39755-nyi_50-1 Sheet No. 82 Side A 01/29/2018 16:12:32 R R R R R R R R R R Angela See .... 191 ...... 173 HINESE Nov. 25, 2016), ...... 195 C . ( EV ...... 194 R * SIAN ...... 190 A ...... 180 HANG ...... 168 PPLYING TO Z A IKKEI N ...... 170 159 UYUE EUMR AILS IN H ...... 160 NGELA A EUMR F a. The Decentralized Economy The Utility Function of the Chinese State The Utility Function of the Chinese The Limits of the Chinese State ILEMMA OF THE ...... 190 The China Inc. Illusion, S D The Logic of Recital SOEs Comparing the Chinese and French Applying a Double Standard The Problem of Overinclusion 1. 2. HEN THE HE NTRODUCTION Common ownership by the Chinese State recently caused a stir in Eu- State recently caused by the Chinese Common ownership A. B. C. SOE A. THE ANTITRUST PARADOX OF CHINA, INC. CHINA, OF PARADOX ANTITRUST THE I. I rope. During its review of a joint venture involving a Chinese nuclear power involving a Chinese its review of a joint venture rope. During it would Commission (“Commission”) held that company, the European as a enterprises (SOEs) in the energy sector treat all Chinese state-owned implica- carries significant legal and practical single entity. This decision Commis- and the regulator. It also contradicts the tions for both businesses that the to European SOEs. In this Article, I argue sion’s previous approach to the E.U. Merger Regulation (EUMR) is unsuited legal framework under effects of state ownership. While the delineation deal with the anticompetitive own- undertaking is a prerequisite for merger review, of the boundary of an the not absolute. Importantly, the extent to which ership and control are State has lessened competition is a quantitative coordination by the Chinese qualitative one. Consequently, a bright-line approach question rather than a the is both over and underinclusive. To address to defining an undertaking that the in handling Chinese SOEs, I propose European Union’s dilemma review as a complement to its Commission should view national security to Chinese acquisitions merger review. The optimal regulatory response more importantly, on polit- hinges not only on economics but also, perhaps ics. * Lec- Associate Professor of Law, University of Hong Kong, and Senior II. T III. W http://asia.nikkei.com/Business/Companies/Angela-Huyue-Zhang-The- China-Inc.-illusion. turer in Competition Law and Trade, King’s College London. I am grateful turer in Competition Law and Trade, King’s First, Curtis Milhaupt, Daniel So- for comments from Thomas Cheng, Harry Wouter Wils, and the workshop par- kol, Wentong Zheng, David Stallibras, thank Giulia Gentile for her excel- ticipants at King’s College London. I also An earlier editorial that I con- lent research assistance. All errors are mine. tributed touches on some of the issues discussed in this Article. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 1 29-JAN-18 15:35 Huyue Zhang, 39755-nyi_50-1 Sheet No. 82 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 82 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 82 Side B 01/29/2018 16:12:32 R R R R R R On 1267, 2 . EV ... 216 [Vol. 50:159 ..... 210 ...... 205 . L. R 3 (Feb. 2016), . Anti-Competitive Ef- ARV TUD H S OMPLEMENT , 129 HINA ...... 203 (forthcoming), https://pa- C C ...... 199 FOR A New Record Year for Chinese Out- ´ . e Azar, Sahil Raina & Martin AND POLITICS NST I Overlapping Financial Investor Ownership, EVIEW AS A (forthcoming), https://papers.ssrn.com/ . R NTRODUCTION IN ERCATOR Horizontal Shareholding . 212 (2016); Eric A. Posner, Fiona Scott Morton . 212 (2016); Eric A. Posner, Fiona Scott J. F M I. I , , . F (forthcoming), http://faculty.som.yale.edu/Fiona ...... 222 ECURITY EV S These findings caused alarm in the antitrust These findings L. J. 1 INTERNATIONAL LAW b. Problems Agency Direct Acquisition of Minority Interest of Minority Direct Acquisition Interest of Minority Indirect Acquisition . L. R A Proposal to Limit the Anti-Competitive Power of Institutional A Proposal to Limit the Anti-Competitive Power ´ e Azar, Martin C. Schmalz & Isabel Tecu, e Azar, Martin C. Schmalz & Isabel Tecu, ARV The Problem of Underinclusion The Problem 1. 2. H ATIONAL NTITRUST , Einer Elhauge, , Jos ONCLUSION Ultimate Ownership and Bank Competition A B. , The latest figure from the Rhodium Group shows that The latest figure from the Rhodium E.g. E.g. , 129 3 Common shareholding has recently caused an uproar in has recently caused an uproar Common shareholding 2. 3. Thilo Hanemann & Mikko Huotari, 1. V. C IV. N 1301–14 B. Baker, (2016); Jonathan My Qualified Agreement with Professor Market Power, and Antitrust Enforcement: Elhauge http://www.merics.org/fileadmin/user_upload/downloads/COFDI_2016/ A_New_Record_Year_for_Chinese_Outbound_Investment_in_Europe.pdf. Schmalz, sol3/papers.cfm?abstract_id=2427345; Jos sol3/papers.cfm?abstract_id=2427345; pers.ssrn.com/sol3/papers.cfm?abstract_id=2710252. Investors & E. Glen Weyl, bound Investment in Europe ScottMorton/documents/COpolicyALJ.pdf. fects of Common Ownership the United States. Some academic papers have shown that hor- Some academic papers have shown the United States. facilitates by U.S. institutional investors izontal shareholding airline and prices in industries such as the collusion and raises banking sectors. 160 \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 2 29-JAN-18 15:35 in 2015 alone, Chinese companies invested EUR 20 billion in in 2015 alone, Chinese companies percent increase from the the European Union, a forty-four community and have led prominent scholars to call for legal have led prominent scholars to community and horizontal shareholding. action against anticompetitive the other side of the Atlantic, common ownership has also the Atlantic, common ownership the other side of European policymak- caused a stir. However, what concerned but rather the Chinese State. ers was not financial institutions, the European Union Since the start of the Great Recession, of foreign direct invest- has experienced a significant surge to 2015, annual Chinese ment (FDI) from China. From 2011 EUR 10 billion, compared FDI in Europe averaged more than annually in the previous five to an average of EUR 1 billion years. 39755-nyi_50-1 Sheet No. 82 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 82 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 83 Side A 01/29/2018 16:12:32 OR- 161 F , 5 3 (Jan. EEDS TO partic- 6 N HINA C A recent eco- VERYONE 9 E APERS ON HAT (Aug. 18, 2009) (raising P http://www.worldbank.org/ F. : W , ERICS SIA Record Flows And Growing Imbal- According to the Chinese According to the M ANK 8 , E. A B CONOMY , E S ’ ORLD W , HINA Backed by cheap government financ- Backed by cheap , C Chinese Companies Embark on Shopping Spree in Eu- Chinese Companies Embark on Shopping Spree 10 ROEBER Maaike Okano-Heijmans & Frans-Paul van der Putten, Maaike Okano-Heijmans & Frans-Paul This figure further rose to EUR 35 billion in billion EUR 35 rose to further figure This (June 6, 2011), https://www.wsj.com/articles/SB1000142 4 THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE R. K . J., see also T Indeed, several features of Chinese State ownership Indeed, several S John W. Miller, at 101. 7 TUNE RTHUR See The World Bank in China Id. A Id. ALL (July 22, 2015), http://fortune.com/2015/07/22/china-global-500- 99 (2016). Such a large influx of capital into Europe alarmed Euro- into Europe influx of capital Such a large W 6. 7. broadly not only to For purposes of this article, SOEs are defined 8. 9. 5. Thilo Hanemann & Mikko Huotari, 4. , 10. NOW and politically—motivated firms, takeovers by Chinese 2017), http://rhg.com/wp-content/uploads/2017/01/RHG_Merics_COF DI_EU_2016.pdf. rope en/country/china/overview (last updated Mar. 28, 2017); Scott Cendrowski, en/country/china/overview (last updated Ever-and Mostly State-Owned China’s Global 500 Companies Are Bigger than concern that commercially motivated investments by Chinese SOEs may be concern that commercially motivated investments used to pursue political goals in the future). by the State, but also those include those that are wholly- or majority-owned influence through its control of upon which the State can exercise decisive a lack of majority ownership. voting rights, assets, or contract, despite Europe Needs to Screen Chinese Investment 4052748704355304576214683640225122 (citing examples of some individu- 4052748704355304576214683640225122 Chinese investment is a positive or als in the E.U. who are unsure of whether a negative); government-owned/. ances: Chinese Investment in Europe in 2016 K 2017] year. previous about strategically—were concerned Some pean regulators. