY: Affiliation:
University of New South Wales, Australia, d.healey@unsw.edu.au
Zhang CHENYING: Affiliation:
Tsinghua University, Beijing, zhang-cy@mail.tsinghua.edu.cn

Article contents

Abstract
COMPETITION LAW AND THE ROLE OF THE MARKET
CHINA’S POLITICAL ECONOMY: A SOCIALIST MARKET ECONOMY
STABILITY AND THE CHINESE FINANCIAL SYSTEM
THE FORM OF THE AML
THE CHINESE BANKING REGULATORY ENVIRONMENT
CONCLUSIONS ON CHINESE BANKING SYSTEM
APPLICATION OF THE AML: CHINESE BANKS AND MARKET DEFINITION
MERGER TEST: THE FACTORS
MOFCOM’S APPROACH TO MERGERS
POTENTIAL IMPLICATIONS OF MOFCOM MERGER ANALYSIS FOR THE CHINESE BANKING SECTOR
CONCLUSION
Footnotes

Rights & Permissions

Abstract

This article examines the likely role of competition in the regulatory analysis of bank mergers in China. Despite financial reforms, the banking sector remains subject to a complex web of financial regulation, with industrial policy favouring stability to facilitate national economic development. While there are currently no Ministry of Commerce (MOFCOM) bank merger determinations under the Anti-Monopoly Law (AML), examples of MOFCOM’s merger analysis in other sensitive industries diverge from a pure competition-based analysis, favouring grounds linked to national economic development broadly within the terms of the AML. Given the importance of banking to the Chinese economy, this article argues that competition is unlikely to play a large part in any assessment of bank mergers by MOFCOM, particularly where a foreign bank is involved. Instead, issues linked to ‘national economic development’ and stability are likely to play the most important role, leading to less predictable merger approval outcomes.

Information

Type: Articles
Information: Asian Journal of Comparative Law , Volume 12 , Issue 1 , July 2017, pp. 81 - 114
DOI: https://doi.org/10.1017/asjcl.2017.2 [Opens in a new window]
Copyright: © National University of Singapore, 2017

I. COMPETITION LAW AND THE ROLE OF THE MARKET

The basic economic rationale for competition law is that competition is the best tool for levelling the playing field to foster market efficiencies, which lead to economic and consumer benefits. There is no exact template worldwide for how a competition law should look, and laws differ as to content, approach to application, and enforcement. The extent to which competition laws apply to the conduct of government, state-owned enterprises (SOEs) and other entities are important threshold questions going to the capacity of an individual jurisdiction’s competition laws to create a level playing field for the free market to operate.Footnote ¹

This issue regarding the scope of application of competition law is a particularly important consideration regarding bank mergers in China, given its socialist market economy and significant government involvement in the ownership and conduct of banks.Footnote ² Most banks in China are SOEs, or owned or controlled at some level of government. The extent to which they are caught by China’s competition law, the Anti-Monopoly Law (AML), is not entirely clear.Footnote ³ Even if one accepts that the AML will apply to SOE banks, the way that the AML merger provisions are drafted includes factors for consideration in a merger context which are not linked to an assessment of the impact of the merger on competition. These issues are important when considering the liberalization of China’s financial system and the entry of foreign banks. Instead of encouraging financial stability through competition, the AML may be the Trojan horse through which the state applies other considerations, such as a protectionist industrial policy or national security, to merger approvals in the Chinese banking sector. In any event, the ambit through which MOFCOM can consider competition issues is further limited by the systemic emphasis on stability in prescriptive and stratified banking regulation, while regulators other than MOFCOM hold decisive roles in merger approval for financial institutions despite lacking an express competition mandate.

China has made remarkable progress with the AML since its commencement in 2008. Nevertheless, a number of issues concerning its application, implementation, and enforcement remain. Some of these issues are outlined in this article.

II. CHINA’S POLITICAL ECONOMY: A SOCIALIST MARKET ECONOMY

The enactment of the AML as the first comprehensive competition law in China in 2008 in the context of its socialist market economy, and the prominence of SOEs generally and in banking, are essential foundations for the questions raised in this article. China has a unique competition law environment as the economic model enshrined in its Constitution is that of a ‘socialist market economy’.Footnote ⁴ This means that competition law does not operate in a true market environment and it appears that it will not do so for the foreseeable future.

Central to the concept of socialist market economy in China is not only the acceptance of major movements to markets, but also an on-going recognition of the substantial role of the state as a policy maker, regulator, price setter and market participant.Footnote ⁵ It is the latter elements which distinguish the socialist market economy from a market economy, and which particularly affect MOFCOM regulatory determinations under the AML, as the state’s industrial policy and enterprises play a significant role in the competitive process and regulatory determinations.

Industrial policy, which promotes development in a particular sector, is a crucial element in the functioning of the socialist market economy. The appropriateness of industrial policy as an effective economic tool is the subject of ongoing international debate, but it has some relevance in most countries.Footnote ⁶ In developing countries such as China, it is employed to improve the efficiency of resource allocation to assist social and economic stability. While industrial policy and competition policy both aim to improve the working of the market and provide economic benefits to consumers, the two are at odds because industrial policy relies on policy makers to adjust the market rather than relying on the market to adjust itself.Footnote ⁷

The importance of industrial policy stems from the value placed upon economic stability and continued economic growth by policy makers in China in order to enhance political stability. For this reason, the banking system is designed and implemented to support these important objectives. In practice, this means that competition generally has a low priority.Footnote ⁸ The government plays a dominant role in industries identified as key to the country’s national security and economic development. This will continue despite the increasing trend to marketization foreshadowed by developments such as the Third Plenum in Beijing in mid-November 2013.Footnote ⁹ The Third Plenum heralded a very significant ideological change in economic approach from the National Peoples Congress (NPC), because it expressly acknowledged the decisive impact of the market in achieving efficient resource allocation and growth, when previously the NPC had merely recognized the usefulness of markets. Such developments reflect the approach to liberalization of markets permitted by industrial policy in China.

III. STABILITY AND THE CHINESE FINANCIAL SYSTEM

While China has shown a clear preference for stability over competition in recent years, there has been considerable debate at the international level as to the role of competition and stability in the regulation of domestic financial systems. Two distinct views have emerged: those who argue that there is a nexus between competition and financial system fragility as competition lowers profits and encourages adverse risk-taking, and those who favour the view that competition leads to stability in financial systems, as market power worsens moral hazard and exacerbates adverse selection problems for financial institutions.Footnote ¹⁰ While a clear causal link between either competition or concentration and stability in a financial system is yet to be shown to exist,Footnote ¹¹ it has been demonstrated that banking systems in countries with less competition between financial institutions are more prone to fragility due to, amongst other factors, public policies that limit competition and high government ownership of banks.Footnote ¹²

Despite these views, which have clear implications for China’s approach to competition in the banking sector, policymakers in the Chinese financial system appear to favour the competition-fragility nexus, fearing the role of ‘disorderly competition’, and thus limiting the role of competition in the banking sector.Footnote ¹³ This is problematic given China’s banking regulatory environment which, despite competitive reforms, has produced a highly stratified, mainly government-owned banking sector with limited forms of competition. This emphasis on stability also influences both the form and enforcement of the AML.

IV. THE FORM OF THE AML

China’s large internal markets and growing foreign investment mean that it is quickly becoming a major global player in competition law. It now has a significant role as an adjudicator of a growing number of international mergers, and MOFCOM is arguably the third most influential competition law regulator after the US and EU, with the ability to significantly impact global merger transactions. Against the background of the socialist market economy, the provisions of the AML reflect the perpetual policy tension in China between reform and stability. While express goals of the AML include the more ‘standard’ competition law objectives, such as fostering efficient and competitive markets which benefit consumers and the economy, the AML objects also espouse active industrial policy considerations, clearly recognising the on-going role of the state in the market.Footnote ¹⁴

A. Competition under the AML

The AML prohibits mergers and acquisitions (‘concentrations’) which are likely to have an anti-competitive impact on the market.Footnote ¹⁵ Since the commencement of the AML in 2008, MOFCOM has issued guidelines to indicate its approach to merger regulation,Footnote ¹⁶ and it has made determinations on more than twelve hundred merger proposals. Most proposals have been cleared, but two proposals have been rejected outright and a relatively small number have been cleared with conditions. The AML requires MOFCOM to issue public written determinations only in circumstances where it refuses clearance or imposes conditions on a merger. This means that only a small number of written determinations are available. Despite this, trends in MOFCOM’s approach to merger analysis can be discerned.

At the time of writing, MOFCOM had not considered any bank mergers in its written determinations. There may have been no bank mergers at all, or none falling within the merger thresholds so there was no requirement to notify.Footnote ¹⁷ Alternatively, parties may have failed to notify, which is quite plausible as many banks are SOEs and there has been a tendency for SOEs not to notify MOFCOM of mergers. This is changing, particularly since penalties apply to failures to notify and are made public.Footnote ¹⁸

B. Industrial Policy and the AML

Globally, competition law regulates mergers and acquisitions based on the assumption that the aggregation of businesses may inhibit competition. In practical terms, if structural reorganization is allowed unchecked, it often makes other forms of prohibited anti-competitive conduct unnecessary. The enactment of the AML raised threshold questions about the way competition law would operate in the context of a socialist market economy and China’s well-developed industrial policy. The current provisions of the AML expose this issue; for example, Article 7 of the AML emphasizes the role of industrial policy.Footnote ¹⁹ If MOFCOM were to depart from industrial policy considerations in merger analysis, then the state could exempt certain sectors from competition assessment by specific laws which take precedence over the AML and which may not contain industry-specific competition provisions.Footnote ²⁰ That these considerations are specifically mandated for inclusion as review factors by MOFCOM reflects the continuing emphasis on industrial policy in merger analysis, and gives MOFCOM considerable discretion as to how it determines individual notifications.

MOFCOM downplays the role of industrial policy in its decision-making generally. One senior MOFCOM official has reportedly stated:

[T]he reason why people see shadows of industrial policies in the remedies imposed by MOFCOM is because remedies which aim to solve competition concerns can ease industrial problems at the same time.Footnote ²¹

Despite comments such as these, published determinations suggest that the industrial policy factors are an important feature of decision-making. In some cases, this triggers analysis rather than allowing national economic development to facilitate parallel outcomes.

C. The Jurisdiction of the AML

The extent to which factors other than the competitive impact of a merger are relevant to merger review are important in any consideration of how mergers are regulated. Issues such as industrial policy objectives and concerns, the impact of efficiencies, foreign ownership rules and political considerations all have the capacity to affect merger analysis.Footnote ²² Particular idiosyncrasies with the potential to affect merger analysis under the AML include:

∙ Low designated turnover thresholds for notification:Footnote ²³ MOFCOM has set relatively low thresholds, which means that a very large number of merger transactions are notifiable, including international mergers where the parties have relatively little business in China.Footnote ²⁴ There is even specific guidance on notifiable thresholds for financial institution mergers.Footnote ²⁵ Once notified, MOFCOM has jurisdiction to determine whether the transaction lessens competition without recourse to any particular set threshold of lessening.Footnote ²⁶ These low filing thresholds mean that filing is necessary for transactions which are unlikely to significantly affect competition in China or which may otherwise have little real relationship with China.Footnote ²⁷ Low thresholds give MOFCOM the opportunity to become involved in a greater number of international mergers that would otherwise not be amenable to review because regulators in other jurisdictions either have higher thresholds for notification, or no obligation to notify based on turnover alone.
∙ Broad application to joint ventures: the AML applies to joint ventures more broadly than in other jurisdictions, as MOFCOM has taken a very broad view of the transactions which may be caught under the definition of ‘concentration’ in respect of joint ventures and their likely impact. MOFCOM appears to believe that minority shareholdings may confer control, particularly where the minority shareholder is the largest shareholder.Footnote ²⁸ This is relevant to joint venture banks, although the impact will depend upon the market definition.Footnote ²⁹
∙ Extraterritorial application: Article 2 of the AML provides a broad, extraterritorial application to the AML as it expressly provides that the law applies to conduct within China and outside China with an anti-competitive effect in China. The AML, for example, has been applied in a merger of two Russian companies located outside China and which would have supplied only 25% of the Chinese market.Footnote ³⁰

These idiosyncrasies of the AML mean that merger adjudication in China may affect a greater range of transactions than would otherwise be expected and may apply to international mergers where there would ordinarily be no requirement for merger clearance. Further, any competition assessment for a merger clearance may rely on industrial policy considerations. When considered in the context of bank mergers, where many large financial institutions have a global presence including some lending in China, the form of the AML provides MOFCOM with broad jurisdiction and oversight of even small bank mergers, combined with an ambit to consider factors beyond competition, such as economic stability and national economic development. These are powers and considerations beyond the scope of competition laws in comparative jurisdictions.

V. THE CHINESE BANKING REGULATORY ENVIRONMENT

The likely approach to merger analysis in the banking industry is informed by the industry itself. China’s banking system has changed dramatically over the last 20 years. Before economic reform, China’s banks were fully government-owned, isolated from the global economy and a key plank of the centrally planned economy.Footnote ³¹ Interest rates were set by the central government, the stock market and bond market did not exist, the RMB was largely unconvertible for current and capital account transactions, and foreign investment was negligible.Footnote ³² Great reform has been achieved since then, as foreign ownership of banks has been permitted, sectoral reforms have introduced competitive tensions, and there is far greater liquidity in the financial system. However, the nature of these reforms has also led to the stratification of banks, their products and their customers by law and regulation, creating a fragmented market. This regulatory framework has produced a more competitive banking sector, albeit with a large number of distinct markets for the purposes of merger assessment.

