pdf

China’s NDRC Punishes Rice Noodle Cartel Members

January 1, 0001

 

 On March 30, 2010, the National Development and Reform Commission (NDRC) of the PRC announced the punishment of several Chinese manufacturers of rice noodles in Guangxi province for price-fixing in violation of the Antimonopoly Law (AML).[1] This case reveals key features of the NDRC’s evolving enforcement practices, including:

  • coordination of national, provincial, and municipal authorities in the investigation;
  • reliance on the 1997 Price Law and older regulations to restore pre-cartel pricing;
  • exemption from punishment for twelve of the thirty-three cartel participants under the leniency provisions of the AML; and
  • potential for criminal penalties under the Criminal Law for serious antitrust violations.

A Slow Start for Cartel Enforcement

The NDRC, a powerful macro-economic planning body with broad authority over nationwide industrial policy, has jurisdiction over “price-related” violations of the AML’s rules against “monopoly agreements” (including hard-core cartels as well as other horizontal and vertical restraints) and “abuse of dominance.” The NDRC’s implementation of the AML has lagged behind the merger review program of the Ministry of Commerce (MOFCOM). Although the NDRC has released draft implementing regulations, none have been finalized. Nevertheless, the NDRC has been conducting probes through the provincial and municipal price bureaus. The AML does not mandate the publication of enforcement decisions against cartels or abuse of dominance, so the disposition of earlier inquiries remains unclear. The Guangxi rice noodle case thus marks the first publicized cartel enforcement action by the NDRC since the AML took effect on August 1, 2008.

The Rice Noodle Cartel: A Well-Documented Conspiracy

According to the NDRC, the cartel evolved through a series of dealings among competing rice noodle manufacturers in the neighboring cities of Nanning and Liuzhou.

On November 1, 2009, a senior executive of Nanning Xianyige Food Plant invited local competitors to a meeting at which he proposed to reorganize the local industry through a series of outsourcing, cross-investment, and profit-sharing agreements. Nine competitors subsequently signed outsourcing agreements, and one signed a joint operation agreement. On December 16, 2009, a broader group of eighteen rice noodle producers from Nanning attended a meeting aimed at “reaching consensus” on a price increase. After further negotiations, the eighteen meeting participants “jointly increased prices” by RMB 0.2 Yuan per 500 grams on January 1, 2010. Other producers which had not participated in the meeting soon followed suit. On January 21, 2010, fifteen competitors from neighboring Liuzhou agreed to a joint price increase and signed profit-sharing agreements with the Nanning group.

This price hike before the traditional lunar New Year celebration provoked protest from local consumers. Indeed, the NDRC emphasized concerns about holiday-season price increases (which might explain the announcement of the action one week before the Chinese Tomb Sweeping holiday). In response, the NDRC, the Guangxi provincial price bureau, the municipal governments of Nanning and Liuzhou, and “other relevant government agencies” launched an investigation.

Remedial Orders

The local price bureaus confronted the cartel by invoking both the AML and the Price Law. The NDRC notice explains that: “once it was preliminarily confirmed that the collective rice noodle price raising involved ‘price fixing cartel’, relevant government agencies of the two cities, in accordance with relevant laws and regulations, ordered the operators to stop illegal activities, correct their faults, and formulated the emergency proposal for stabilizing the rice noodle price and ensuring the market supply.” Although Article 46 of the AML contemplates ordering cartel participants to “cease illegal acts” by ending collusion, the local price bureaus specifically directed the cartel participants to restore pre-cartel pricing pursuant to the Price Law and the Regulations on Administrative Penalties for Price Related Violations. The NDRC explained that these expedient measures were taken “to quickly stabilize the rice noodle market, protect the consumers’ legal rights and interests, and ensure the people to have a peaceful and happy Chinese New Year.” In essence, the price bureaus opted to reverse the price effects of the cartel through regulatory intervention rather than allowing resumed competition to reset pricing.

Administrative Fines and Leniency

Under Article 46 of the AML, parties to monopoly agreements should be fined “no less than 1% and no more than 10% of their sales revenue in the previous year.” Accordingly, the three organizers were fined RMB 100,000, while eighteen of the companies received fines ranging from RMB 300,000 to RMB 800,000 “in accordance with the seriousness of their respective cases.”

The case also represents the debut of China’s leniency program. Article 46 of the AML permits the reduction or exemption from penalties for cartel participants that “on their own initiative, report information concerning the conclusion of monopoly agreements and provide important evidence” to the authorities. In this case, twelve plants that cooperated with the investigation received only warnings. Warning letters were also issued to other rice noodle plants which were found to have raised prices following the initial moves by the cartel members, even though they did not actually participate in any agreements.

Criminal Antitrust in China?

The most provocative aspect of the case was not reflected in the NDRC’s announcement. Chinese media have reported that one cartel participant was actually arrested pursuant to Article 225 of the Criminal Law, which broadly prohibits “other illegal business activities that seriously disrupt the market order.”[2] The AML itself does not criminalize any conduct that is not already covered by the Criminal Law. Article 52 of the AML provides that “where any conduct constitutes a criminal offense, the relevant individual or organization shall be prosecuted for criminal liability in accordance with the law.” If the media reports of arrests in this case are accurate, then Chinese prosecutors may be emboldened to treat AML violations as predicates for criminal charges under Article 225. While the U.S. and many other jurisdictions criminalize hard-core cartels, grave doubts about the political independence and procedural soundness of Chinese criminal prosecutions endure. Moreover, nothing in the text of Article 225 would confine such criminal charges to hard-core cartels as opposed to competitor collaborations (such as standard-setting initiatives or patent pools) or abuse of dominance that “seriously disrupts” the market order. It remains to be seen whether the People’s Procurators will limit criminal antitrust cases to hard-core cartels.

Test Case or Warning Shot?

The rice noodle producers’ written agreements to raise prices on a Chinese staple food in the holiday season presented an ideal test case—a straightforward fact pattern with visceral appeal to average Chinese citizens. The NDRC similarly trumpeted its response to alleged price-fixing in the food industry amidst inflationary fears in mid 2007 (although that incident resulted in no penalties). However, the Chinese adage of “killing the chicken to the monkey” also resonates in the selection of targets. Although collusive practices in other sectors likely inflict far greater harms on Chinese consumers, tackling prominent industries would entail more complicated fact patterns, more nuanced legal questions, and much higher political stakes. It remains to be seen whether busting the rice noodle cartel was simply an easy test case, or a warning to other cartels.




[1] See Some Rice Noodles Producers in Nanning and Liuzhou Were Severely Punished For Colluding on Price Increase, NDRC News, March 30, 2010, available at http://www.ndrc.gov.cn/xwfb/t20100330_338104.htm; Replies to Press by the Official In Charge of NDRC regarding the Colluding on Price Increase of Rice Noodles in Some Area of Guangxi, NDRC News, March 30, 2010, available at http://www.ndrc.gov.cn/xwfb/t20100330_338105.htm.

[2] See The Prime Criminal Manipulated the Price Increase of Rice Noodles in Guangxi Was Arrested, Several Rice Noodle Producers Were Punished, GXNews, April 1, 2010, available at http://news.qq.com/a/20100401/001283.htm.