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 3 29-JAN-18 15:35 2016, another seventy-seven percent increase from 2015. percent increase seventy-seven 2016, another present significant challenges for antitrust enforcement. challenges for antitrust present significant it also has an second-largest economy, and China is the world’s sector. unusually large state-owned ing and state support, Chinese SOEs are venturing abroad and Chinese SOEs are venturing ing and state support, investment. players in China’s outbound becoming dominant model to manage its Meanwhile, China applies a centralized industrial SOEs are supervised vast state assets, and most major Administration Commission by the State Asset Supervision and Ministry of Finance, as of 2013, China had about 150,000 SOEs as of 2013, China had about Ministry of Finance, assets of USD $16.8 trillion. with combined nomic study estimated that SOEs account for thirty-five per- that SOEs account for thirty-five nomic study estimated GDP. cent of China’s ularly those in which the Chinese government holds a control- Chinese government in which the ularly those ling interest—entitiesenterprises known as state-owned (SOEs). 39755-nyi_50-1 Sheet No. 83 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 83 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 83 Side B 01/29/2018 16:12:32 15 ON TATE 697, . . 111th RP EV , S R G [Vol. 50:159 BCG PERSPEC- . L. SSETS , A 14 TAN S ORKING This arrange- 13 8 (2009). WNED , 65 Moreover, SASAC Moreover, O 12 ) [Guiding Opinion on OECD W VIDENCE TATE E We Are the (National) Champions: S AND POLITICS 395, 435 (2014) (describing how in re- . US EVIEWING THE , Foreign Direct Investment from China: Sense and SASAC: China’s Megashareholder OVERNANCE OF : R . G L. & B L HINA ’ ORP C NT C INTERNATIONAL LAW . J. I W This suggests that an extensive amount of Chinese amount extensive that an suggests This N 11 Guanyu Tuijin Guoyou Ziben Tiaozheng he Guoyou Qiye Guanyu Tuijin Guoyou Ziben Tiaozheng Li-Wen Lin & Curtis J. Milhaupt, Angela Huyue Zhang 34 NTERPRISE IN See China’s Indus. Policy and Its Impact on U.S. Cos., Workers and the See China’s Indus. Policy and Its Impact on TIVES E See See See The increased vigilance surrounding Chinese investment The increased vigilance (Dec. 1, 2007), http://www.bcgperspectives.com/content/articles/ 15. 12. Marcos Aguiar et al., 14. 13. 11. by SASACs. For exam- Certainly, not all Chinese SOEs are supervised WNED RIVATISATION AND 738 (2013) (noting that only 51 of the core companies of the 117 national 738 (2013) (noting that only 51 of the business groups in 2012 had boards of directors). Sensibility, Cong. 78–79(statement of Terrence P. Stewart). (2009) Promoting the Adjustment of State-Owned Capital and the Reorganization Promoting the Adjustment of State-Owned by St. Council, Dec. 5, 2006, ef- of State-Owned Enterprises] (promulgated fective May 12, 2006), http://en.pkulaw.cn/display.aspx?cgid=82473&lib= generally understood to be majority law. In particular, “absolute control” is an ownership share of thirty to fifty ownership and “strong control” reflects percent. Econ. & Sec. Review Comm’n, Am. Econ.: Hearing Before the U.S.-China Understanding the Mechanisms of State Capitalism in China Understanding the Mechanisms of State Capitalism cent cases involving Chinese SOEs, the Commission has considered the globalization_strategy_sasac_chinas_megashareholder. Zhongyue Zhidao Yijiande Tongzhi ( ple, State-owned financial institutions are supervised by the China Banking ple, State-owned financial institutions are Regulatory Commission, and Regulatory Commission, China Insurance There are also SOEs whose super- China Securities Regulatory Commission. government ministries other than visory authorities are in individual central Ministry of Education, Ministry SASAC, such as the Ministry of Commerce, of Industry and Information Technology. P O coincided with the Commission’s tightening of scrutiny over Commission’s tightening of coincided with the 2011, the involving Chinese SOEs. Since merger transactions approach applied a “worst-case scenario” Commission has SOEs. transactions involving Chinese when reviewing merger 162 (SASAC). \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 4 29-JAN-18 15:35 State assets are managed under one roof, with SASAC as the with SASAC under one roof, are managed State assets shareholder. largest controlling world’s ment raises suspicion about the independence of Chinese the independence suspicion about ment raises SOEs have control. Even worse, Chinese SOEs under SASAC’s by problems such as opaque organizational long been beset and pervasive sound corporate governance, structure, lack of Communist Party (CCP). control by the Chinese desires to dominate a few key sectors closely linked to national key sectors closely dominate a few desires to a and to maintain of the economy, and the lifelines security pillar industries. in several strong presence 39755-nyi_50-1 Sheet No. 83 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 83 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 84 Side A 01/29/2018 16:12:32 163 May 16, 2016), http:// ( EU Antitrust Regulator Widens EXOLOGY L , Such an approach is akin to treat- approach is akin Such an 16 ., Commission Decision No. COMP/M.6151 This determination allowed the Commis- This determination allowed the . See, e.g note 15. 19 THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE supra Nicholas French & Ninette Dodoo, Because CGN has little turnover in Europe, the Com- little turnover in Europe, the Because CGN has ¶ 49 (“In view of the fact that Central SASAC can interfere with ¶ 49 (“In view of the fact that Central This also made it possible for the Commission to leave it possible for the Commission to This also made 18 Id. Id. 17 18. slip op. ¶ 102 Commission Decision No. M.7850 (EDF/CGN/NNB), 19. 16. Zhang, 17. www.lexology.com/library/detail.aspx?g=176114c2-d471-4860-a14e-ac- bedb4183ea. (Mar. 10, 2016). strategic investment decisions and can impose or facilitate coordination be- strategic investment decisions and can active in the energy industry, the tween SOEs at least with regard to SOEs hand that CGN and other Chinese Commission concludes in the case at SOEs in that industry should not be deemed to have an independent power of decision from Central SASAC. The turnover of all companies controlled by Central SASAC that are active in the energy industry should therefore be aggregated.”). “worst-case scenario”) 2017] considers Commission the approach, cautious this Under harm, anticompetitive could pose a given transaction whether are the same sector Chinese SOEs in that all while assuming a single entity. treated as \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 5 29-JAN-18 15:35 open the issue of how it would determine the exact scope of how it would determine the exact open the issue of found it diffi- in 2016, the Commission China, Inc. However, the proposed issue when asked to scrutinize cult to dodge this state-owned France’s EDF and China’s joint venture between (EDF/ Nuclear Power Corporation (CGN) China General CGN). over have been able to exert jurisdiction mission would not undertaking was viewed as an independent this deal if CGN Then the Commission, for separate from other Chinese SOEs. Chinese SOEs in the energy the first time, concluded that all entity for the purpose of sectors would be treated as a single merger analysis. ing a large part of the Chinese economy as a firm—China, economy part of the Chinese ing a large Inc. unconditionally the Commission end of 2015, Until the the “worst- transactions because even under cleared all such con- would not pose any anticompetitive case scenario,” they cern. (Petrochina/Ineos), slip op. ¶ 31; Commission Decision No. COMP/M.6113 (Petrochina/Ineos), slip op. ¶ 31; Commission 2011); Commission Decision No. (DSM/Sinochem), slip op. ¶ 8 (May 19, Corporation/Koor Indus- COMP/M.6141 (China National Agrochemical op. ¶ 7 (Oct. 3, 2011); Commission tries/Makhteshim Agan Industries), slip slip op. ¶ 29 (Dec. 2, Decision No. COMP/M.6235 (Honeywell/Sinochem), 2011). Its Net to Review Chinese SOE Transactions 39755-nyi_50-1 Sheet No. 84 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 84 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 84 Side B 01/29/2018 16:12:32 The At the 25 [Vol. 50:159 From a proce- From a A few Commis- 295, 305 (2017). 20 . 23 If other European RAC 22 L. & P AND POLITICS note 21, at 306. Practitioners have warned that the OMPETITION note 17. 21 June 12, 2016), http://www.reuters.com/arti ., supra . C ( UR supra J. E Chinese State-Owned Companies Face Greater Scrutiny of Chinese State-Owned Companies Face Greater EUTERS R , 8 , They noted that two Chinese SOEs consid- They noted that two Chinese INTERNATIONAL LAW all the Chinese SOEs in the same sector, or even all the Chinese SOEs 24 ` eve Lallemand-Kirche, Caroline Tixier & Henri Piffaut, eve Lallemand-Kirche, Caroline Tixier and Id. Id. The EDF/CGN decision has significant repercussions for has significant decision The EDF/CGN 25. 23. 