A. The Reform Agenda

After the 16^th NPC Meeting in 2002, private ownership in the banking sector was actively promoted and foreign banks were allowed to take minority stakes in Chinese banks in preparation for the obligations and international competition of China’s WTO membership.Footnote ³³ These developments have not translated into easy entry for foreign banks, which in most cases have limited avenues of business development or are consigned to minority shareholdings in Chinese banks. Instead, the continuing focus on strategic and stability concerns by the government means that the state has retained substantial control of banks and of money supply, which finances state development priorities.Footnote ³⁴

B. The Regulatory Framework

The banking landscape in China is driven by the key regulators in banking, these being the People’s Bank of China (PBOC), which is the central bank;Footnote ³⁵ the China Banking and Regulatory Commission (CBRC), the prudential supervisor with oversight of foreign and domestic banks; and the Ministry of Finance (MOF), which is the major executive body for government financial policies, managing the finance industry across the economy and guiding entry and operation in Chinese markets.Footnote ³⁶ Each of these regulators operates in a very complex and proscriptive environment, under regulations and directives which set out the way banks are established, controlled and conducted, and the manner in which foreign banks are allowed to enter and operate.Footnote ³⁷

While there are multiple regulators, there are two main banking laws which shape the Chinese banking landscape, namely:

∙ The Banking Supervision Law: Footnote ³⁸ This law established the CBRC and its responsibility for prudential regulation, supervising both domestic and foreign banks.Footnote ³⁹ While the Banking Supervision Law has broad objectives,Footnote ⁴⁰ it also gives a procedural role to the CBRC in bank mergers.Footnote ⁴¹ The Law promotes fair competition and competitiveness in relation to merger approvals; however, these considerations do not appear elsewhere in the Law and it is unclear where they sit in the CBRC decision-making hierarchy.Footnote ⁴² It has been suggested that the CBRC’s actual purpose is to improve the ‘lagging competitiveness’ of Chinese banks and Chinese financial system.Footnote ⁴³
∙ The Law on Commercial Banks: Footnote ⁴⁴ This law applies to domestic and foreign retail banksFootnote ⁴⁵ and sets out detailed requirements for establishing and conducting a commercial bank, which reflects how commercial bank operations are very closely controlled.Footnote ⁴⁶ The law provides that bank mergers and the dissolution of commercial banks are governed by the Company Law and subject to approval by CBRC.Footnote ⁴⁷ The law has broad competition objectives, which state that commercial banks must abide by fair competition and not engage in illegitimate competition.Footnote ⁴⁸ However, industrial policy, which requires banks to conduct business in accordance with the needs of national economic and social development by acting under the guidance of the state, must also be considered by the CBRC.Footnote ⁴⁹ These provisions do not accord priority to either competition or industrial policy in their implementation, and they contain little discussion of how competition might work or the extent to which it should be applied or fostered. Given the importance of banking to the economy, the emphasis on stability and the absence of a hierarchy of considerations, it is likely that industrial policy will prevail over competition considerations in most CBRC decisions.

As such, the banking regulatory framework is shaped by a centrally planned industrial policy, imposed through stringent regulation, which emphasizes stability over competition and disrupts competitive tensions in the market.

C. Regulation of State-Owned Banks

State-owned banks are major competitors in the Chinese banking sector and critical to stability in the Chinese financial system.Footnote ⁵⁰ Traditionally, these banks performed poorly but their performance has greatly improved following bailouts, bad loan carve outs, capital injections, and initial public offerings (IPO).Footnote ⁵¹ These banks have internationalized to divest themselves of non-performing loans, and improved their corporate governance by listing on overseas stock exchanges and taking foreign investment.Footnote ⁵² Their clients are mainly large SOE corporations, with fewer private firms, small and medium enterprises (SME) and retail clients.Footnote ⁵³ When equitized, these banks were given different categories of shareholders; however, despite the injection of private funds the majority of the shares in these banks are held by PBOC, MOF or other government entities. Tradeable shares typically represent only a fraction of their total equity.

Given the prominence of state-owned banks in China, industrial policy clearly takes on a special significance in influencing how competition laws are applied to these entities. There are many examples where SOEs have been fined for breaches of the AML. However, MOFCOM is bound to consider the state’s industrial policy and guidance when assessing competition implications of mergers involving SOEs. In the past, this has led to criticisms that MOFCOM has not enforced merger filing requirements against SOEs. This has changed to some extent, with MOFCOM fining the Chinese state-owned Tsinghua Unigroup and other SOEs after they completed its acquisitions without reporting them.Footnote ⁵⁴ These enforcement actions against SOEs are also perhaps a response to the increased emphasis on resource allocation by markets arising from the Third Plenum, which foreshadowed both further SOE reform and inevitable changes in industrial policy treatment of SOEs.Footnote ⁵⁵ While SOEs have traditionally been a stabilising economic feature, their inefficiency has markedly increased. SOE reform and diversification of ownership should increase efficiency; however, the extent to which this will displace industrial policy considerations in favour of competition is not yet established.

D. Regulation of Foreign Banks

Foreign banks are allowed to enter China in a number of ways,Footnote ⁵⁶ and there are even a limited number of Chinese-foreign joint venture banks.Footnote ⁵⁷ By the end of 2013, foreign banks from fifty-one countries were operating in some way in China.Footnote ⁵⁸ However, there is no level playing field for foreign banks as regulation prohibits them from competing in areas where it is difficult for domestic banks to compete in the short term, or where it is feared that foreign banks may obtain a competitive edge in the long run.Footnote ⁵⁹

Additional regulation applies to foreign banks. While the Law on Commercial Banks applies generally to foreign invested commercial banks (those banks with some degree of foreign ownership), Sino-foreign joint venture commercial banks, and branches of foreign commercial banks, other laws and administrative regulations addressed to foreign banks expressly prevail over the Law on Commercial Banks.Footnote ⁶⁰ In addition, CBRC supervizes and approves all equity investment in Chinese-funded financial institutions,Footnote ⁶¹ applying strict limitations on foreign ownership in these institutions.Footnote ⁶² Historically, these regulations have imposed a high regulatory burden on foreign banks and restricted their freedom to compete alongside wholly Chinese or state owned banks.

This is changing. Less strenuous compliance requirements on market entry for foreign bank ownership were introduced by the Implementation Measures for the Administrative Licensing Items Concerning Foreign-Funded Banks,Footnote ⁶³ which delegated various issues relating to the formation, modification, and termination of a financial institution, the scope of its business and its governance to the CBRC and its local offices. These rules were later replaced by the Implementing Measures of June 2015,Footnote ⁶⁴ which reduced the requirements for establishing a Chinese subsidiary by a foreign funded financial institution, delegated some CBRC responsibilities to local banking regulatory authorities and removed the requirement to establish a 100 million Yuan (US 16 million) branch operations fund.Footnote ⁶⁵ Further revisions in 2014 and 2015 meant that licensing conditions for foreign funded banks have become more akin to those which apply to Chinese-funded banks. The main changes following amendments to the Equity Investment Measures and the Implementation Measures include reductions in the scope of administrative licensing, and the unification of market entry criteria for different types of banks. Areas traditionally subject to strict administrative licensing have also been relaxed.Footnote ⁶⁶ The Measures, however, have some added requirements for the establishment of IT structures, refinement of managerial tasks and prudential requirements.Footnote ⁶⁷

These changes, which ease the entry requirements for foreign financial institutions into China, complement the lower regulatory burden that has been historically applied with respect to foreign entry into county banks. The regulatory requirements for foreign entry into county banks, particularly those in less developed rural areas where county banks provide financial support for farmers and promote economic development in rural areas, have long allowed foreign banks to set up or acquire local banks with greater ease. The CBRC has had a pegging policy facilitating foreign banks’ establishment of county banks in more developed areas if they had previously established a county bank in a key impoverished county.Footnote ⁶⁸

Combined with detailed proposals on changes to banking regulations, foreshadowed at the Third PlenumFootnote ⁶⁹ and which are starting to occur,Footnote ⁷⁰ the reform of these regulations creates opportunities for foreign banks to play a more meaningful role in the financial system and engenders further competition. As steps towards internationalization of the currency are taken, the easing of the regulatory burden on foreign banks should contribute to greater competition in the financial sector as the disparate regulatory burden on foreign and domestic banks is eased.

E. Shanghai Free Trade Zone

As part of the continued opening up of the Chinese economy, the State Council passed the Framework Plan for China (Shanghai) Pilot Free Trade Zone (SFTZ) in July 2013.Footnote ⁷¹ The Framework Plan outlined the expansion of the SFTZ to many areas of trade and professional services, including investment and financial services. By the end of 2013, twenty-two banking institutions had been approved to establish twenty-five outlets in SFTZ, including twelve sub-branches of foreign banks.Footnote ⁷²

While the general objectives of the SFTZ include encouraging the establishment of foreign banks and easing restrictions on foreign investment,Footnote ⁷³ there are three main regulatory innovations in the SFTZ. The first is the establishment of a ‘negative list’ administrative mode for foreign investment. Under a principle of consistent policies for foreign-funded and domestic enterprises, fields outside an eighteen-industry negative list are subject to a filing system and not an approval system.Footnote ⁷⁴ Second, certain excluded investment areas such as national security, public safety and areas detrimental to social and public interest remain.Footnote ⁷⁵ Finally, mergers and acquisitions by foreign investors, strategic investment by foreign investors in listed companies, and capital contribution by offshore investors with their holdings of equities in enterprises in mainland China are allowed, subject only to the usual national security considerations and a streamlined anti-monopoly review.Footnote ⁷⁶ The creation of the SFTZ and other free trade zones of a similar nature, at this initial stage, has eased entry requirements for foreign banks and spurred greater competition in the Chinese financial system.

F. Shadow Banking

Shadow banking, or credit intermediation outside the official banking system, is an extremely large and important element of the Chinese financial system. It operates quite differently from the way it operates in developed economies,Footnote ⁷⁷ with a diverse range of players, legitimate and otherwise, offering credit through a range of different vehicles.Footnote ⁷⁸ It is an important feature of any consideration of banking markets. There are estimates that it currently finances ‘almost half of new credit.’Footnote ⁷⁹ It exists primarily due to the tendency of traditional banks to favour SOEs rather than small business and others in the allocation of loans, the general tightening of credit following the global financial crisis of 2008,Footnote ⁸⁰ and low interest rates available to bank depositors generally, which encourages them to invest in more risky ventures to maximize returns on invested funds.Footnote ⁸¹ China’s large commercial banks participate, circumventing strict regulations on bank lending, as shadow banks are not subject to rules on capital and liquidity.Footnote ⁸² SOEs can make great profits from shadow banking, with their position enabling them to borrow from the formal banking sector at lower interest rates and lend at higher rates.Footnote ⁸³ There are other, alternative forms of shadow banking emerging, facilitating market entry by smaller players.Footnote ⁸⁴

The most authoritative government document on shadow banking, the Circular of the General Office of the State Council on Relevant Issues of Strengthening the Regulation of Shadow Banking,Footnote ⁸⁵ (Circular 107) categorizes shadow banking into three main groups:

∙ Operations without a licence and subject to no regulations, such as internet finance, P2P lending and underground banks;
∙ Operations without a licence but subject to some regulation, such as guarantee companies, pawn shops and small lenders;
∙ Unregulated operations of traditional banks such as most wealth management products, which offer small investors greater yields.Footnote ⁸⁶

On the positive side, shadow banking offers different products and services unavailable to users elsewhere due to strict banking regulations and the practices of major banks, thus stimulating innovation in financial products from more traditional lenders. Real concerns exist, however, particularly about the flow of bank money into loans in this market. The involvement of local and central government and SOEs in the shadow banking system suggests implicit guarantees and may encourage investors to take part in the shadow banking system and overlook the material risks. Comprehensive regulation of shadow banking would encourage financial stability and sustainable growth, and protect investors. The CBRC recognizes the tension between prudential regulation of shadow banking for stability and the benefits of competition which shadow banking generates. The CBRC has taken steps to regulate the area, but no one regulation can control all aspects, as shadow banking operates through diverse entities, products and distribution channels which require different regulatory authorities and methods.Footnote ⁸⁷

However, between 2010 and 2013, the government acted to regulate and curtail shadow banking by restricting the off-balance activities of commercial banks and placing limits on both the balance between wealth management and other bank business and the links between wealth management business and other assets. In May 2014, the PBOC, CBRC, CSRC, and the State Administration of Foreign Exchange (SAFE) jointly issued a NoticeFootnote ⁸⁸ aimed at controlling ‘…the risk of inter-bank borrowing, inter-bank deposit, inter-bank payment and repurchase dealing.’Footnote ⁸⁹ It forbade ‘financial institutions to move repurchase dealings off balance sheet’, and prevented third parties from guaranteeing investment between financial institutions.Footnote ⁹⁰ It was expected to greatly restrict parts of shadow banking.Footnote ⁹¹ As noted previously, the most important document to date regulating shadow banking has been Circular 107,Footnote ⁹² which established for the first time a framework for the regulation of aspects of shadow banking in the context of the existing current regulation of banking, insurance and securities by their individual regulators: CBRC, China Insurance Regulatory Commission (CIRC), and CSRC. It requires shadow banking entities under the control of each of these individual regulators to establish proper internal mechanisms for control, risk management and risk segregation. It also requires the functional separation of wealth management products from other businesses, and in some cases imposed additional requirements.Footnote ⁹³ Circular 107 has been described as ‘… a good effort to correct all three fundamental types of market failure, namely information failure, agency failure and responsibility failure… [and] covers significant components of China’s shadow banking….’Footnote ⁹⁴ It is, however, a policy document which is couched in general terms, and leaves agencies to make specific implementing rules which will be crucial to the success of the regulatory scheme.Footnote ⁹⁵

The existence and significant role of shadow banking must be factored into market definition and any competition analysis of bank mergers in China, despite regulatory uncertainty regarding the sector’s legality. In summary, shadow banking creates risks for the finance industry and the economy generally because it is not comprehensively regulated, but it also offers innovative products and services unavailable elsewhere to its users, providing substantial competition to the traditional banking sector.

G. Further Reform of the Chinese Financial System

Financial system reform in China is ongoing, and despite the Third Plenum’s commitment to increased marketization, full details of the way forward and timing remain unclear. However, it is expected that stability and industrial policy will form the cornerstone of the system, with competition being a subsidiary concern. Despite these policy uncertainties, the government has implemented important reforms through, for example, the introduction of a new deposit insurance scheme.Footnote ⁹⁶ This is a further step towards marketization since it reduces the impact of the implied guarantee of SOE banks, and arguably moves the banking system towards interest rate liberalization, a crucial step in further financial reform.

Despite the continued ‘...tight internal financial regulation, strong controls on portfolio capital flows and a steadily appreciating currency’,Footnote ⁹⁷ recent regulatory changes have strengthened the system, particularly through the establishment of the CBRC and its strong policy framework. Interest rates and exchange rates are more flexible and the emphasis of monetary policy has shifted. The PBOC still gives ‘window guidance’, guiding individual banks on the extension of credit to priority sectors, but it has phased out mandatory credit ceilings and restrictions on capital flows. While portfolio flow control remains heavy-handed, efforts towards internationalization of China’s currency have led to ‘growth in offshore RMB deposits and ... an increase in avenues for cross-border flows.’Footnote ⁹⁸ These changes, amidst other reforms, have facilitated greater competition between foreign and domestic banks.

Nonetheless, key structural reforms to facilitate greater competition in the financial sector are still required. These challenges were discussed in a comprehensive report issued by the World Bank and the Development Research Centre of the State Council of the PRC in 2013. The Report charted principles for China’s on-going growth and development and concluded that a redefinition of the role of government in the market would be essential to China’s progress. It recommended reforming and restructuring state enterprises and banks, developing the private sector, promoting competition, and deepening reforms in markets including financial markets. Unsurprisingly, the banking sector was identified as crucial to China’s development,Footnote ⁹⁹ with the Report recommending further liberalization.Footnote ¹⁰⁰ The Report noted that despite substantial progress in China’s reform and deepening of the financial sector over the last 30 years, key structural imbalances such as the dominance of state owned banks, strong state intervention, and controls on interest rates still existed. The Report foreshadowed that the benefits of the existing system would likely be outweighed in the future by costs,Footnote ¹⁰¹ that the system would pose significant financial risks, and that going forward it would prevent the financial system from serving an economy driven by the private sector. It noted that global Chinese enterprises would benefit from a domestic financial sector having seamless integration with foreign financial institutions and global capital markets.Footnote ¹⁰² The Report proposed comprehensive financial sector reforms, but strongly emphasized the need for:

[C]areful monitoring of the progress of liberalization … to ensure that banks do not indulge in destabilizing competition that erodes margins or in reckless lending that harms the quality of the loan portfolio, and that any emerging risk of distress is dealt with swiftly.Footnote ¹⁰³

The reforms proposed by the World Bank Report would impact both the nature of lending and the role of SOE banks.

More recent reform initiatives appear to parallel some of the Report’s ideas, although there still is no universal acceptance of competition amongst Chinese decision-makers. The CBRC Chairman in the 2013 Annual Report flagged reforms to improve ‘…coverage, differentiation and efficiency’ of banking institutions emphasising ‘differentiated competition and specialized services’, talking of the ‘risks brought by homogenous competition.’Footnote ¹⁰⁴ This suggests a real recognition of the value of competition to the banking sector and the objective of assisting its development. However, the Chairman also emphasized the ‘…momentum of robust growth and orderly competition’Footnote ¹⁰⁵ to be contrasted with ‘blind expansion and disorderly competition.’Footnote ¹⁰⁶ These latter descriptions of competition accord with the socialist market competition view of managed competition, rather than true market led competition.Footnote ¹⁰⁷

VI. CONCLUSIONS ON CHINESE BANKING SYSTEM

In summary, while there has been significant reform of the Chinese financial system, interest rates are still set by the PBOC, and the state continues to influence the allocation of capital, with the majority of legitimate funds still funding SOEs. The PBOC frequently adjusts the required rate of return (RRR) for commercial banks, with the ratio exceeding 20% in mid-2011. The authorities maintain strict capital account controls, especially over portfolio investment, debt financing and foreign direct investment (FDI).Footnote ¹⁰⁸ While there is some competition between banks, detailed regulation on the functions of particular categories of banks means that competition tends to be between those performing similar functions. This contributes to the stratification of banks in China into three tiers – the big four SOE banks, the joint stock commercial banks, and the city commercial banks, rural commercial banks, rural co-operative banks, postal savings banks, and foreign banks.Footnote ¹⁰⁹ While the rigid nature of banking regulation creates a very stable system, more conduct is driven into the shadow banking system. Shadow banking clearly provides competitive tension for some categories of borrowers and lenders, but there is little discussion of its impact in formal documents about banking.

Existing regulation has limited the ability of foreign banks to innovate and fully leverage the inherent advantages they hold in operating in complex financial markets.Footnote ¹¹⁰ While more recent actions have been described as indicating a ‘tangible commitment to change’,Footnote ¹¹¹ the CBRC continues to address problems relating to efficient and quality financial support for rural and agricultural industries by adopting different regulatory policies and initiatives,Footnote ¹¹² while also encouraging large and medium sized banks to set up special SME units to serve SMEs at a grassroots level and expand institutional coverage through private banks to diversify and assist SMEs.Footnote ¹¹³

In summary, Chinese banking regulation is primarily driven by the interests of the government. This involves pursuing economic and political stability, concurrently protecting banks and using them to serve its interests. The government will not allow banks to fail, given the likely disruptive social and economic consequences. The government allows foreign competition to serve those ends. When necessary, banks are directed against their own commercial interests to serve the objects of government policy. While banking regulation may contain provisions noting the role of competition, based on interpretation of regulations, it is clearly of less relevance to policy makers than stability and national economic development. The laws and regulations make market entry for new and foreign banks difficult and impede innovation and competition between banks at all levels. This is, to a great extent, by design as part of the socialist market economy matrix, but as the World Bank has noted, it may not assist China in the long run to provide its citizens with economic and social development. While some initiatives are aimed at opening up parts of the financial economy, there is still a very long way to go. At the same time, stability is threatened by the unregulated shadow banking system, which has some advantages in competitive terms but encourages risky financial activities, including by SOEs, local and central governments.

VII. APPLICATION OF THE AML: CHINESE BANKS AND MARKET DEFINITION

The value of competition law in merger analysis depends upon the accuracy of market definition in the context under examination. MOFCOM adopts the relatively standard approach of considering substitutable products or services when approaching the analysis.Footnote ¹¹⁴ However, the market definition by MOFCOM focuses primarily on product and geographic market definition and less on the functional market, ignoring the stratification brought about by banking regulation.Footnote ¹¹⁵ Earlier determinations of MOFCOM focused mainly on the overlap between the products of the merging parties, but a more sophisticated and transparent approach has been developed more recently.

Nonetheless, MOFCOM market determinations continue to adopt the geographic market definition as the default position of China in all conditional determinations and rejections considered to date. China is a huge country and it seems unrealistic to assume that there will not be mergers of companies that have a more limited impact in relation to particular products or services, particularly in the banking sector where, for example, regulation drives foreign investment in county banks and particular rural areas.

The highlighted features of AML market definition hold particular implications for mergers involving banks outside the big four SOE banks. MOFCOM’s tendency to define markets and products broadly means that it is less likely to find anti-competitive impact in bank mergers outside the big four SOE banks,Footnote ¹¹⁶ given their very large market shares and operations throughout the whole of the country. Unless two of the big four SOE banks were merging, given the broad market definition, it is unlikely that there would be a problem. However, given the nature of banking in China, it is clear that narrower markets may in many cases deliver a more accurate picture of the state of competition and the impact of a particular merger for the purposes of merger analysis.

Whether MOFCOM will narrow its approach to the market definition to take account of more local lending patterns or define a narrower market for more innovative products when dealing with, say, a commercial city bank merger, is unclear. This is a particular concern given that the emphasis in the banking regulation on stratification means that competitiveness within product markets is going to be vital in determining the outcome of a merger. Given that the impact of such a bank merger may be significant to a more local SME or consumer loans market, where the big four SOE banks do not participate, this is an important issue. The market definition must also recognize the impact of the substantial financial regulation as a barrier to entry and competition. Finally, to accurately assess mergers, the market definition must also factor in the important role of shadow banking in the finance landscape, and its role in stimulating competition in financial products and services. Without considering these significant factors, it will be impossible for MOFCOM to create a true picture of the workings of financial markets.

VIII. MERGER TEST: THE FACTORS

China prohibits mergers that eliminate or restrict competition. However, the AML does not require the elimination or restriction to be ‘substantial’, and in fact, it sets no threshold for application of the provision. This, in practical terms, means that any level of restriction on competition may be relevant and it provides MOFCOM with considerable discretion for intervening in many merger transactions.Footnote ¹¹⁷

In reviewing a merger, MOFCOM considers a range of competition factors that reflect features of standard merger clearance practice in established jurisdictions.Footnote ¹¹⁸ Some factors raise issues not strictly linked to competition, such as the effect of the merger on national economic development.Footnote ¹¹⁹ If the merger will or may eliminate or restrict competition, under the AML, MOFCOM must prohibit it, and give reasons. However, if the parties can prove that the advantages of the merger exceed the disadvantages, or that the concentration is in harmony with the public interest, the merger must be allowed.Footnote ¹²⁰ There is no indication of what will constitute ‘advantages’ and ‘disadvantages’, whether they are tied to competition, or have a wider focus. Further, there is no indication of the size or weightage of relevant advantages or disadvantages, for example, whether they need to be significant or substantial, to counteract the lessening of competition. There is no indication in the relatively small number of written determinations of MOFCOM to date, for example, of what ‘advantages’ might be, or what might constitute relevant ‘public benefit’ in the clearance process.Footnote ¹²¹ At the same time in China, Article 5 of the AML is an overarching provision providing that:

[U]ndertakings may concentrate when such an action is in accordance with the law and adheres to fair competition and is a voluntary union that expands the scale of operation and improves market competition.

This general qualification for concentrations ‘in accordance with the law’ appears to mean law other than the AML. The AML separately considers concentrations which improve competition by improving scale despite these mergers being unlikely to offend Article 28, which suggests that Article 5 serves some other purpose. The addition of the words ‘adheres to fair competition’ introduces the concept of competitive ‘fairness’, which has been a feature of prior Chinese regulation,Footnote ¹²² but is not focused strictly on the economic aspects of regulation. Government-mandated industry restructuring plans in China do not mention the AML and while MOFCOM has stated that the usual notification procedures should apply in circumstances involving SOEs, SOEs often do not notify. Instead, some SOEs argue that their mergers are approved by government and do not need MOFCOM approval. While MOFCOM has emphasized that SOEs do need to notify,Footnote ¹²³ the issue of whether state-endorsed industry reorganization achieved under legislation will be excluded from the AML is still unclear. Given that specific laws may override the AML,Footnote ¹²⁴ the state could avoid AML merger clearance review in the event of a contentious state-supported consolidation, including in the banking sector.

A further layer of administrative discretion in mergers is the national security review under the AML, which requires filing when a domestic business is acquired by a foreign entity.Footnote ¹²⁵ While banking is not prescribed for national security review, it is possible that this could change. Review is by an interagency panel looking at the impact of the transaction on national defence, including relevant products and services; stable operation of the national economy; basic social order; and research and development capacity for key technologies having a bearing on national security.Footnote ¹²⁶ In other jurisdictions, this process is often contained in other laws and is separate from, but parallel to, competition law adjudication. Additionally, in China as a matter of course, other government ministries sign off on merger approvals and can influence conditions and concessions of merger parties, some of which have little to do with competitive effects.Footnote ¹²⁷

IX. MOFCOM’S APPROACH TO MERGERS

While there has not yet been any written determination relating to bank mergers released by MOFCOM, a number of issues arise from the conditional decisions and refusals which are likely to be relevant to bank mergers in China. This part draws some conclusions from those written determinations. It is worth noting at the outset that there are two particular categories of mergers, which the written determinations of MOFCOM touch on in a particular manner.