24. Lallemand-Kirche et al 22. French & Dodoo, 21. Genevi 20. Michelle Price, take a similar view, then a Chinese SOE may be required to take a similar view, then a Chinese cle/us-china-eu-m-a-idUSKCN0YZ00U. Competition Law: New Developments Treatment of State-Owned Enterprises in EU and Future Challenges 164 cleared ultimately it even though deal, the to scrutinize sion imposing any remedies. without the transaction Chinese SOEs. cases involving future antitrust \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 6 29-JAN-18 15:35 EU Deals After Ruling problems could go beyond antitrust law. problems could go beyond antitrust ered to be part of the same group in a competition case may ered to be part of the same group unbundling rules provided in have trouble complying with the European Union. the Third Energy Package in the regulators—such of securities regulation— as those in charge the other SOEs operating in provide financial disclosure of all parties. the same sector, as they are concert sion officials suggested that the issue of the independence of sion officials suggested that the on state-aid law Chinese SOEs could also have repercussions enforcement. dural standpoint, the decision means that more deals involv- means that the decision dural standpoint, which Commission, notifiable to the SOEs will be ing Chinese also makes it The EDF/CGN decision could cause delays. author- deal to be held up by the Brussels more likely for the Chi- on the target and the acquiring ity. Instead of focusing focus on the competitive assessments would nese SOE alone, the target same time, the Commission’s adoption of this seemingly cau- same time, the Commission’s adoption legal risks. As I have argued tious approach is also fraught with number of Chinese SOEs in a previous paper, treating a large the whole public economy in China. Such assessment would economy in China. Such assessment the whole public and vertical the potential horizontal significantly increase affect the parties, which could adversely overlaps between has implications for remedies—atransactions. It also Chinese for the unsuited to be a purchaser SOE may be deemed deemed to of another SOE because they are divested business belong to the same entity. 39755-nyi_50-1 Sheet No. 84 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 84 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 85 Side A 01/29/2018 16:12:32 165 805, . CON L. & E OMPETITION . C 8 J 195, 201–02(explaining how (2015) L. L ’ The Single Entity Theory: An Antitrust Time Taming the Chinese Leviathan: Is Antitrust Reg- Taming the Chinese Leviathan: Is Antitrust Rampant agency problems also NT 29 . J. I The European Union may have an inter- Union may The European TAN S 26 ? 51 THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE Moreover, even if the SOEs still command a signif- Moreover, even if the SOEs still Competition was deliberately injected into those Competition was deliberately 28 Angela Huyue Zhang, Angela Huyue Zhang, 27 at 202. at 207–08. See Id. Id. See In this Article, I argue that the Commission’s fundamen- In this Article, I 27. 28. 29. 26. 825-26 (2012) (noting that if Chinese SOEs in the same sector are treated as 825-26 (2012) (noting that if Chinese SOEs as mergers between them, would part of a single entity, agreements, as well law). arguably be exempted from E.U. competition ulation a False Hope for the past few decades the main agenda of SOE reform has been to grant more autonomy to SOEs to motivate them to pursue growth and profit). icant share of national assets in the country, the power to man- icant share of national assets in the due to China’s highly age and control the SOEs is fragmented decentralized economy. 2017] future the Commission’s can jeopardize Inc. of China, as part be- or agreements mergers over cases involving jurisdiction SOEs. tween these \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 7 29-JAN-18 15:35 Bomb for Chinese State-Owned Enterprises? sectors to stimulate growth and to enhance productivities of sectors to stimulate growth and the SOEs. make it difficult for SASAC to exert control over the SOEs, make it difficult for SASAC to behemoths with tre- especially central SOEs that are corporate est in intervening in such cases if the market positions of the positions cases if the market in such est in intervening such, consumers. As to European SOEs pose a threat Chinese for uncertainties not only creates approach the Commission’s legal risks for but also carries grave the business community, itself. the Commission from the tackling Chinese SOE cases stems tal challenge in undertaking of applying the concept of an inherent difficulty Regulation Under the E.U. Merger to state ownership. the delinea- of control is crucial for (EUMR), the assessment in turn deter- of an undertaking, which tion of the boundary control and transaction results in a change of mines whether a of the con- However, a literal application is subject to review. While lead to an overinclusive outcome. cept of control could to influence its SOEs, it in theory a State has the voting power to coordinate their may not necessarily have the incentive State may lack the ability to competition. Even if it does, the commercial decisions. This is exert control over those SOEs’ over three decades of market notably the case for China. After in China have been lib- reform, most of the economic sectors eralized. 39755-nyi_50-1 Sheet No. 85 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 85 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 85 Side B 01/29/2018 16:12:32 [Vol. 50:159 As such, the As such, 30 However, acquisitions In fact, economists have In fact, economists 32 31 AND POLITICS Therefore, minority acquisitions by Therefore, minority 33 INTERNATIONAL LAW Part III(A)(2)(b). Part III(B)(1). Part III(B). See infra See infra Id. See infra The fact that the EUMR can simultaneously lead to both The fact that the EUMR can simultaneously At the same time, the reliance on the EUMR to deal with on the EUMR time, the reliance At the same 30. 31. 32. 33. 166 the bureaucracy. within clout political mendous \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 8 29-JAN-18 15:35 SOEs may not withstand proper antitrust scrutiny by the Com- proper antitrust scrutiny SOEs may not withstand in this re- SOEs pose particular challenges mission. Chinese to state fi- deep pockets, their easy access spect due to their in concen- desire to acquire strategic assets nancing, and their tend to overseas. Moreover, regulators trated industries ownership manifests itself overlook the fact that Chinese State between SOEs and privately- in diverse forms, and that the line blurred in China. owned enterprises (POEs) is increasingly the Commission’s scrutiny Consequently, an SOE can escape subsidiary as a vehicle entirely if it employs a non-controlling to acquire European assets. outcomes is not self-contra- overinclusive and underinclusive derive from the inherent dif- dictory. Such divergent outcomes and abilities of the Chinese ferences between the incentives State—a utility function and a sovereign with a highly complex vast, intricate bureaucracy—and of an SOE—a those commer- desire to maximize financial cial entity which has the strong This does not deny the possi- returns in its overseas expansion. have the incentive or the bility that the Chinese State could the purpose of this Arti- ability to coordinate its SOEs. Rather, and nuanced analysis cle is to provide a more comprehensive in China, refuting the sim- of the actual competitive landscape will always coordinate its plistic view that the Chinese State that an SOE’s sole goal is SOEs. Nor does this Article suggest of a significant but non-controlling interest are currently ex- but non-controlling interest are of a significant EUMR. empt from the Chinese State’s formal corporate rights over an SOE may have an SOE may rights over State’s formal corporate Chinese effects such owner- anticompetitive to the a weak correlation cause. ship could Abun- outcome. an underinclusive could lead to SOE cases in rivals shown that minority shareholding dant literature has effects. can lead to anticompetitive shown that even a non-voting cross-ownership in concentrated a non-voting cross-ownership in shown that even be anticompetitive. industries could 39755-nyi_50-1 Sheet No. 85 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 85 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 86 Side A 01/29/2018 16:12:32 167 Further- 36 In fact, communication between Such an approach fundamentally 35 34 THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE Part III(B)(1). Part II(C). See infra See infra Id. Given the inadequacy of the EUMR in tackling SOE is- of the EUMR in tackling Given the inadequacy Paradoxically, addressing both the overinclusion and un- Paradoxically, addressing both the 34. 35. 36. 