The first is foreign mergers. Although most mergers involving foreign companies have been allowed without intervention, all of the conditional mergers and the two refusals have involved foreign companies.Footnote ¹²⁸ This has significant implications for foreign banks involved in a merger clearance, with a seemingly increased likelihood that conditions would be imposed or the merger opposed. A possible cause of this preference to impose conditions on foreign mergers is that the state already has a great deal of control over the domestic sectors of the economy which it regards as priority, so there is little need to impose further controls in those sectors under the AML merger provisions. Another possible cause might be that because scope is an issue in China generally, including for Chinese private companies, there is less need to notify or review wholly Chinese mergers, given that few mergers occur between Chinese private companies which would actually satisfy the merger thresholds.Footnote ¹²⁹ The second category is SOE mergers. It is worth noting that only one of the MOFCOM determinations imposing conditions has involved an SOE,Footnote ¹³⁰ even in the context of regulations providing penalties for non-notification.Footnote ¹³¹ It appears, however, that many transactions involving domestic corporations including SOEs are still not notified. This raises two issues in relation to SOEs: that the relationship internally between the regulation of SOEs and the AML itself has not been completely resolved, and that the objectives of the socialist market economy have a significant impact in the context of AML implementation.Footnote ¹³² There has also traditionally been a gap in notification compliance between international and domestic filings, but this appears to have closed slightly following fines imposed for non-filing and the later so-called ‘Naming and Shaming’ initiative of MOFCOM.Footnote ¹³³ However, while MOFCOM records since January 2014 show that domestic to domestic notifications have risen, they are still ‘limited compared to notifications involving one foreign party’, casting doubt on ‘whether reporting such transactions is routine practice in China’.Footnote ¹³⁴

Reviewing written decisions to date, it is clear that aside from the broad objectives of the AML and some of the unusual factors listed there in, MOFCOM uses relatively standard methods and techniques in its competition assessment. However, MOFCOM appears to have disallowed or allowed with conditions a small but significant number of mergers by focusing particularly on the impact of the merger on national economic development, consumers, and local competitor firms, with emphasis on protecting market revenues for local competitor firms. Arguably, these determinations do not merely assess the impact of the merger on competition in the market,Footnote ¹³⁵ but go further and consider the impact of the merger ‘on China’. In fact, some written determinations appear to look only at the impact ‘on China’. Clearly, the two considerations are not always the same. The view appears to be that a merger should not be allowed ‘if China is worse off’, showing a clear preference for stability over disruption. This trend can be seen in a number of the refusals and conditional mergers, but it is impossible to know the extent to which this approach has been applied in those mergers which have been allowed and which are not subjects of written decisions. These different views on the impact of a merger ‘on China’ influence the outcomes and inform the nature of conditions imposed to allow mergers to proceed.

These subtle distinctions in consideration as to the nature of the impact of the merger ‘on China’ are seen in a number of MOFCOM merger determinations. An example being the first MOFCOM-opposed merger under the AML, the proposed Coca-Cola and Huiyuan Juice merger, where MOFCOM opposition was based on the potential of the merger to leverage power from one beverage market to a second fruit juice market.Footnote ¹³⁶ MOFCOM opposed the merger due to the reduction in the chances of survival of mid and small-sized fruit juice enterprises, limitations on the ability of domestic enterprises to compete, and the harm to sustainable and sound development of the fruit juice industry in China. The decision was widely criticized as being based on the unpopular portfolio market effect theory and incorporating industrial policy considerations (‘development of the national economy’), although the latter is a legitimate consideration under the AML.Footnote ¹³⁷ Arguably, however, the decision was primarily focused on the potential impact of the merger ‘on China’, due to the focus on national economic development, individual classes of competitors, and consumers.

The second MOFCOM merger refusal—the June 2014 prohibition of the establishment of a network centre between the world’s three largest container shipping companies (the P3 shipping merger)Footnote ¹³⁸ —illustrates the emphasis in consideration as to the market impacts ‘on China’, even in the context of joint ventures. In this clearance review, MOFCOM opposed the joint venture on the basis that it was a ‘close joint operation’ which would have the effect of eliminating or restricting competition in the market for international scheduled container shipping services across the Asia-Europe shipping route.Footnote ¹³⁹ The joint venture was not treated as a merger in other jurisdictions, which cleared it.Footnote ¹⁴⁰ As China is a major exporter and importer, shipping operations are vital to the Chinese economy. MOFCOM’s blocking of the merger reflects its broad jurisdiction, and its focus on the impact of the merger ‘on China’ suggests that issues of stability of the supply of shipping services and national economic development were again at play.Footnote ¹⁴¹

A further example of a decision which focused primarily on the impact of the merger ‘on China’ was the merger between Japanese trading house Marubeni and US grain merchant Gavilon, where conditions were imposed post-acquisition which involved keeping businesses strictly separate through subsidiaries.Footnote ¹⁴² Despite the very low market share of the merged entity – less than 20% – MOFCOM imposed conditions to protect China’s soybean crushers, which were mainly small enterprises with weak bargaining power. The conditions required the merged entity to operate two China soybean import and distribution businesses through subsidiaries of the merging parties, separate and independent in all respects, including keeping assets, information exchanges and business deals at arms’ length, for at least 24 months. The focus of the conditions was on maintaining the status quo for Chinese soybean purchasers, in the context of China’s concern for food security in a staple food product, of utmost importance to the national interest.Footnote ¹⁴³ Again, this reflects MOFCOM considering the impact of a transaction ‘on China’ by imposing a particular focus on stability in clearing a merger.

MOFCOM’s consideration of the impact of merger clearance ‘on China’ often leads to closer consideration of mergers which affect important wholesale supply side inputs despite low market shares. This is seen in the conditions which have been applied in mergers between potash suppliers, Uralkali and Silvinit, and minerals companies Glencore and Xstrata. In relation to the potash merger, a significant supply side input in China as the product is used in agricultural fertilizer, MOFCOM maintained the status quo for an indeterminate period, providing stability in the market.Footnote ¹⁴⁴ The potash market was subject to a well-known cartel, and as a matter of record, demand worldwide exceeds supply.Footnote ¹⁴⁵ This contributed to MOFCOM’s intervention in the market, despite the low market shares (a mere 25% of the total Chinese market) of the merger parties.Footnote ¹⁴⁶ It appears from the decision that ensuring continuing supply of a product on the current reasonable terms for an indeterminate period was crucial to the MOFCOM decision, while issues of food safety and security were also relevant.

Consideration of the impact of changes in supply side inputs ‘on China’ was also present in the review of the merger between Glencore and Xstrata. MOFCOM found that the merger was likely to have the effect of limiting or restricting competition, despite low market shares, in the markets for copper (9.3% market share of merged entity), zinc (17.9%) and lead concentrate (7.6%). MOFCOM imposed sweeping structural and behavioural conditions on the transaction,Footnote ¹⁴⁷ despite the merger being cleared in AustraliaFootnote ¹⁴⁸ and in the US without conditions,Footnote ¹⁴⁹ while only conditions on zinc were imposed in the EU.Footnote ¹⁵⁰ The outcome is notable for the finding of anti-competitive impact leading to sweeping conditions despite market shares being very low, a further example of MOFCOM ensuring stability by providing continuing certainty of supply of an important commodity on reasonable terms to the Chinese market.

It is worth noting that MOFCOM will also take a particular interest in mergers that involve consolidation in strategically important industries to the Chinese socialist market economy. This is particularly relevant in relation to bank mergers given the strategic importance of the financial system. MOFCOM written determinations have been issued particularly in relation to strategically significant mergers in high technology industries, where China has a competitive advantage in manufacturing, examples being the determinations issued in relation to the mergers of Google and Motorola, and Samsung and Seagate.

In relation to the merger of Google and Motorola, concerns were raised in relation to the smart mobile market as Google made smart terminal operating systems (Android) and Motorola Mobility made smart mobile terminals. MOFCOM found that the market for smart terminal operating systems was concentrated,Footnote ¹⁵¹ with Android having a dominant position in the market because smart mobile terminals were heavily reliant on smart operating systems and with Google holding a very strong financial position and technical development capabilities. MOFCOM expected that this strong market position, achieved mainly on a free and open source model, would be maintained over a long period. Switching costs were high and any change to the model would adversely affect downstream parties. MOFCOM feared that post acquisition Google would have incentive to favour its subsidiary in future product trials, affecting competition. MOFCOM thus required the five-year licensing of Android on a free and open source basis to other equipment manufacturers, with all original equipment manufacturers to be treated on a non-discriminatory basis, and compliance with Motorola’s existing obligations to licence its patents on fair, reasonable, and non-discriminatory (FRAND) terms. The key distinction between the approaches of MOFCOM and other regulators was the characterization of Google’s incentive to maintain supply of Android on fair terms to third party equipment manufacturers. For example, the US, the EU and Australian regulators relied on Google’s representations that it would allow on-going FRAND use of its standard essential patents by competitors.Footnote ¹⁵² Technology markets are a sensitive area under industrial policy and China is a major player in mobile phones, so it is likely that national economic development, industrial policy, and considerations of economic stability play a significant role in the conditions.Footnote ¹⁵³

With regard to the Seagate and Samsung merger, MOFCOM was the only regulator globally to find anti-competitive impact and impose conditions.Footnote ¹⁵⁴ MOFCOM found that the merger would negatively affect consumers in China by removing an important competitor from the market, undermining the competitive effect of purchasing patterns and increasing the possibility of co-ordinated effects. MOFCOM imposed behavioural conditions requiring Seagate to keep the Samsung business independent for at least a year. Seagate also agreed to expand Samsung production capacity within six months; to maintain normal research and development investments (at USD 800 million annually for the following three years); and not to force any exclusive arrangements upon its customers or suppliers. These substantial conditions significantly affected the ability of the merging companies to take advantage of anticipated efficiencies. Once again, the merger took place in a sensitive industry with conditions aimed at keeping the market in its current form to improve the position of business and consumers.Footnote ¹⁵⁵ These mergers were in important technology markets, which again suggests that industrial policy issues were at play, with significant implications for the Chinese banking sector given the rise of e-commerce and growth of ‘fintech’.Footnote ¹⁵⁶

MOFCOM’s determinations have also imposed conditions in relation to mergers which impact distribution and pricing of consumer products, reflecting MOFCOM’s focus on stability for all participants in the Chinese economy. A merger which affected the distribution of consumer products was that between Walmart and Newheight Holdings. Newheight Holdings was the owner of Yihaodian, the largest online supermarket in China which also provides value-added telecommunications services by offering online trading platforms to other online retailers. MOFCOM was concerned that Walmart would leverage its competitive advantages in the bricks and mortar supermarket business into the online retail business, materially strengthening its market power in the online sector. It was also concerned that the merged entity would rapidly expand its business in the value-added telecommunications business, which would materially strengthen its market power against network platform users there. MOFCOM allowed the merger on condition that the Newheight’s business was conducted through the Yihaodian website alone. In addition, Newheight was not to use its network platform to provide internet services to other transaction parties for value-added telecommunications services without obtaining approval. Walmart was also prohibited from using a variable interest structure to carry out value-added telecommunications business through Yihaodian. Following the merger, these conditions ring-fence the business of Yihaodian from that of Walmart for an unlimited time. This is another example of a merger involving key technology in a sensitive industry where MOFCOM had sought to maintain stability, suggesting that industrial policy considerations were again involved in merger clearance.

Finally, a merger that indicates MOFCOM’s willingness to ensure stability in consumer prices is the one between Thermo Fisher Scientific Inc and Life Technologies Corporation.Footnote ¹⁵⁷ In that matter, MOFCOM was in general consensus with other regulators but imposed additional conditions relating to on-going supply and pricing. The US, the EU, China, and Australia all approved the merger subject to the divestment of businesses relating to gene modulation (particularly siRNA reagents), cell culture and cell media businesses in similar terms.Footnote ¹⁵⁸ Most agencies based their decisions on the high concentrations post-merger, which would have provided the merged parties with the ability to raise prices, especially given the high barriers to entry. MOFCOM carefully considered the impact of the merger on a larger number of potential markets in China using concentration analysis and price increase forecasts, but in contrast to other regulators imposed additional and onerous conditions on markets for SSP kits and SDS-PAGE protein standards.Footnote ¹⁵⁹ This shows that not only will MOFCOM turn to considerations of national economic development in reaching a conclusion on merger analysis, but stability of all participants in the Chinese economy, including consumers, will be an important element in their decision-making.

From the foregoing assessment, a number of trends in MOFCOM’s merger analysis become apparent. For instance, while MOFCOM uses the standard economic analytical tools, the context and form of the AML result in a practical focus on the impact of the merger on China, particularly in sensitive industries, in a relatively small but significant number of determinations. MOFCOM’s analysis in these examples goes far beyond consideration of the impact of the merger on competition in a market in China. Importantly, in a number of the examples, MOFCOM intervened where market shares were low, or where incremental shareholdings were slight. In these examples, findings that competition were lessened by the acquisition were unconvincing in themselves and appeared to provide a platform for market reorganization or restructuring which appeared to be out of proportion to the impact of the transaction itself. MOFCOM has also taken the opportunity to maintain the existing market structure post-merger or refashion the market to the benefit of Chinese business or consumers, even as to price. This is particularly pronounced in sensitive markets for natural resources, food products and technology.Footnote ¹⁶⁰

These interventions are arguably examples of the exercise of market control by a regulator accustomed to operating in a command economy. The conditions imposed have been quite sweeping and they are unlike conditions imposed in most other jurisdictions. They also reflect the ability of MOFCOM to assess the impact of a transaction on the national economy under the merger review factors in the AML. MOFCOM is more ready to accept behavioural conditions to resolve problematic mergers, which may be a result of the socialist market economy context, showing a greater readiness to control or guide the market following a merger. These behavioural undertakings often maintain the status quo of existing supply or licensing arrangements, and contain ‘hold separate’ obligations, some for indeterminate periods, which arguably dilutes the efficiency benefits of the transactions. Still, in other cases, operational parts of the combined businesses were effectively ring-fenced or had pricing imposed. Such an approach to merger analysis has significant implications when considered in the context of the Chinese banking sector.