2017] profits—itto maximize polit- has other an SOE that is possible af- Chinese SOEs can However, as few objectives. ical or social on their invest- the financial returns indifferent to ford to be risks to competition be alert to the should ments, regulators in concentrated cross-ownership Chinese SOE holds when a industries. fixating on should not tie its hands by sues, the Commission may limit the of the undertaking, as this defining the scope Chinese SOEs to those cases in which the EUMR’s review only question, af- interest. The fundamental acquire a controlling into the legal to define and fit China, Inc. ter all, is not how is about the EUMR; rather, the question framework under Un- effects of state ownership. identifying the anticompetitive recognizing is far from an easy task. Indeed, fortunately, this when applied of its legal framework the clear incompatibility from de narrows its assessment of control to SOEs, the EUMR jure to de facto control. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 9 29-JAN-18 15:35 the State investor and management is not necessary for any the State investor and management anticompetitive effect does coordination to occur. Further, the firms when the Chinese not require communication among stake of a competing busi- SOE indirectly invests in a minority in itself leads to the struc- ness. The interlocking ownership competition. tural incentives that could reduce shifts the paradigm of the merger review from a form of ex shifts the paradigm of the merger on structural incentives, ante enforcement, which turns purely of communication. However, to one that emphasizes evidence evidence of actual coordina- it is extremely difficult to compile tion by the Chinese State. more, due to their superior political and economic status, Chi- more, due to their superior political control that exceed their nese SOEs could wield power and shareholder. formal corporate rights as a minority SOEs have posed to the derinclusion problems that Chinese require the Commission to si- existing legal framework would the concept of control, a multaneously narrow and expand the EUMR. To address mission impossible to achieve within Commission ought to view this dilemma, I propose that the 39755-nyi_50-1 Sheet No. 86 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 86 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 86 Side B 01/29/2018 16:12:32 [Vol. 50:159 Article 101 of the EUMR 37 AND POLITICS 301 (2012) (explaining how boundaries J. The Boundaries of an Undertaking in EU Com- ILEMMA OF THE D HE OMPETITION INTERNATIONAL LAW . C Alison Jones, II. T UR E , 8 See generally Determining the boundary of an undertaking is crucial to Determining the boundary of an My analysis will proceed in three steps. Part II analyzes the My analysis will proceed in three 37. must be clearly defined to ensure that potentially anticompetitive arrange- petition Law whether E.U. competition law applies. whether E.U. competition law 168 review. its merger to complement as a review security national share an overlapping security law and national Both antitrust a sig- accumulating State from in preventing a foreign interest mar- product in a strategic domestic market position nificant and more flexibility review provides national security ket, but with such competi- deal regulators to preemptively room for basis for the optimal the More fundamentally, tion concerns. toregulatory response by SOEs hinges not only acquisitions on politics. also, perhaps more importantly, on economics but policy too against deploying competition I thus caution the Eu- Chinese acquisitions. Indeed, broadly when reviewing seems concern about a regulatory vacuum ropean Union’s the Chinese extent that coordination by overstated. To the it would have concerns in Europe, State poses any competition of the E.U. security review at the level been subject to national of antitrust Therefore, adding a further layer member states. burden is unnecessary as it will unduly regulatory screening grave risks for the Commis- businesses. Moreover, it will carry jurisdiction over sion, as it could jeopardize the Commission’s future cases involving Chinese SOEs. rationale behind the the assess- EUMR provisions regarding After comparing the Commis- ment of mergers between SOEs. and Chinese SOEs, sion’s precedents dealing with European has applied a double stan- Part II reveals that the Commission Chinese SOEs. Part III exam- dard in its current approach to to address the fundamental ines how the EUMR has failed of state ownership, thus re- problem of anticompetitive effects underinclusive outcomes. sulting in both overinclusive and a formalistic approach in Part IV cautions against adopting presents the solution of us- dealing with state ownership and complement to antitrust re- ing national security review as a SOEs. view of acquisitions by Chinese \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 10 29-JAN-18 15:35 Treaty on the Functioning of the European Union (TFEU) ap- Treaty on the Functioning of the 39755-nyi_50-1 Sheet No. 86 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 86 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 87 Side A 01/29/2018 16:12:32 43 169 ]. Since concentrations Moreover, under E.U. Moreover, 41 39 Jurisdictional Notice note 37. Intractable as it is to define an under- Intractable as it supra 40 note 39, ¶ 22. Jones, whereas the EUMR only applies to corporate the EUMR only whereas supra 38 THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE art. 3(2). a merger between SOEs belonging to the same State a merger between EUMR, 42 See id. See generally See [W]here a State-owned company is not subject to any [W]here a State-owned company holdings, it coordination with other State-controlled To avoid discrimination between the public and private To avoid discrimination between 42. Commission Consolidated Jurisdictional Notice under Council Regu- 41. 38. the Functioning of the Euro- Consolidated Version of the Treaty on 39. (L24) art. 3 [hereinafter Council Regulation 139/2004, 2004 O.J. 40. 43. lation (EC) No 139/2004 on the Control of Concentrations Between Under- takings 2008 O.J. (C 95), ¶ 51 [hereinafter The Commission’s Jurisdictional Notice expands further on The Commission’s Jurisdictional this point: under international competition ments between firms do not escape review laws). O.J. (C 115) 47 [hereinafter TFEU]. pean Union art. 101, May 9, 2008, 2008 EUMR]. 2017] separate between conduct and concerted to agreements plies undertakings, \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 11 29-JAN-18 15:35 should not be deemed to trigger a change in control, thus ex- should not be deemed to trigger empting consolidations between SOEs from E.U. regulation. creates an exception. Recital sector, Recital 22 of the EUMR SOEs belonging to the 22 provides that for mergers between of “the undertakings mak- same State, account must be taken independent power of deci- ing up an economic unit with an their capital is held or of sion, irrespective of the way in which applicable to them.” the rules of administrative supervision reorganization between undertakings. between reorganization taking, the EUMR is built upon such a concept. Indeed, it is is built upon such a concept. taking, the EUMR to deter- the boundary of an undertaking crucial to delineate a transaction constitutes a concentration, mine whether and how the Commission’s jurisdiction, whether it falls within 3(2) of the competitive assessment. Article to conduct the of exercising as having the possibility EUMR defines control over an undertaking. decisive influence law, the boundary of an undertaking is relevant for the assess- undertaking is relevant boundary of an law, the has been a peren- While this issue liabilities and fines. ment of in Eu- and academics to policymakers of fascination nial topic and a consistent in vain to identify have tried rope, scholars coherent approach. to changes in of the EUMR are limited within the meaning control, 39755-nyi_50-1 Sheet No. 87 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 87 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 87 Side B 01/29/2018 16:12:32 29–55 [Vol. 50:159 TRUCTURE S INANCIAL F AND POLITICS AND , note 42, ¶ 194. As a consequence, not all rights 46 ONTRACTS supra Because transaction costs are never Because transaction costs are , , C The Logic of Recital 22 45 IRMS A. , F INTERNATIONAL LAW ART H 44 at 30. LIVER Id. O See Jurisdictional Notice As demonstrated by Oliver Hart’s Nobel winning scholar- As demonstrated by Oliver Hart’s should be treated as independent for the purposes of the purposes for independent as be treated should companies of other 5, and the turnover Article into ac- not be taken that State should owned by compa- several State-owned however, count. Where, of com- independent center under the same nies are of those then the turnover decision-making, mercial of be considered part of the group businesses should Arti- concerned for the purposes of the undertaking cle 5. [I]f the parent company has the possibility to exer- [I]f the parent company has the strategic commercial cise decisive influence over the subsidiary cannot behaviour of the subsidiary, the its course of action have real freedom to determine company hap- on the market. Even if the parent influence, the sub- pened not actually to exercise its only exist by the sidiary’s apparent freedom would 46. 