X. POTENTIAL IMPLICATIONS OF MOFCOM MERGER ANALYSIS FOR THE CHINESE BANKING SECTOR

In the context of a merger in the Chinese banking sector, it would appear that – based on the foregoing arguments and given the sensitivity of the banking industry – competition is unlikely to play a large part in any assessment of a bank merger by MOFCOM. Instead, considerations of national economic development and economic stability are likely to play the most important role, which in turn leads to some unpredictability in the outcomes relating to banking mergers. This has significant complications for practitioners seeking merger clearance, with outcomes likely to encompass a range of matters not related to competition. These issues would be particularly problematic in a banking merger, given the emphasis of banking regulation on stability. This regulatory emphasis on stability comes at a time when the place of stability in financial services regulation is in doubt in other contexts, with competition law apparently eclipsing banking regulation in other financial systems.Footnote ¹⁶¹

However, the approval of a bank merger in China is complicated by the fact that the legislative hierarchy between the AML and MOFCOM, and other banking laws or regulations, or other regulators such as the CBRC, is unclear. On the wording of the AML, and given the place of competition in the political agenda and MOFCOM in the political hierarchy, it is likely that other regulators will have priority over MOFCOM. The AML does have specific provisions on administrative monopoly, considering the anti-competitive impact of regulations and regulators. However, other financial regulators generally lack a competition mandate rendering this important consideration lost in favour of stability mandates. While MOFCOM would consider a bank merger in the usual manner, past surveys of banking industry participants have indicated that no merger would proceed without CBRC approval and that the CBRC would be the pre-eminent regulator in a bank merger situation, particularly in circumstances of financial crisis.Footnote ¹⁶²

Furthermore, the stratified banking sector arising as a result of the complex web of banking regulation, combined with the low notification thresholds, mean that mergers between a domestic bank and a foreign bank may require notification even in circumstances where it is unlikely to result in anti-competitive impact. Once MOFCOM is seized with jurisdiction in these circumstances, competition issues alone are not likely to determine the outcome for the reasons noted above. Based on the analysis of previous examples of conditional MOFCOM determinations in sensitive industry mergers, even where shareholdings are low and changes in ownership are small, MOFCOM may impose conditions on the merger which promote industrial policy aims. This is of concern to international banks contemplating a merger in China.

These notable features of AML merger determination by MOFCOM also have potentially important implications for international mergers between two foreign banks that have a presence in China. The relatively low notification thresholds of MOFCOM mean that these mergers may be subject to notification under the AML even in circumstances where the level of business in China is relatively low. This again means that conditions may be imposed by MOFCOM—particularly onerous behavioural conditions—on international transactions looking at issues such as national economic development despite the small operations (as a proportion of market share) in China.

Finally, the objects of the AML and the wording of its provisions provide scope for legitimate recourse to industrial policy in its interpretation and enforcement. These provisions, combined with the prominence of SOEs and the government’s stated policy of promoting mergers that form large internationally competitive companies, creating national champions, are inconsistent with generally accepted competition law principles which place competition as the primary consideration in merger analysis. This displacement of competition’s primacy in MOFCOM’s merger analysis has concerning systemic implications for the Chinese banking system, with particular potential issues for stability and competition amongst Chinese banks.Footnote ¹⁶³

XI. CONCLUSION

Despite general recognition that competition is important for the Chinese banking market, the implications of the MOFCOM approach need to be considered in the context of the heavily regulated market, along with its substantial bias to stability and national economic development. In these circumstances, the individual determinations of MOFCOM in a small but significant number of examples show a marked propensity to consider national economic development issues and to focus on ‘the impact on China’. Competition issues appear to be a secondary consideration in public policy terms, particularly in sensitive industries, although there is some recognition of the importance of the relationship between competition and national economic development. Ultimately, this means that competition is unlikely to be the crucial factor in decision making where bank mergers are concerned, and competition may, in practice, play little part in the outcome. There is also potential for the wide scope of the AML to be used as a threshold for the imposition of conditions which refashion markets as required in both domestic and international mergers falling within its scope.

Footnotes

LLM (Hons) (U.Syd) LLB (U.Syd); Professor, Faculty of Law, University of New South Wales (Australia). The authors wish to thank the Centre for International Finance and Regulation for the funding used to complete this research.

BA, LLB, LLM, PHD, Peking University; Associate Professor, Faculty of Law, Tsinghua University (China).

1. This article refers to only a selection of more recent merger determinations. For more detailed discussions of earlier determinations, see Healey, Deborah, ‘Mergers with Conditions in China: Caution, Control or Industrial Policy’ in Colin Picker, Lisa Toohey and Jonathan Greenacre (eds), China in the International Economic Order: New Directions and Changing Paradigms (Cambridge University Press 2015).

2. In this article, mergers refers to the wide variety of mergers, acquisitions, partial or minority share acquisitions and other changes in control (for example, ‘control by contract’), which lead to two separate, competing entities becoming a single entity for the purposes of competition law, which may have the effect of eliminating or restricting competition.

3. See generally Healey, Deborah, ‘A comparative look at the competition law control of state-owned enterprises and government in China’ in Josef Drexl (ed.), More Common Ground for International Competition Law (Edward Elgar 2012) 122-148 .

4. In November 1993, the Decision on Some Issues Concerning the Establishing of the Socialist Market Economy was made at the Third Session of the Fourteenth Central Committee of the CPC, the first CPC document to expressly and clearly indicate the establishment of a modern enterprise system. The prime characteristics of a modern enterprise system were clearly established: an ownership structure, well-defined power and responsibilities, a separation of operation rights from ownership rights and management practices in line with market rules. See Xu Shiying, ‘Competitive Neutrality of SOEs in China’ in Deborah Healey (ed), Competitive Neutrality and its Application in Selected Developing Countries (UNCTAD 2014) 44.

5. See Jiang Zemin, ‘Report of Accelerating the Pace of Reform, Opening Up and Modernization to Win Greater Victory of Socialism with Chinese Characteristic’ (14^th National Congress of the Chinese Communist Party, Beijing, 12 October 1992), quoted in Wang, Xiaoye, The Evolution of China’s Anti-Monopoly Law (Edward Elgar 2014) 35 .

6. Bremmer, Ian, The End of the Free Market: Who Wins the War between States and Corporations (Portfolio 2010) 46ff .

7. In 2011, the European Union reaffirmed that its policy objectives for merger regulation did not favour the creation of national champions: Joaquin Almunia, ‘Policy Objectives in Merger Control’ (Fordham Competition Conference, New York, 8 September 2011).

8. Ping, He Wei, Banking Regulation in China: The Role of Public and Private Sectors (Palgrave MacMillan, 2014) 11 .

9. ‘Decision on Major Issues Concerning Comprehensively Deepening Reforms in Brief’, China Daily (Beijing, 16 November 2013) <www.china.org.cn/china/third_plenary_session/2013-11/16/content_30620736.htm> accessed 26 October 2015; An (ed) ‘CPC Announces Decision on Comprehensive Reform’ Xinhuanet (China, 12 November 2013) <http://news.xinhuanet.com/english/china/2013-11/12/c_132882325.htm> accessed 26 October 2015.

10. For a nuanced representation of the ongoing debate, see Cetorelli, Nicola and Peretto, Pietro, ‘Credit quantity and credit quality: Bank competition and capital accumulation’ (2012) 147(3) Journal of Economic Theory 967 (reflecting the ‘more credit’ view, in which bank competition leads to greater credit availability, greater firm entry and greater growth); but see Thorsten Beck, ‘Bank Competition and Financial Stability: Friends or Foes?’ (World Bank Policy Research Working Paper No 4656, World Bank July 2008) <http://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-4656> accessed 8 February 2017; Beck, Thorsten, Demirguc-Kunt, Asli and Maksimovic, Vojislav, ‘Bank Competition and Access to Finance: International Evidence’ (2004) 36 (3) Journal of Money, Credit, and Banking 627 ; Berger, Allen N, Demirgüç-Kunt, Asli, Ross Levine and Joseph Haubrich, ‘Bank Concentration and Competition: An Evolution in the Making’ (2004) 36(3) Journal of Money, Credit and Banking 433 ; Berger, Allen N, Klapper, Leora F and Turk-Ariss, Rima, ‘Bank Competition and Financial Stability’ (2009) 35(2) Journal of Financial Services Research 99 (reflecting the ‘less credit’ view, where credit availability may be higher in less competitive environments).

11. OECD, ‘Policy Framework for Effective and Efficient Financial Regulation: General Guidance and High-Level Checklist’ (2009) 97 OECD Journal: Financial Market Trends 267 <www.oecd-ilibrary.org/finance-and-investment/policy-framework-for-effective-and-efficient-financial-regulation_fmt-2009-5kmn0vkxwng1> accessed 5 February 2017.

12. Anginer, Demirgüç-Kunt and Zhu found that ‘greater competition encourages banks to take on more diversified risks, making the banking system less fragile to shocks’: Deniz Anginer, Asli Demirgüç-Kunt and Min Zhu ‘How Does Bank Competition Affect Systemic Stability’ (World Bank Policy Research Working Paper No 5981, World Bank March 2012) <http://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-5981> accessed 5 February 2017 (observing that an examination of impact of the institutional and regulatory environment on systemic stability shows that banking systems are more fragile in countries with weak supervision and private monitoring, high government ownership of banks, and in countries with public policies that restrict competition).

13. China Banking Regulatory Commission (CBRC), ‘Annual Report’ (CBRC 2013), 88-9 <www.cbrc.gov.cn/chinese/files/2014/A2726BEBE1AA406BB5CAC4ADA3875D35.pdf>.

14. Zhonghuarenmingongheguo Fanlongduanfa (中华人民共和国反垄断法) [Anti-Monopoly Law of the People’s Republic of China (AML)] (promulgated by the Standing Committee of National People’s Congress, 30 August 2017, effective 1 August 2008) art. 1, 4 and 11.

15. The AML refers to ‘concentrations of undertakings’ rather than mergers or acquisitions, but for simplicity ‘merger’ is used throughout this report: AML, art 28.

16. Some of the guidelines which have been issued by MOFCOM in relation to mergers are: Jingyingzhe Jizhong Shencha Banfa (经营者集中审查办法) [Rules for Review of Concentration of Undertakings] (promulgated by the Ministry of Commerce, 24 November 2009, effective 1 January 2010), Order No 12; Guanyu Pinggu Jingyingzhe Jizhong Jingzheng Yingxiang De Zanxing Guiding (关于评估竞争者集中竞争影响的暂行规定) [Interim Provisions for the Assessment of the Effects of Concentrations of Undertakings on Competition] (promulgated by the Ministry of Commerce, 29 August 2011, effective 5 September 2011) Announcement No 55; Guanyu Jingyingzhe Jizhong Fujia Xianzhixing Tiaojian De Guiding (Shixing) (关于经营者集中附加限制性条件的规定 (试行)) [Provisions on the Imposition of Restrictive Conditions on Concentrations of Undertakings (for Trial Implementation)] (promulgated by the Ministry of Commerce, 4 December 2014, effective 1 May 2015) Announcement No 6.

17. As of the last inspection of the MOFCOM lists in late 2014, no bank mergers had been notified since the commencement of the AML although it is possible that there had been provincial transactions which were notified. The merger between Pin’An Insurance Company and the Shenzin Development Bank to create the Ping’An Bank was allowed, and although there was no written decision as no conditions were imposed, the size of the merger parties indicated that it should be considered by MOFCOM and it is understood that this was the case. This was, however, not a bank merger proper but the merger of an insurance company and a bank. There appears to be one other international transaction reviewed which involved a purchase by financial services firms of some bank assets.

18. This changing approach to SOEs was reflected in late 2014 when MOFCOM announced that it had fined Tsinghua Unigroup, an SOE, for failure to notify; see ‘Competition Law in East Asia: A Month in Review’ (Norton Rose Fullbright December 2014) 5, <www.nortonrosefulbright.com/knowledge/publications/124572/competition-law-developments-in-east-asia-december-2014> accessed 26 October 2015 (copy on file with author).This issue is discussed later in this article.

19. AML, art 7 notes that ‘the State shall protect the legitimate business activities of the undertakings’ in industries dominated by SOEs that have ‘a direct bearing on national economic well-being and national security’, while also recognising an on-going role for the State in price setting. It has been suggested that this provision reconciles antitrust law and industrial policy for the purposes of the AML, with the same author also suggesting that the administrative monopoly provisions of the AML keep industrial policy in check; see Yanbei, Meng, ‘The Uneasy Relationship between Antitrust Enforcement and Industry-Specific Regulation in China’ in Adrian Emch and David Stallibrass (eds), China’s Anti-Monopoly Law: The First Five Years, (Kluwer Law International 2013) 259 , 265.