45. 44. (1995). But how is it possible for an SOE to have independent deci- for an SOE to have independent But how is it possible shareholder, the State, as the controlling sion-making when In the fol- the firm’s corporate governance? could influence 22, compare I analyze the logic of Recital lowing discussion, SOEs, and structure of Chinese and French the governance applying this the Commission faces in discuss the challenges cases. provision to SOE is that the owner re- ship, the defining feature of ownership tains residual control. 170 \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 12 29-JAN-18 15:35 conferred by ownership will be contracted away and an owner conferred by ownership will be contracted over their property. As can always retain some residual control Wouter Wils succinctly points out: zero, contracting parties could never write a contract that an- zero, contracting parties could never ticipates all contingencies. 39755-nyi_50-1 Sheet No. 87 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 87 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 88 Side A 01/29/2018 16:12:32 . EV . L. 171 . L. R OLUM C UR E , 113 , 25 The Agency Costs of Agency Capi- Separation of Ownership and Con- In a similar vein, it should be efficient The Undertaking as Subject of E.C. Competition Law The Undertaking as Subject of E.C. Competition 49 301, 304 (1983). . CON THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE To safeguard the State’s interests in the SOEs, it is State’s interests in the SOEs, it To safeguard the 47 48 Wouter P.J. Wils, J. L. & E See parent company’s grace, which could change at any change could which grace, company’s parent time. have sole that SOEs need to Moreover, the requirement The above analysis shows that the State, by simply voting The above analysis shows that the . 863, 896-7 (2013). 48. Eugene F. Fama & Michael C. Jensen, 49. Ronald J. Gilson & Jeffrey N. Gordon, 47. , 26 EV 99, 107–08 (2000). trol R talism: Activist Investors and the Revaluation of Governance Rights and the Imputation of Infringements to Natural or Legal Persons and the Imputation of Infringements to Natural 2017] retain will always a State owner this logic to SOEs, Applying rights residual its SOEs. Through control over some residual firms, influence such the power to the State has of control, actually been exerted influence has of whether such regardless no SOEs can Thus, strictly speaking, or is explicitly specified. from powers completely independent enjoy decision-making the State. of their their businesses independently autonomy in running sound corpo- with the basic requirements for owners interferes govern- The fundamental issue in corporate rate governance. concern in the agency problem, an inherent ance is to address whereany modern corporation and control are ownership separate. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 13 29-JAN-18 15:35 for a State shareholder to actively participate in the govern- for a State shareholder to actively ance of the firms it owns. its SOEs. Accordingly, if the its stock, can always influence a firm, then it will have the State is solely profit-driven like to maximize the joint profit. incentive to coordinate its SOEs to engage with the de In that case, it is not even necessary coordination has indeed oc- facto question of whether such curred. that a Thus, to make sense, Recital 22 must assume essential for the State investor to actively exercise its voting State investor to actively exercise essential for the in corporate governance. If a rights as a shareholder to engage control over the firm to man- large investor completely cedes subject to little monitoring agement, management will be Ronald Gilson and Jeffrey from shareholders. For this reason, to encourage activist invest- Gordon have advocated using law investors are more moti- ing in the United States, as activist to achieve vigorous vated than large institutional shareholders corporate governance. 39755-nyi_50-1 Sheet No. 88 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 88 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 88 Side B 01/29/2018 16:12:32 [Vol. 50:159 Indeed, explicit 52 50 AND POLITICS note 42, ¶ 194. supra , INTERNATIONAL LAW note 47, at 107. Such a legal design makes sense from a practical Such a legal design makes sense 51 supra ¶ 16. Jurisdictional Notice Id. Such a legal framework, however, results in a paradigm Such a legal framework, Further, the State can design incentive packages for exec- Further, the State can design incentive 50. 51. 52. Wils, shift in the way that merger review is conducted. As a form of merger review is conducted. shift in the way that whether the merger review focuses on ex ante enforcement, will re- otherwise independent competitors integration of two loss of com- lessening of competition. The sult in a substantial firms to com- on how the incentives of the petition depends in the struc- reduced because of the change pete have been ture of the market. 3(2) of Consistent with this logic, Article possibility of exercising deci- the EUMR defines control as “the and “it is therefore not nec- sive influence on an undertaking,” is or will be actually essary to show that the decisive influence exercised.” 172 commer- ordinary an from different function has a utility State facto examining de issue here lies in and the key cial entity, in is, while the State control. That than de jure control rather inde- in fact operate if the SOEs influence its SOEs, theory can will between them then a merger from each other, pendently the This provides real competitors. the market of two deprive an interpretation to intervene. Such the Commission basis for Notice, the Commission’s own Jurisdictional is consistent with to coordi- whether the State in fact attempts which focuses on among its SOEs. nate competition \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 14 29-JAN-18 15:35 standpoint. As Wouter Wils has pointed out, de facto control is standpoint. As Wouter Wils has pointed identify. extremely difficult and costly to communication is not necessary for the State to exert control communication is not necessary does not participate in the over the SOEs. Even if the State has the opportunity to ap- firm’s activities directly, the State will then participate in the point executives to the board, who decisions, such as its budget, company’s important commercial To display loyalty to business plans, and commercial strategies. an incentive to act according the State, management may have despite engaging in a passive to the State’s wishes. Therefore, would have the opportu- investment strategy, the State investor of the SOEs by simply nity to indirectly influence the actions This is the same for all SOEs, exercising its basic voting rights. whether they are Chinese or non-Chinese. competition with their utives at SOEs in a way that discourages 39755-nyi_50-1 Sheet No. 88 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 88 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 89 Side A 01/29/2018 16:12:32 173 . L. ICH M , 99 Recent empirical Recent 53 CEOs are therefore in- CEOs are 54 Similarly, the State can in- Similarly, the State note 2, at 1278–81. 55 supra Common Ownership, Competition, and Top Manage- Common Ownership, Competition, and Top Elhauge, The Anticompetitive Effect of Passive Investment see also China State-Owned Asset Management System Reform Entering ´ on et al., Comparing the Chinese and French SOEs Comparing the Chinese and French THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE Part II(B). 3-5 (Ross Sch. of Bus., Working Paper No. 1328, 2017). 3-5 (Ross Sch. of Bus., Working Paper B. Local governments—including and mu- provincial SASAC, (May 22, 2003), http://www.china.org.cn/e-news/news03-052 56 See infra See In China, most industrial firms are currently supervised by In China, most industrial firms are 1, 26 (2000); . 54. Miguel Ant 53. David Gilo, 55. 56. EV R ment Incentives 2017] the struc- when the case is especially rivals. This state-owned to firm’s profitability links the compensation ture of executive profitability. or competitor’s the industry \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 15 29-JAN-18 15:35 nicipal governments—were to establish their own also directed New Stage 2.htm. research on common shareholding by institutional sharehold- by institutional on common shareholding research com- more likely to firms are that commonly-owned ers shows on rather than industry performance CEOs based on pensate competitors. relative to performance their competition with rivals to maximize centivized to soften absolutely no In fact, even if the State has own compensation. to ordinary are other means not available voting power, there exert influ- through which the State can commercial investors incentives For instance, managers could have ence over firms. their fu- if the State can somehow influence to obey the State the managers upon departure, especially if ture employment political careers. ultimately desire the firm commercial decisions if it can entice fluence a firm’s the market or than what is available on with cheaper financing it is in trouble. The cor- if it promises to bail out a firm when French SOEs illustrates the porate governance of Chinese and faces in applying Recital 22 to challenges that the Commission SOEs. SASAC, a special commission directly subordinate to the State SASAC, a special commission directly all industrial Chinese SOEs Council. In the pre-reform era, central ministries. After were owned and managed by various the control rights were trans- several rounds of market reform, an independent agency ferred from the ministries to SASAC, of SASAC—acreated in 2003. Thus, the establishment move public role from its intended to separate the government’s role as an investor—is step in China’s market an important reform. 39755-nyi_50-1 Sheet No. 89 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 89 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 89 Side B 01/29/2018 16:12:32 60 57 [Vol. 50:159 The central 64 Other than in the 63 AND POLITICS 1, 3 (2003). ) [Law of the People’s Republic of China , SASAC (Dec. 20, 2016), http://www.sasa Monetary and Fiscal Stimuli, Ownership Structure, ONITOR In addition, SASAC has the authority 48 (Nat’l Bureau of Econ. Research, Working 48 (Nat’l Bureau of Econ. Research, 62 M The State Asset Commission: A Powerful New Government The State Asset Commission: A Powerful New note 56. INTERNATIONAL LAW supra However, by the end of 2016, that number de- 2016, that number by the end of However, EADERSHIP 59 arts. 6, 14. L At its inception, SASAC oversaw 196 SOEs at the oversaw 196 SOEs SASAC At its inception, arts. 12, 16, 18, 21, 30–38. 58 SASAC, art. 22. HINA This law explicitly designates SASAC as a fiduciary for designates SASAC as a fiduciary This law explicitly C See Id. The List of Central SOEs Id. See id. 61 Notably, SASAC’s role in the management of state assets role in the management of state Notably, SASAC’s , 8 58. Yongsheng Deng et al., 59. 61. 60. 62. 63. 64. 57. Barry Naughton, and China’s Housing Market Paper No. 16871, 2011). on the State-Owned Assets of Enterprises] (promulgated by the Standing on the State-Owned Assets of Enterprises] effective May 1, 2009), http:// Comm. Nat’l People’s Cong., Oct. 28, 2008, www.lawinfochina.com/Display.aspx?lib=law&Cgid=109891. c.gov.cn/n86114/n86137/index.html. Body creased to 102, as SASAC encouraged the consolidation of as SASAC encouraged the consolidation creased to 102, of non-strategic SOEs to local governments. SOEs or the sale ( was only formally recognized upon the promulgation of the recognized upon the promulgation was only formally Law”) in Assets Law (the “State Assets Enterprise State-Owned 2008. 174 owner- government’s the local represent which SASACs, local the central SASAC. subordinate to and are not ship of assets were approximately in 2011, there to an estimate According SASAC, approxi- the central in China, including 300 SASACs scores of municipal SASACs, and 30 provincial mately SASACs. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 16 29-JAN-18 15:35 to appoint directors, managers, and supervisors of wholly state- to appoint directors, managers, and directors and supervi- owned enterprises and may nominate sors in partially state-owned enterprises. the State’s ownership interest. Under the State Assets Law, interest. Under the State the State’s ownership returns to rights as a shareholder, including SASAC is entitled deci- and approval of any major ownership on its investments of new bankruptcy, and the issuance sions such as mergers, securities of the firm. central level. exercise of such rights, SASAC is not allowed to intervene di- exercise of such rights, SASAC is operations. rectly in management or day-to-day SOEs and oversees the activ- SASAC also promulgates rules for 39755-nyi_50-1 Sheet No. 89 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 89 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 90 Side A 01/29/2018 16:12:32 S ’ AR- 175 M HINA C EVIEWS OF note 14, at Although 68 The success supra 631 (2014) (dis- 67 ORLD OF ETWEEN THE B W L. J. L Moreover, the ex- ’ 69 NT ECRET I . [OECD], OECD R OUNDARY S EV B HE D Lin & Milhaupt, ORNELL : T The Political Logic of Corporate Govern- C ARTY , 47 see also P , an influential book published in , an influential book EFINING THE HE —D , T OPERATION AND - O Jiangyu Wang, , McGregor coined and popularized the , McGregor coined HINA note 26, at 814–15 how the CCP’s con- (explaining The Party . C (2009). REGOR : C G note 68, at 659; (2010). 59 C CON supra E THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE has generated further suspicion of the indepen- has generated further M EFORM TATE see generally ULERS The Party FOR S 65 R R . Zhang, at 34-49. KET AND THE RG ICHARD In Wang, supra Id. See O R 66 While on the surface the establishment of SASAC has establishment the surface the While on The Party 69. 66. 67. 68. 65. OMMUNIST EGULATORY cussing how controlling personnel allows the CCP to also control the cussing how controlling personnel allows decision-making processes). 737–38 the fifty-three (noting that this practice of appointing top leaders of central SOEs is a legacy of the appointment practice prior to the establish- ment of SASAC). trol over personnel allowed them to overhaul companies while still maintain- trol over personnel allowed them to overhaul ing leverage); ance in China’s State-Owned Enterprises R C 2017] with government compliance to ensure SASACs of local ities mandates. and the government ties between the administrative weakened severed. Richard not been completely their link has the SOEs, de- Financial Times, chief of the a former bureau McGregor, tailed as much in \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 17 29-JAN-18 15:35 ecutive positions in Chinese SOEs are not solely awarded ecutive positions in Chinese SOEs The career paths of top exec- based on financial performance. leaving their firms are de- utives at leading central SOEs upon 2010 that attempts to unravel the mystery behind the CCP’s to unravel the mystery behind 2010 that attempts econ- aspects of the Chinese political control over various omy. SASAC in theory has the right to appoint and select managers, SASAC in theory has the right to in the shadow of party con- in practice it exercised such rights central companies, who trol. The top leaders of the fifty-three ranking of vice-ministers, are have the equivalent bureaucratic of Organization, the directly appointed by the Department the CCP. human resource department of term “China, Inc.,” telling vivid stories of how the CCP was telling vivid stories of how term “China, Inc.,” behe- a tight grip on Chinese state-owned able to maintain mineral, and banking sectors. moths in the oil, of Indeed, SOEs under SASAC’s supervision. dence of Chinese can exert important controls that the CCP one of the most through personnel appointment. over the SOEs is 39755-nyi_50-1 Sheet No. 90 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 90 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 90 Side B 01/29/2018 16:12:32 ` a A- HE G note T APITAL- C FFICIAL [Vol. 50:159 O TATE OVERNMENT AS EGULATING S R G ´ eation du service in HE , [J.O.] [ HINESE , T see also Wang, supra C CAISE TAT ´ E ’ RAN ¸ F AND POLITICS , http://www.economie.gouv.fr/files/ Governance Arrangements for State Owned 63,74 (2010); MPLICATIONS OF . ´ EPUBLIQUE I EV R EPORT . R Such a model has also been adopted Such a model has R Furthermore, because SASAC only has SASAC because Furthermore, RG 72 ARTICIPATIONS DE L 70 P NNUAL . & O As of the end of 2014, it manages 74 SOEs As of the end of 2014, it manages Established in 2004, the APE is the French Established in 2004, NSTITUTIONAL FFICIEL DE LA 75 Capitalism in China: A Centrally Managed Capitalism (CMC) Capitalism in China: A Centrally Managed Indigenous Evolution of SOE Regulation I INTERNATIONAL LAW 74 GMT Maria Vagliasindi, O ], Sept. 10, 2004, p. 341. HE M 7 (Benjamin L. Liebman & Curtis J. Milhaupt eds., 2016). (Benjamin L. Liebman & Curtis J. Milhaupt GENCE DES : 2014 A ? T A RANCE , Nan Lin, OURNAL Among these countries, France is the most similar to France is the most similar Among these countries, at 11–14. AND (World Bank Sustainable Dev. Network, Working Paper No. 4542, (World Bank Sustainable Dev. Network, ZETTE OF J ´ ecret 2004-963 du 9 septembre 2004 portant cr ecret 2004-963 du 9 septembre 2004 portant ISM F 73 See generally Id. E.g. See 71 H ´ etence nationale Agence des participations de l’Etat [Decree 2004-963 Yet, China is not unique in applying a centralized model unique in applying a centralized Yet, China is not 14, 14–16 71. Deng Feng, 75. D 72. 73. 74. 