20. AML, art 51.

21. Reported comments of Mr Shang Ming, Chief Executive of MOFCOM (ABA Antitrust in Asia Conference, Beijing, 21-23 May 2014), set out in Lisha Zhou, ‘MOFCOM will continue to seek comments fromindustrial regulators in merger reviews’ (PaRR Special Report: ABA Antitrust in Asia, PaRR 12 June 2014) , 21 <www.parr-global.com/%3Fp%3D1264> accessed 26 October 2015.

22. See generally Sokol, D. Daniel, ‘What Drives Merger Control’ in Thomas K. Cheng, Ioannis Lianos and D. Daniel Sokol (eds), Competition and the State, (Stanford University Press 2014) 89 , 90ff.

23. The thresholds are: (i) worldwide business volume of all business operators exceeds 10 billion yuan (approximately USD1.6 billion) and the business volume in China of at least two parties to the merger exceeds 400 million yuan (approximately USD64 million) in the last accounting year; or (ii) business volume in China of all business operators exceeds 2 billion yuan (approximately USD320 million) in the last accounting year and the business volume in China of at least two parties to the merger exceeds 400 million yuan (approximately USD64 million) in the last accounting year; See AML, art 20; Guanyu Jingyingzhe Jizhong Shenbao Biaozhun De Guiding (关于经营者集中申报标准的规定) [Provisions on the Reporting Threshold for Concentrations of Business] (promulgated by the State Council, 3 August 2008, effective 3 August 2008) Order No 529 [2008] art 3.

24. The low thresholds for filing can lead to enforcement action for failing to file even in circumstances where notification would not be thought necessary. This occurred most recently in October 2015 when MOFCOM announced fines in respect of failure to file in four transactions, these being two joint ventures and two multi-step acquisitions; see Simon Baxter, Frederic Depoortere, Ingrid Vandenborre, James S. Venit and Andrew L Foster, ‘MOFCOM cracking down on failures to notify qualifying mergers, acquisitions and joint ventures’ (Lexology 12 October 2015) <www.lexology.com/library/detail.aspx?g=735726f9-f7f7-4ae9-916e-b4c6ef1316ba> accessed 26 October 2015.

25. The Measures were agreed between MOFCOM, the PBOC, the CBRC, the China Securities Regulatory Commission (CSRC) and the China Insurance Regulatory Commission (CIRC). The Measures list different categories of revenue which should be included in computing turnover in each of four categories of business: banking institutions; securities companies; futures companies; and fund management companies. Categories of revenue such as interest income, commissions, fees, gains of currency exchange, for example, are aggregated, and business costs are deducted to arrive at a net aggregate value. Turnover for the purposes of notification thresholds is 10 % of the net aggregate value: see The Measures were agreed between MOFCOM, the PBOC, the CBRC, the China Securities Regulatory Commission (CSRC) and the China Insurance Regulatory Commission (CIRC). The Measures list different categories of revenue which should be included in computing turnover in each of four categories of business: banking institutions; securities companies; futures companies; and fund management companies. Categories of revenue such as interest income, commissions, fees, gains of currency exchange, for example, are aggregated, and business costs are deducted to arrive at a net aggregate value. Turnover for the purposes of notification thresholds is 10 % of the net aggregate value: see Jinrongye Jingyingzhe Jizhong Shenbao Yingyee Jisuan Banfa (金融业经营者集中申报营业额计算办法) [Measures for Computation of Turnover for Notification of Concentrations by Business Operators in the Financial Sector] (Jointly promulgated by the Ministry of Commerce, People’s Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission, China Insurance Regulatory Commission, 15 July 2009, effective 14 August 2009) Announcement No 10, arts 3, 4, 5, 6 and 7.

26. A catch-all provision allows consideration outside these thresholds. Failure to file the required notification, particularly by SOEs, has been noticeable, and recognition of this is evidenced by the promulgation of regulations, which allow investigation and punishment for failure to file.

27. Many jurisdictions do not adjudicate control by contract under their merger provisions. Some would instead consider the relevant contract under other provisions, which would not require notification over a prescribed threshold. See Francois Renard and Michael Edwards, ‘China Merger Control Practice: A Comparative Analysis’ in Adrian Emch and David Stallibrass (eds), China’s Anti-Monopoly Law: The First Five Years (Kluwer Law International 2013) 165, 167.

28. See Savio Macchine Tessili S.P.A. by Penelope Company Limited [2011] MOFCOM No 73 (31 October 2011) where the words ‘control or decisive influence’ were construed broadly. See also Corun, Toyota China, PEVE, Sinogy and Toyota Tsusho [2014] MOFCOM No 49 (2 July 2014); Maersk, MSC and CMA CGM [2014] MOFCOM No 46 (20 June 2014).

29. When considering ‘control’ or ‘decisive influence’ in the context of advising on the need to notify a joint venture transaction, the relevant Guidance states that the issues will be viewed in a practical context by looking at relevant documentation and other surrounding circumstances; see Guanyu Jingyingzhe Jizhong Shenbao De Zhidao Yijian (关于经营者集中申报的指导意见) [Guidance on Notification of Concentration of Undertakings] (promulgated by the Anti-monopoly Bureau of the Ministry of Commerce, 6 June 2014, effective 6 June 2014) arts 3, 4.

30. Uralkali and Silvinit [2011] MOFCOM No 33 (2 June 2011), where the suppliers provided an essential product in a highly concentrated world market. See Michael Faure and Xinzhu Zhang, ‘Towards an Extraterritorial Application of the Chinese Anti-Monopoly Law that Avoids Trade Conflicts’ (2013) 45(3) The George Washington International Law Review 501.

31. Alexander Ballantyne, Jonathan Hambur, Ivan Roberts and Michelle Wright, ‘Financial Reform in Australia and China’ in Ligang Song, Ross Garnaut and Cai Fang (eds), Deepening Reform for China’s long-term growth and development, (ANU Press 2014) 251, 270.

32. Ballantyne et al (n 31).

33. He Wei Ping, ‘Banking Regulation in China: what, why, and how?’ (2012) 20(4) Journal of Financial Regulation and Compliance 367.

34. Many of the laws and regulations governing banking were passed by the Standing Committee of the National People’s Congress, signifying their importance; Roselyn Hseuh, China’s Regulatory State: A New Strategy for Globalization (Cornell University Press 2011) 198.

35. The functions and operation of the PBOC are set out in the Zhonghuarenmingongheguo Zhonghuarenminyinghangfa (中华人民共和国中国人民银行法) [Law of the People’s Republic of China on the People’s Bank of China] (promulgated by the Standing Committee of the National People’s Congress, 21 December 2003, effective 1 February 2004) Order No.12 of the President of the People’s Republic of China.

36. There are other regulators with systemic responsibilities which include the National Development and Reform Commission, which regulates prices of banking products and services, and the State-Owned Assets Supervision and Administration Commission of the State Council, which oversees the operation of SOEs generally.

37. The regulatory approach flows in part from the different meaning of regulation in China, which covers not only regulation but has connotations of supervision and management; see Ping (n 8) 3.

38. Zhonghuarenmingongheguo Yinhangye Jiandu Guanlifa (中华人民共和国银行业监督管理法) [Law of the People’s Republic of China on Regulation on Supervision over the Banking Industry] (promulgated by the Standing Committee of National People’s Congress, 31 October 2006, effective 1 January 2007) Order No 58.

39. ibid, art. 2; He Wei Ping, ‘The Powers of the China Banking Regulatory Commission’ (2012) 27 Journal of International Banking Law and Regulation 103, 104.

40. Law on Banking Regulation and Supervision, art 3 provides for the establishment and operations, both domestically and overseas, of financial instutitions in China. Other articles include providing for: improving regulation and supervision in the industry, promoting the sound development of the industry, and, preserving public trust.

41. AML, art 3 states that the industry ‘… shall be regulated and supervised in such a way as to protect fair competition in the industry and increase the competitiveness of the industry.’; Law on Banking Regulation and Supervision, arts 16, 17.

42. These criteria are, however, mentioned in other documentation which aggregates competition with other considerations; see China Banking Regulatory Commission (n 13) XVI. The same document states that its objectives are ‘To protect fair competition in the banking sector and enhance the industry’s competitiveness , and thereby promote the safety and soundness of the banking sector and maintaining public confidence in the banking sector.’: China Banking Regulatory Commission (n 13) XV.

43. Ping, ‘Banking Regulation in China: what, why, and how?’ (n 33) 12.

44. Zhonghuarenmingongheguo Shangye Yinhangfa (中华人民共和国商业银行法) [Law of the People’s Republic of China on Commercial Banks] (promulgated by the National People’s Congress, 29 August 2015, effective 1 October 2015) Order No 34.

45. Law on Commercial Banks, art 2: retail banks are defined as those which, amongst other functions, take deposits from the general public, grant loans, and handle settlements; see also Law on Commercial Banks, arts 1, 16, 17.

46. For example, commercial banks must determine their interest rates on deposits and loans in accordance with prescribed upper and lower rates set by the PBOC; Law on Commercial Banks, arts 31, 38.

47. Law on Commercial Banks, arts 25, 69. Further, it should be noted there are few specific administrative regulations which specifically relate to bank mergers, but most regulations governing corporate mergers apply.

48. Law on Commercial Banks, art. 9.

49. Law on Commercial Banks, art. 34. To some extent this mirrors the hierarchy of decision-making under the merger provisions of the AML.

50. The four major banks are all state-owned banks, namely: Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China. These banks were all listed in the top 100 companies in the world in 2013: ‘CBC Defends Top of Banking Industry on Fortune Global 500 List’ (Industrial and Commercial Bank of China 7 July 2014) <www.icbc.com.cn/icbc/newsupdates/icbc%20news/ICBCDefendsTopofBankingIndustryonFortuneGlobal500List.htm> accessed 26 October 2015. As to the development of the Bank of China to its current position, see generally Leong H. Liew, ‘A State Enterprise in China’s Capitalist Transformation: the Bank of China’ in Xu Yi-chong (ed), The Political Economy of State-Owned Enterprises in China and India, (Palgrave Macmillan 2012) 220.

51. Wei, Shen, The Anatomy of China’s Banking Sector and Regulation (Wolters Kluwer 2014) 67 .

52. Tan, Michael N., Corporate Governance and Banking in China, (Routledge 2013) 4 .

53. Shen (n 51) 51.

54. See discussion at Part IX.

55. See text to n 9.

56. Foreign banks may use representative offices, branches, local incorporation, equity participation or enter via county banks, while the CBRC generally encourages local incorporation to prioritize the safety of depositors’ funds, see Ping (n 8) 80.

57. In some cases they are only allowed to conduct more limited activities under the Banking Supervision Law and the Law on Commercial Banks.

58. China Banking Regulatory Commission (n 13) 20.

59. For example, participants in a survey on competition in Chinese bank mergers, commented on the difficulties for foreign banks in China, including governance problems, government involvement in decisionmaking and absence of power to make or influence decisions as minority shareholders. See Deborah Healey and Zhang Chenying, ‘The Chinese Anti-Monopoly Law: Lessons for Australian Banks and Chinese Regulators’ (CIFR Paper No 81/2015, Centre for International Finance and Regulation 2015) 35; Ping (n 8) 58.

60. Banking Supervision Law, art 92; for example, the Zhonghuarenmingongheguo Waiziyinhang Guanli Tiaoli (中华人民共和国外资银行管理条例) [Regulation on the Administration of Foreign-Funded Banks] (promulgated by State Council, 27 November 2014, effective 1 January 2015) Announcement No 657. has previously required different capital requirements for foreign banks. Changes made to the Regulation on Foreign-Funded Banks in late 2014 deleted the foreign-funded minimum working capital requirements, shortened or cancelled time limits in relation to business openings and requirements to show profitability, while also cancelling the requirement for an incoming foreign bank to have a representative office for two years before expansion. These changes reduced inconsistencies between domestic and foreign owned banking entities.

61. Law on Commercial Banks, arts 3, 4. Under art 2 of the same law, Chinese Funded Financial Institutions include commercial banks, urban and rural credit co-operatives, trust and investment companies of enterprise groups and financial leasing companies within China as well as other Chinese Funded Financial Institutions established with CBRC approval.

62. For example, the shareholding of a single foreign financial institution may not exceed 20%, and when the aggregate of foreign investment reaches or exceeds 25% in a non- listed Chinese funded financial institution it is regarded as a foreign-funded financial institution; see Jingwai Jinrong Jigou Touzi Rugu Zhongzi Jinrong Jigou Guanli Banfa (境外金融机构投资入股中资金融机构管理办法) [Administrative Rules Governing the Equity Investment in Chinese Financial Institutions by Overseas Financial Institutions] (promulgated by the China Banking Regulatory Commission, 8 December 2003, effective 31 December 2003) Order No 6, arts 8, 9 (Equity Investment Measures).

63. Zhongguoyinjianhui Waiziyinhang Xingzhengxukeshixiang Shishibanfa (中国银监会外资银行行政许可事项实施办法) [Implementation Measures for the Administrative Licensing Items Concerning Foreign-Funded Banks] (promulgated by the China Banking Regulatory Commission, 11 September 2014, effective 11 September 2014) Order No 6.

64. Zhongguo Yinjianhui Waizi Yinhang Xingzheng Xuke Shixiang Shishi Banfa (中国银监会外资银行行政许可事项实施办法) [Implementation Measures of the China Banking Regulatory Commission for the Administrative Licensing Items concerning Foreign-Funded Banks] (promulgated by the China Banking Regulatory Commission, 5 June 2015, effective 5 June 2015) Order No 4.