70. ISIBLE HAREHOLDER 68, at 660 (noting that as of 2010, 43 of the 263 governors and vice gover- 68, at 660 (noting that as of 2010, 43 of municipalities had business nors for China’s provinces and provincial-level had governors or vice gover- backgrounds and 23 of China’s 31 provinces nors who had worked as SOE executives). files/directions_services/agence-participations-etat/ANG-Panorama.pdf [2014 Annual Report]. comp of September 9, 2004 establishing the national service State Shareholding Agency], Enterprises 2008) (listing several countries that use a centralized model, including but 2008) (listing several countries that use and Belgium). not limited to: Denmark, Spain, Sweden, S V 176 the CCP. by termined assets. to manage state \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 18 29-JAN-18 15:35 and Its Future, China because it has established a specialized independent it has established a specialized China because to man- Shareholding Agency (APE), agency, the Government age state assets. of the Acting under the joint authority counterpart of SASAC. Minister for the Public Budget, and the Minister of Finance, Affairs, the APE’s statutory the Economy, Industry and Digital interests of the French mission is to preserve the patrimonial of the State-shareholder government and to fulfill the mission in French SOEs. a limited capacity and lacks management expertise in a diverse management capacity and lacks a limited reg- on industry it relies heavily industries, in practice range of of senior for the appointment recommendations ulators for the rights in of shareholders’ and the exercise executives SOEs. by a number of European countries, including Denmark, the European countries, including by a number of France, and Norway, Sweden, Belgium, Netherlands, Spain, re- a result of implementing privatization Poland, often as forms. 39755-nyi_50-1 Sheet No. 90 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 90 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 91 Side A 01/29/2018 16:12:32 ´ e 78 177 In ´ EPUB- 81 Leg- R 77 ´ electricit at 33. ` a la gouvernance et Id. ], Aug. 23, 2014, p. FFICIEL DE LA O RANCE F ` eres [Law 2004-803 of August According to the APE’s According to the OURNAL ` a participation publique [Ordi- J 79 ´ es ˆ ut 2014 relative ´ et note 78, at 14011. AZETTE OF note 74, at 9. note 74, at 19. note 74, at 8. G supra French State ownership is most com- State ownership French supra supra supra ´ ˆ electriques et gazi At the end of 2014, the composition of At the end of 2014, the composition ut 2004 relative au service public de l’ The report also shows that the agency The report also 76 FFICIAL 84 80 O In fact, EDF’s statute restricts non-state owner- In fact, EDF’s statute restricts non-state [J.O.] [ THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE 83 CAISE at 9. LIQUE RAN ¸ ´ erations sur le capital des soci Id. Id. 82 F At least on paper, the French style of state holding is simi- At least on paper, the French style 79. 80. 2014 Annual Report, 81. 83. 2014 Annual Report, 84. Loi 2004-803 du 9 ao 82. Ordonnance 2014-948, 78. Ordonnance 2014-948 du 20 ao 76. 2014 Annual Report, 77.April 2014. These statistics are current through 14011. et du gaz et aux entreprises nance 2014-948 of August 20, 2014 on the governance and capital transac- nance 2014-948 of August 20, 2014 on tions of publically-controlled companies], aux op lar to the Chinese model. Consider EDF, the counterparty to lar to the Chinese model. Consider case and also one of the the Chinese SOE in the EDF/GCN State. The French govern- largest SOEs owned by the French to the latest annual re- ment owns 84.5% of EDF, according port by APE. Legislation also allows the APE to appoint representatives to allows the APE to appoint representatives Legislation also than ten bodies if it owns more the company’s deliberative in the firm. percent of the capital 2017] of assets oversees and government the French of on behalf billion euros. over 110 \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 19 29-JAN-18 15:35 ship to thirty percent. mon in the energy sector (72%), followed by the defense (72%), followed the energy sector mon in sectors (4.9%). and telecom transport (9.5%), (13.3%), attended 287 board of directors or supervisory board meetings of directors or supervisory board attended 287 board 2013. committee meetings since June and 274 specialized addition, legislation on the APE’s representatives allows the on the APE’s representatives addition, legislation to exercise the same rights representatives of the French State other members of the board and powers as those provided to or the governing body in of directors, the supervisory boards, place. islation on the APE’s representatives allows the APE to appoint allows the APE’s representatives islation on of directors, supervi- board to the company’s representatives indi- if it directly or bodies or other deliberative sory board, in the firm. than fifty percent of the capital rectly owns more 2014 annual report, the French government appointed 761 di- the French government appointed 2014 annual report, boards of of directors or the supervisory rectors to the boards year. these SOEs that 39755-nyi_50-1 Sheet No. 91 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 91 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 91 Side B 01/29/2018 16:12:32 , 91 FFI- caise O ` a recon- [Vol. 50:159 [J.O.] [ ´ erard Magnin, CAISE ´ epublique Fran¸ RAN ¸ F Therefore, even if Therefore, even The chairman and The chairman In 2014, the French 87 85 89 Governance Challenges of Listed Some commentators sug- 21–22, https://www.edf.fr/sites/ ´ AND POLITICS EPUBLIQUE 90 FR R EDF. , Loi 2014-384 du 29 mars 2014 visant FFICIEL DE LA see Resignation of EDF Director Paves Way for Hinkley Point Resignation of EDF Director Paves Way for Hinkley O ], Aug. 11, 2004, p. 14256 (noting in Article 24 that ], Aug. 11, 2004, p. 14256 (noting in Article (July 28, 2016), https://www.theguardian.com/uk- Illusionary French Sell-Off Plan Lacks Authenticity of Old Illusionary French Sell-Off Plan Lacks Authenticity ´ eelle [Law 2014-384 of March 29, 2014 to reclaim the eelle [Law 2014-384 of March 29, 2014 INTERNATIONAL LAW Given Magnin’s background in alternative en- Given Magnin’s RANCE OURNAL 88 J F 2014 Facts and Figures UARDIAN G (Nov. 26, 2014), https://www.ft.com/content/56eacd34-748f- at 27. CIAL ´ economie r Any major commercial decisions, such as mergers and decisions, such commercial Any major Id. Id. Id. IMES AZETTE OF 86 G . T 86. 87. 88. Graham Ruddick, 89. 90. Tony Barber, 85. EDF, 91. Curtis Milhaupt & Mariana Pargendler, ´ erir l’ IN default/files/documents/faits_et_chiffres/2015/F%26F_EDF_2014_VA.pdf. Go-Ahead, news/2016/jul/28/resignation-edf-director-hinkley-point-gerard-magnin. the State retains seventy percent of the capital of the company). the State retains seventy percent of the 11e4-8321-00144feabdc0; qu real economy (“Loi Florange”)], Journal Officiel de la R [J.O.] [Official Gazette of France], Apr. 1, 2014, p. 6232. State-Owned Enterprises Around the World: National Experiences and a Framework F 9, 2004 relating to the public service of electricity and gas and to electric and 9, 2004 relating to the public service of electricity gas companies], 178 at appointed directors of eleven EDF consisted board on the of shareholders—five meeting the general were recom- one APE representa- State, including by the French mended by employees. six were elected tive, and \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 20 29-JAN-18 15:35 gested that the aim of the new law was to allow the State the gested that the aim of the new SOEs while retaining or even flexibility to divest its holding in in strategic industries. strengthening its control over SOEs ergy, his appointment at that time was widely speculated to be at that time was widely speculated ergy, his appointment the by the French government to encourage a strategic move energy. firm to invest more in renewable acquisitions, investments, and executive compensation, re- and executive compensation, acquisitions, investments, of the French State. quire the approval parliament introduced a new decree granting long-term share- parliament introduced a new decree powers, unless a firm’s arti- holders automatic double voting cles of association forbid them. the CEO of EDF are appointed by the decree of the French by the of EDF are appointed the CEO direc- the board of of upon the recommendation President tors. the French government adopts a passive investment strategy, it adopts a passive investment the French government the ap- the strategy of EDF through can indirectly influence to EDF. For instance, G pointment of executives who recently resigned from the board of EDF in opposition to from the board of EDF in who recently resigned govern- was appointed by the French its EDF/GCN project, ment in 2014. 