65. Christopher Bates, ‘International Regulatory Update: 8-12 June 2015’ (Clifford Chance 16 June 2015), 7 <www.cliffordchance.com/briefings/2015/06/international_regulatoryupdate812june2015.html> accessed 26 October 2015.

66. These areas include e-banking, debit card business, changes to working capital and business addresses for operating branches, and the establishment of automatic teller machines,

67. Jocelyn Gao, ‘Revised Measures Challenges and Opportunities for Foreign Bank Branch Openings and RMB Business in China’ (Wolters Kluwer Financial Services 12 February 2015) <www.wolterskluwerfs.com/geographies/asia-pacific/China/revised-measures-for-foreign-funded-banks.aspx> accessed 26 October 2015.

68. Ping (n 8) 87ff.

69. Reforms foreshadowed at the Third Plenum include allowing private capital to set up small and medium sized banks, and accelerating interest-rate liberalization and capital account convertability.

70. HSBC, Morgan Stanley and 30 other foreign institutions were approved to invest in China’s domestic bond market, in a move to open up capital markets to foreign investment; see ‘China opens up bond market to foreigners’ (Weekly News Roundup, China Law & Practice 5 May 2015) <www.chinalawandpractice.com/Article/3450410/Channel/9951/In-the-news-China-probes-GE-Royal-Philips-and-Siemens-police-raid-Ubers-office-and-the-domestic-bond.html> accessed 26 October 2015.

71. Zhongguo (Shanghai) Ziyoumaoyishiyanqu Zhongtifangan (中国(上海)自由贸易试验区总体方案) [The Overall Plan for China (Shanghai) Pilot Free Trade Zone] (promulgated by the State Council, 18 September 2013, effective 18 September 2013) Announcement No 38. See generally Wei Shen and Matthias Vanhullebusch, ‘Where is the Alchemy? The Experiment of the Shanghai Free Trade Zone in Freeing the Foreign Investment Regime in China’ (2015) 16(2) European Business Organisations Law Review 321-352.

72. China Banking Regulatory Commission (n 13) 47.

73. Zhongguoyinjianhui Guanyu Zhongguo (Shanghai) Ziyoumaoyishiyanqu Yinhangye Jianguan Youguan Wenti De Tongzhi (中国银监会关于中国(上海)自由贸易试验区银行业监管有关问题的通知) [Notice of the China Banking Regulatory Commission on Issues concerning Banking Supervision in China (Shanghai) Pilot Free Trade Zone] (promulgated by the China Banking Regulatory Commission, 28 September 2013, effective 28 September 2013) Order No 40.

74. In practice, approval of contracts and by-laws of foreign-funded enterprises have been replaced by filings to the Shanghai Municipal People’s Government, and the relevant formalities after filing are the same as requirements for local businesses unless the State Council reserves the approval requirement for particular domestic investment projects.

75. Zhongguo Shanghai Ziyoumaoyishiyanqu Waishangtouzizhunru Tebieguanlicuoshi (Fumian Qingdan) (中国(上海)自由贸易试验区外商投资准入特别管理措施(负面清单)) [Special Management Measures for the Market Entry of Foreign Investment in the China (Shanghai) Pilot Free Trade Zone (Negative List)] (promulgated by the Shanghai Municipal People’s Government, 30 June 2014, effective 30 June 2014) No 1 of 2014.

76. MOFCOM has introduced measures to streamline its filing procedures for businesses operating in China; see Waishangtouziqiye Sheli Ji Biangeng Beianguanli Zanxingbanfa (外商投资企业设立及变更备案管理暂行办法) [Interim Measures for the Recordation Administration of the Formation and Modification of Foreign-Funded Enterprises] (promulgated by the Ministry of Commerce, effective 8 October 2016) Order No. 3. These measures by MOFCOM are in addition to other initiatives which should ease the regulatory burden of dealings for all businesses, not only financial services. For example, quarantine and entry and export inspections are relaxed and made more efficient, and there will be better co-operation between government departments, such as customs, quality inspection, industry and commerce, taxation, and foreign exchange, and the Shanghai Municipal People’s Government. Other important changes include simpler administrative procedures and adjustments to various laws, including the Zhonghuarenmingongheguo Waiziqiyefa (中华人民共和国外资企业法) [Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises (2016 Amendment)] (promulgated by the Standing Committee of the National People’s Congress, 3 September 2016, effective 4 December 1986) Order No 51 <www1.lawinfochina.com/display.aspx?id=22675&lib=law> accessed 6 February 2017; Zhonghuarenmingongheguo Zhongwaihezijingyingqiyefa (中华人民共和国中外合资经营企业法) [Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures (2016 Amendment)] (promulgated by the National People’s Congress, 3 September 2016, effective 8 July 1979) Order No 51 <http://en.pkulaw.cn/display.aspx?cgid=279350&lib=law> accessed 6 February 2017; Zhonghuarenmingongheguo Zhongwaihezijingyingqiyefa (中华人民共和国中外合作经营企业法) [Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures (2016Amendment)] (promulgated by the National People’s Congress, 3 September 2016, effective 13 April 1988) Order No 51 <http://en.pkulaw.cn/display.aspx?cgid=279351&lib=law> accessed 6 February 2017.

77. There are estimates that shadow banking currently finances ‘almost half of all new credit’: Shen (n 51) 596.

78. A range of entities which encompasses shadow banking includes off-balance sheet vehicles (commercial bills and entrusted loans between corporates which are off the administering bank’s balance sheet) of legitimate banks; loans structured as interbank assets to dodge lending caps; investment products backed by murky pools of loans; high risk business projects such as property development, steelmaking, mining and shipping companies; and funds borrowed by local government financing vehicles (LGFV) to finance investment in municipal infrastructure projects. The Guowuyuanbangongting Guanyu Jiaqiang Yingziyinhang Jianguan Youguan Wenti De Tongzhi (国务院办公厅关于加强影子银行监管有关问题的通知) [Circular of the General Office of State Council on Relevant Issues of Strengthening the Regulation of Shadow Banking] (promulgated by General Office of the State Council of the People’s Republic of China, 2013) State Council Circular No 107 describes shadow banking as ‘credit intermediation entities and activies outside the traditional banking system’. See generally Robin Hui Huang, The Regulation of Shadow Banking in China: International and Comparative Perspectives’ (2015) 30 Banking and Finance Law Review 481.

79. Shen (n 51) 596

80. ibid.

81. Simin Gao and Qianyu Wang, ‘Chasing the Shadow in Different Worlds: Shadow Banking and Its Regulation in the US and China’ (2014) 11 Manchester Journal of International Economics and Law 421.

82. Shen (n 51) 592.

83. Jing Jiang, ‘Shadow Banking in China; Battling the Darkness’ The Economist (London, 10 May 2014) <www.economist.com/news/finance-and-economics/21601872-every-time-regulators-curb-one-form-non-bank-lending-another-begins> accessed 26 October 2015.

84. Other emerging shadow banking platforms include person-to-person banking (P2P), which involves individuals using online platforms like Baidu China and Alibaba, without a financial institution as a middleman to collect deposits and pay interest. In addition, wealth management products have grown exponentially and form part of the shadow banking sector as most of these are off-balance sheet products. Finally, loan sharks are the other alternative source of capital in shadow banking pools. Shen (n 51) 599.

85. Circular on Shadow Banking.

86. Gao and Wang (n 81); Circular on Shadow Banking.

87. China Banking Regulatory Commission (n 13) IX, 5, 57, 58, 98.

88. Zhongguoyinjianhuibangongting Guanyu Guifan Shangyeyinhang Tongyeyewu Zhili De Tongzhi (中国银监会办公厅关于规范商业银行同业业务治理的通知) [Notice on the Regulating the Interbank Business Governance of Commercial Banks] (promulgated by the General Office of the China Banking and Regulatory Commission, 8 May 2014, effective 8 May 2014) No 140 of 2014.

89. Gao and Wang (n 81) 455.

90. ibid.

91. ibid.

92. Circular on Shadow Banking.

93. For a full description of the content of the Circular on Shadow Banking, see Huang (n 78) 490-491.

94. Huang (n 78) 501.

95. Huang (n 78) 502.

96. Cunkuan Baoxian Tiaoli (存款保险条例) [Deposit Insurance Regulation] (promulgated by the State Council, 17 February 2015, effective 1 May 2015) Order No 660. This regulation had no material change from the draft regulation. For reference, see Sun Hong and Qing Hua Song, ‘Deposit insurance system formally enacted in People’s Republic of China’ (Norton Rose Fulbright 31 March 2015) <www.regulationtomorrow.com/asia/deposit-insurance-system-formally-enacted-in-peoples-republic-of-china> accessed 26 October 2015.

97. Alexander Ballantyne, Jonathan Hambur, Ivan Roberts and Michelle Wright, ‘Financial Reform in Australia and China’ (Research Discussion Paper, Reserve Bank of Australia September 2014), 29 <www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-10.pdf> accessed 6 February 2017.

98. ibid 30.

99. World Bank, ‘China 2030 – Building a Modern, Harmonious, and Creative Society’ (Publication Report No 76299, The World Bank and the Development Research Centre of the State Council 23 March 2013), 111 <http://documents.worldbank.org/curated/en/781101468239669951/China-2030-building-a-modern-harmonious-and-creative-society> accessed 6 February 2017.

100. The Report recommended further commercialization of the banking sector, interest rates set by the market, deepening of capital markets and improving the legal and supervisory infrastructure to ensure financial stability and internationalization of the financial sector; see World Bank (n 99) 118–125.

101. ibid 28.

102. ibid.

103. World Bank (n 99) 27- 30; Wing Thye Woo, ‘Increasing the Resilience of China’s Financial Sector and the Global Monetary System’ in Ligang Song, Ross Garnaut and Cai Fang (eds), Deepening Reform for China’s long-term growth and development (ANU Press 2014) 315.

104. CBRC (n 13) 89.

105. ibid 88.

106. ibid 89.

107. ‘Orderly competition’ is often mentioned in China and is actually mentioned in the AML: AML, art 4.

108. Yiping Huang, Ran Li and Bejun Wang, ‘The Last Battles of China’s Financial Reform’ in Ligang Song, Ross Garnault and Cai Fang (eds), Deepening Reform for China’s long-term growth and development (Canberra, ACT: ANU Press, 2014), 233. See also W. Zhou, D.W. Arner and R.P Buckley, ‘Regulation of Digital Financial Services in China: Last Mover Advantage’ (2015) 8(1) Tsinghua Law Review 25.

109. The Postal Savings Bank, which will reportedly soon be listed, is probably placed fifth; see Michael N. Tan, Corporate Governance and Banking in China (Routledge 2013) Appendix 1.

110. PwC, ‘Foreign Banks in China’ (PwC January 2014) <www.pwccn.com/webmedia/doc/635253186547653351_fbic_2013.pdf> accessed 26 October 2015.

111. ibid 10.

112. China Banking Regulatory Commission (n 13) IX.

113. PwC (n 110) 38.

114. For example, see the MOFCOM merger guidelines which prescribe 30 criteria for merger evaluation: ‘Guiding Opinions on Notification of Concentration of Undertakings’ (n 29).

115. For a more detailed discussion, see Deborah Healey, ‘Strange Bedfellows: Merger Regulation in China and Australia Compared’ (2012) 7 Asian Journal of Comparative Law 281, 292.

116. ibid 295.

117. This is by way of contrast to laws applied in other jurisdictions such as the US, EU and Australia which all require a substantial lessening of competition before intervention.

118. These factors are: market share of the business operators and controlling power over the market; market concentration; influence of the concentration on market access and technological progress; influence on consumers and other business operators; influence on national economic development; and other elements affecting market competition as determined by the Anti-Monopoly Enforcement Authorities under the State Council: see AML, art 27. MOFCOM uses the Herfindahl-Hirschman Index (HHI) but has not disclosed the levels which it uses or the change required to trigger a competition problem in a merger.

119. AML, art 27(4)-(5).

120. AML, art 28.

121. AML, art 26. In an attempt to provide more information, MOFCOM has more recently adopted a practice of releasing a list of approved mergers.

122. See Zhonghuarenmingongheguo Fanbuzhengdangjiangzhengfa (中华人民共和国反不正当竞争法) [Law of the People’s Republic of China Against Unfair Competition] (promulgated by the National People’s Congress, 2 September 1993, effective 1 December 1993) Order No 10. Issues of ‘fair competition’ are also relevant in the competition laws of other Asian jurisdictions, such as Japan and Korea.

123. As to this see both earlier and later comments in this article.

124. AML, art 51.

125. Key areas of industry nominated for review under this process are the military sector, key agricultural, energy, infrastructure, transport, and the technology and equipment sectors: AML, art 31.

126. For a more detailed consideration, see Healey (n 115) 32, and sources there in cited.

127. Sokol (n 22) 102.

128. By December 2015, MOFCOM had considered more than 1,277 proposed mergers since the introduction of the AML, giving written reasons for two refusals and 27% conditional approvals, with approximately 97% of the merger applications approved without conditions: Yuni Yan Sobel, ‘Domestic-to-Domestic Transactions (2014-2015) Narrowing Gap in China’s Merger Control Regime’ (The Antitrust Source February 2016), 2 <www.americanbar.org/content/dam/aba/publishing/antitrust_source/feb16_sobel_2_12f.authcheckdam.pdf> accessed 1 March 2016.

129. For example, the OECD’s report identifies competition problems in the Chinese economy, it describes a variety of factors which result in low national concentration, with many markets operating at below minimum efficient scale and significant market distortions; see OECD, ‘The Challenges of Transition for Competition Law and Policy in China’ (DAF/COMP/GF(2008)2/REV1, Note by the Secretariat, OECD 27 January 2009), 25 <www.oecd.org/daf/competition/prosecutionandlawenforcement/40016995.pdf> accessed 6 February 2017.

130. General Electric China Ltd and China Shenhua Coal to Liquid and Chemical Co., Ltd [2011] MOFCOM No 74 (10 November 2011).

131. Weiyifa Shenbao Jingyingzhe Jizhong Diaocha Chuli Zanxing Banfa (未依法申报经营者集中调查处理暂行办法) [Interim Measures for Investigating and Punishing of Concentration of Undertakings Failing to File Notification] (promulgated by the Ministry of Commerce, 30 December 2011, effective 1 February, 2012) Order No 6 of 2011.

132. In late 2014 MOFCOM announced that it had fined Tsinghua Unigroup, an SOE, for failure to notify; see Norton Rose Fulbright (n 19) 5. Other companies which have been fined include two other SOEs. For full list up till December 2015, see Sobel (n 128) 5.

133. Sobel (n 128) 2.

134. ibid 5.

135. Although in some circumstances damaging local firms will damage competition, this depends upon the extent to which they are efficient and competitive.

136. Coca-Cola Company and Huiyuan Corporation [2009] MOFCOM No 22 (18 March 2009).

137. In truth the major concerns were the lack of detailed explanation for the findings and support for the use of the portfolio market effect theory, which might have been better supported. This theory was also applied more recently in Merck KGa and AZ Electronic Materials SA [2014] MOFCOM No 30 (30 April 2014).

138. Maersk, MSC and CMA CGM [2014] MOFCOM No 46 (20 June 2014).

139. ibid. Another decision on joint ventures in Corun, Toyota China, PEVE, Sinogy and Toyota Tsusho [2014] MOFCOM No 49 (2 July 2014) was also in the sensitive industry of batteries for use in hybrid cars, with detailed conditions imposed.

140. MOFCOM did not follow the EU practice of limiting the review of joint ventures to those ‘performing on a lasting basis all of the functions of an autonomous economic entity’, while competition authorities in the US and EU stated that they would maintain a watching brief.

141. Nate Bush, ‘MOFCOM’s hidden motives for merger review’ (China Law & Practice July 2014) <www.chinalawandpractice.com/Article/3361050/Channel/16143/MOFCOMs-hidden-motives-for-merger-review.html> accessed 26 October 2015.

142. Marubeni Corporation and Gavilon Holdings LLC [2013] MOFCOM No 22 (22 April 2013). This merger was against the background of significant pressure on local soybean suppliers by imports. See also MediaTek Inc and MStar Semiconductor Inc (Cayman) [2013] MOFCOM No 61 (6 August 2013). There the market shares of the parties were large but the conditions required that the LCD Master TV chip business of MStar be conducted by a Taiwanese subsidiary for at least three years, and other onerous conditions relating to separation of that business were imposed. The time limit may have been related to the changing nature of the market.

143. Xi Jiping said in November 2013 that food safety is and will always be one of the Government’s top priorities. He said China must be able to guarantee the food supply of its 1.3 billion people because “history has shown that even a huge fortune is of no use if a famine hits us”: Zhao Lei, ‘Move on reforms, but not rashly, Xi says’ China Daily (29 November 2013) <http://usa.chinadaily.com.cn/china/2013-11/29/content_17139905.htm> accessed 26 October 2015.

144. Uralkali and Silvinit [2011] MOFCOM No 33, 2 June 2011.

145. See Frederic Jenny, ‘Export Cartels in Primary Products: The Potash Case in Perspective’ in Simon Evenett and Frederic Jenny (eds), Trade, Competition, and the Pricing of Commodities (Centre for Economic Policy Research 2012).

146. ‘MOFCOM Issues Conditional Clearance of Russian Potash Merger and Circulates Two Draft Regulations for Public Comment’ (Hogan Lovells June 2011) <www.hoganlovells.com/files/Publication/a87327ad-0095-4dbf-80d7-543c27fc5dfa/Presentation/PublicationAttachment/c17f70d7-4c2f-4344-b1fe-5f2784412a4d/11.06.23_Hogan_Lovells_ACER_Alert_China_June_2011.pdf> accessed 26 October 2015.

147. The conditions included Glencore being required to sell the USD5.7 billion Las Bambas copper project in Peru (expected to produce 400,000 tonnes per annum) within six months from the date of the acquisition; guarantee supply of specified quantities of copper concentrate to China under an annual contract for the next eight years, with a minimum quantity of 900,000 tonnes in 2013-14 (equivalent to the average sales of the two companies in the past two years); and, for both zinc concentrate and lead concentrate the merged firm was required to provide long-term contracts to customers in China on fair and reasonable terms: Glencore International and Xstrata [2013] MOFCOM No 20 (16 April 2013).

148. Australian Competition & Consumer Commission, ‘Glencore International plc – proposed acquisition of Xstrata Plc’ (Merger Register, R45863, completed 3 July 2012).

149. John Tivey and Rebecca Campbell, ‘Glencore’s Long March to Take Over Xstrata’ (White & Case 29 April 2013) <www.whitecase.com/publications/alert/glencores-long-march-take-over-xstrata> accessed 26 October 2015.

150. European Commission (EC), ‘Mergers: Commission approves Glencore’s acquisition of Xstrata, subject to conditions’ (IP/12/1252, Press Release, EC 22 November 2012) <http://europa.eu/rapid/press-release_IP-12-1252_en.htm> accessed 6 February 2017.

151. Google’s Android held almost 74% of the market in China, with just two other much smaller competitors (Nokia and Apple). See Google and Android [2012] MOFCOM No. 25 (31 May 2012).

152. United States Department of Justice (USDOJ), ‘Statement of the Department of Justice’s Antitrust Division on Its Decision to Close Its Investigations of Google Inc.’s Acquisition of Motorola Mobility Holdings Inc. and the Acquisition of Certain Patents by Apple Inc., Microsoft Corp.’ (USDOJ 13 February 2012) <www.justice.gov/opa/pr/statement-department-justice-s-antitrust-division-its-decision-close-its-investigations> accessed 6 February 2017; Australian Competition & Consumer Commission, ‘Google Inc – proposed acquisition of Motorola Mobility Holdings Inc’ (R46736, 21 February 2012); European Commission (EC), ‘Mergers: Commission approves acquisition of Motorola Mobility by Google’ (EC 13 February 2012) <http://europa.eu/rapid/press-release_IP-12-129_en.htm> accessed 6 February 2017. Other examples are Mitsubishi Rayon and Lucite [2009] MOFCOM No 28, 24 April 2009 and GM and Delphi [2009] MOFCOM No 76, 28 September 2009, both discussed in Healey (n 115) 35.

153. A similar approach was adopted in the Microsoft/Nokia conditional approval: see Microsoft and Nokia [2014] MOFCOM No 24 (8 April 2014).

154. Seagate Technology PLC and Samsung Technology PLC [2011] MOFCOM No 90 (12 December 2011).

155. The US, the EU and Australia allowed the Seagate/Samsung merger without conditions on the basis that the transaction was not likely to impact competition, particularly in the context of an increased likelihood of co-ordination, although both the US and the EU imposed conditions on this merger. This was despite those regulators considering similar issues relating to competitive impacts in similarly defined markets: see Federal Trade Commission, ‘FTC Issues Modified Final Order Settling Charges that Western Digital Acquisition of Hitachi Global Storage Technologies was Anticompetitive in Market for Desktop Hard Disk Drives’ (May 9 2013); Federal Trade Commission (FTC), ‘In the Matter of Western Digital Corporation, a corporation’ (FTC Matter/File Number: 1110122, Docket Number: C-4350, FTC 9 May 2013) <www.ftc.gov/news-events/press-releases/2013/05/ftc-issues-modified-final-order-settling-charges-western-digitals> accessed 6 February 2017. Other competition regulators tended to break the market down further by the form and end use of the HDDs. See, for example, the EU (separate worldwide markets for hard disk drives based on their end use application such as desktop computers, mobile computers, servers and a separate market for ‘external hard disk drives in the European Economic Area, which is downstream from hard disk drives’): European Commission (EC), ‘Mergers: Commission clears Western Digital’s acquisition of Hitachi’s hard disk drive business subject to conditions’ (EC 23 November 2011) <http://europa.eu/rapid/press-release_IP-11-1395_en.htm> accessed 6 February 2017; Australia (five separate product markets): Australian Competition & Consumer Commission, ‘Seagate Technology PLC – proposed acquisition of the hard disk drive business of Samsung Electronics Co Ltd’, (Public Competition Assessment, R46180, 13 December 2011). For MOFCOM’s assessment, see Western Digital [2012] MOFCOM No 9 (2 March 2012).

156. Weihuan Zhou, Douglas Arner and Ross Buckley, ‘Regulation of Digital Financial Services in China: Last Mover or First Mover?’ (2015) University of Hong Kong Faculty of Law Research Paper, No 44 of 2015.

157. Thermo Fisher Scientific Inc./Life Technologies [2014] MOFCOM No. 3, 15 January 2014. More recent decisions imposing pricing conditions involved the Merck-AZ acquisition (inputs for flat panel displays), and Corun PEVE joint venture (battery systems in hybrid cars) both of which took place in sensitive industries considered important to Chinese economy; see Merck KGa and AZ Electronic Materials SA [2014] MOFCOM No 30 (30 April 2014); Corun, Toyota China, PEVE, Sinogy and Toyota Tsusho [2014] MOFCOM No 49 (2 July 2014).

158. See, for example, Federal Trade Commission (FTC), ‘FTC Puts Conditions on Thermo Fisher Scientific Inc.’s Proposed Acquisition of Life Technologies Corporation’ (FTC 31 January 2014) <www.ftc.gov/news-events/press-releases/2014/01/ftc-puts-conditions-thermo-fisher-scientific-incs-proposed> accessed 6 February 2017; European Commission (Competition), ‘M.6944 Thermo Fisher Scientific/Life Technologies’ (IP/13/1167, 29 November); Australia Competition & Consumer Commission, ‘Thermo Fisher Scientific Inc. – proposed acquisition of Life Technologies Corporation’ (R52214, 25 February 2014). The ACCC in fact noted that the undertakings it accepted related to the Australian businesses which formed part of EU-ordered global divestments.

159. The additional conditions Thermo Fisher agreed to were: lowering the list prices of SSP kits and SDS-PAGE protein standards in the Chinese market by 1% per year for the next 10 years while retaining the same level of discounts offered to distributors in China; and, committing to either supply SSP kits and SDS-PAGE protein standards to the third party on an original equipment manufacturer basis, or grant the third party a perpetual and non-exclusive licence to use the technology relating to SSP kits and SDS-PAGE protein standards, at the option of the relevant third party.

160. Marubeni Corporation and Gavilon Holdings LLC [2013] MOFCOM No 22 (22 April 2013); Glencore International and Xstrata [2013] MOFCOM No 20 (16 April 2013); Novartis and Alcon [2010] MOFCOM No 53 (13 August 2010).

161. Rob Nicholls and Justin O’Brien, ‘Hanging together or hanging separately: Is competition law in the process of eclipsing financial regulation?’ (2014) 8(2) Law and Financial Markets Review 178.

162. Healey and Zhang (n 59).

163. Rob Nicholls, Carolyn Evans and Deborah Healey, ‘Competition in Financial Services’ (CIFR Research Paper No RR/2015, Centre for International Finance and Regulation 2015) 133-136.

* LLM (Hons) (U.Syd) LLB (U.Syd); Professor, Faculty of Law, University of New South Wales (Australia). The authors wish to thank the Centre for International Finance and Regulation for the funding used to complete this research.

** BA, LLB, LLM, PHD, Peking University; Associate Professor, Faculty of Law, Tsinghua University (China).

Article contents

Bank Mergers in China: What Role for Competition?

Abstract

Information

I. COMPETITION LAW AND THE ROLE OF THE MARKET

II. CHINA’S POLITICAL ECONOMY: A SOCIALIST MARKET ECONOMY

III. STABILITY AND THE CHINESE FINANCIAL SYSTEM

IV. THE FORM OF THE AML

A. Competition under the AML

B. Industrial Policy and the AML

C. The Jurisdiction of the AML

V. THE CHINESE BANKING REGULATORY ENVIRONMENT

A. The Reform Agenda

B. The Regulatory Framework

C. Regulation of State-Owned Banks

D. Regulation of Foreign Banks

E. Shanghai Free Trade Zone

F. Shadow Banking

G. Further Reform of the Chinese Financial System

VI. CONCLUSIONS ON CHINESE BANKING SYSTEM

VII. APPLICATION OF THE AML: CHINESE BANKS AND MARKET DEFINITION

VIII. MERGER TEST: THE FACTORS

IX. MOFCOM’S APPROACH TO MERGERS

X. POTENTIAL IMPLICATIONS OF MOFCOM MERGER ANALYSIS FOR THE CHINESE BANKING SECTOR

XI. CONCLUSION

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