39755-nyi_50-1 Sheet No. 91 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 91 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 92 Side A 01/29/2018 16:12:32 179 URVEY 352/ : A S EVELOPMENT 97 D NTERPRISES For instance, the For instance, E 92 Anecdotal evidence 95 WNED -O OPERATION AND - 9, 13 (2004). French Government Ousts Proglio at On another occasion, the L O ’ 96 TATE NT C S I France to Buy Unneeded Train to Save Belfort Fac- CONOMIC Improving Corporate Governance in SOEs: An Inte- Improving Corporate Governance in SOEs: E OVERNANCE . G OVERNANCE OF note 90. 91 (2005). G ORP Oct. 15, 2014), https://www.ft.com/content/fa74939a- C note 85, at 26. ( THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE , https://papers.ssrn.com/sol3/papers.cfm?abstract_id= supra (Oct. 4, 2016), https://www.ft.com/content/9e7deeee-8a07- , 7 supra IMES OUNTRIES ORPORATE IMES A recent example is the French socialists’ govern- A recent example 11 (European Corp. Governance Inst., Working Paper No. 11 (European Corp. Governance Inst., RGANISATION FOR . T OF 94 . T O IN F IN A comparison of the respective corporate governance A comparison of the respective Similar to Chinese SOEs, political appointments of repre- SOEs, political appointments Similar to Chinese 93 F , , 97. Ann-Sylvaine Chassany, 95. Michael Stothard & Hugh Carney, 96. Simon C.Y. Wong, 92. Barber, 93. EDF, 94. OECD C tory EDF 545a-11e4-b2ea-00144feab7de. grated Approach 2942193. 11e6-8aa5-f79f5696c731. structures of the Chinese and French SOEs is revealing. First, structures of the Chinese and French SASAC and APE assume the as fiduciaries of the State, both state assets. As such, they management role of safeguarding for Reform 2017, 2017) [OECD], C 2017] fend off to government French the also allows new law The companies. takeovers of French unwanted As an French SOEs is not uncommon. sentatives to large there is a di- out, “In a number of cases OECD report points the direct in- to the nomination with rect political dimension the President, Council of Ministries or even volvement of the some large for Chairmen and CEOs of such as in France SOEs.” \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 21 29-JAN-18 15:35 French government’s concern about job loss prompted the French government’s concern euros on a high-speed train government to spend 600 million engineering plant. in order to save a failing Alstom ment’s move to oust Henri Proglio in 2014 as chief executive oust Henri Proglio in 2014 as chief ment’s move to the former as he was particularly close to of EDF France, Nicolas Sarkozy. center-right president suggests that the French government had also interfered in French government had also suggests that the instance, the French govern- the daily operation of SOEs. For SOEs to buy products of Al- ment has reportedly pressured its stom to prop up the ailing SOE. French government now has double voting rights in EDF, thus rights in EDF, has double voting now French government on greater influence to exert a much the government allowing its existing sharehold- beyond commercial activities the firm’s ing. 39755-nyi_50-1 Sheet No. 92 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 92 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 92 Side B 01/29/2018 16:12:32 [Vol. 50:159 In reality, the 98 AND POLITICS Applying a Double Standard C. INTERNATIONAL LAW The Commission has applied Recital 22 to examine The Commission has applied 98. St. Gallen International Joaquin Almunia, Speech at the Eighteenth Competition Law Forum ICF: Recent Developments and Future Priorities in Competition Law Forum ICF: Recent Developments Cecilio Madero Villarejo, Deputy E.U. Competition Policy (Apr. 8, 2011); Director General for Antitrust Directorate General for Competition Euro- pean Commission, Speech at the Seventh International Conference on Com- petition Law and Policy in Beijing: Recent Trends in EU Merger Control (June 1, 2011). merger transactions involving both European and Chinese merger transactions involving both have stated that the SOEs. Officials from the Commission criteria to assess both cases Commission has applied the same SOEs. involving Chinese SOEs and European 180 decision-making, commercial in the SOEs’ to be involved need State to expect the It is unrealistic or indirectly. either directly au- will have sole so that the SOEs tie its hands to completely a suggests. Such as the EUMR to run the company, tonomy stand- governance from a corporate is not efficient demand the can influence SASAC and APE Second, both point either. ap- through the the SOEs indirectly strategies of commercial involved even if they are not directly pointment of executives, discretion to and have delegated much in any decision-making mecha- agency needs to rely on explicit management. Neither neces- its management, nor is communication nisms to control the power as long as the government retains sary. Therefore, ties between within the SOEs, the to control the personnel severed. business cannot be completely government and corporate SOEs have established a better Third, even if French in its opera- injected more transparency governance structure, its manage- more public disclosure about tion, and provided they are not completely ment than their Chinese counterparts, Thus, the question con- immune from political interference. a qualitative one about fronting the Commission is not power of decision- whether the SOEs have the independent None of them do. The real making as laid down in Recital 22. question is quantitative—to does the SOE’s power what degree in the market indepen- of decision-making allow it to compete dent from other SOEs? \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 22 29-JAN-18 15:35 Commission’s approach has been anything but consistent. Commission’s approach has been actual control when scruti- While the Commission focuses on 39755-nyi_50-1 Sheet No. 92 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 92 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 93 Side A 01/29/2018 16:12:32 181 and 105 The Com- 102 second, there 104 The Commission 103 The Commission there- The Commission 100 101 THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE ¶ 93. However, the Commission found no indications that found no indications However, the Commission ¶ 98. ¶ 97. Based on the totality of the circumstances, the Com- Based on the totality of the circumstances, 99 Id. Id. Id. Id. Id. Id. 106 In EDF/Segebel, an acquisition by EDF of a Belgian elec- an acquisition by EDF of a Belgian In EDF/Segebel, In Neste/IVO, a merger transaction between two Finnish transaction between a merger In Neste/IVO, 99. slip op. ¶ 8 (Sept. Commission Decision No. IV/M.931 (Neste/IVO), 103. 100. 101. 102. (EDF/Segebel), slip op. Commission Decision No. COMP/M.5549 104. 105. 106. (Nov. 12, 2009). 17, 2002). tricity company in 2009, the Commission had to decide in 2009, the Commission had tricity company of the which is also a portfolio company whether GDF Suez, from EDF. APE, should be deemed independent 2017] a implemented it has SOEs, European involving cases nizing involving Chinese reviewing cases test when more onerous SOEs. the Finnish govern- found that 1998, the Commission SOEs in and vote on impor- rights exercise its shareholding ment could and issues such as mergers and acquisitions tant commercial listing. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 23 29-JAN-18 15:35 the commercial conduct of Neste and IVO had been coordi- conduct of Neste and IVO had the commercial that the rather, the Commission determined nated in the past; by their matters were run independently two SOEs’ operative management. respective operating fore concluded that these two Finnish SOEs acted indepen- that these two Finnish SOEs acted fore concluded dently on the market. third, there are adequate safeguards to ensure that commer- third, there are adequate safeguards shared between these two en- cially sensitive information is not tities. is no interlocking directorship between these two SOEs; is no interlocking directorship between mission acknowledged that the APE is responsible for manag- mission acknowledged that the APE in both SOEs; however, ing the French State’s shareholding role of the APE was “clearly the Commission noted that the affect “the commercial and limited” and does not appear to business autonomy of these companies.” suggesting that these also pointed to three pieces of evidence first, EDF can inde- two French SOEs are in fact independent: relation to GDF Suez and in pendently set its business plan in interest; accordance with its own commercial 39755-nyi_50-1 Sheet No. 93 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 93 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 93 Side B 01/29/2018 16:12:32 [Vol. 50:159 AND POLITICS China National Bluestar is a subsidiary of China National Bluestar is a subsidiary 109 INTERNATIONAL LAW 107 ¶ 94. But such power is a norm among all SOEs. If it did not But such power is a norm among Id. 108 In both the Neste/IVO case and the EDF/Segebel case, case and the EDF/Segebel the Neste/IVO In both The first case in which the Commission raised suspicions The first case in which the Commission 107. 109. Commission Decision No. COMP/M.6082 (China National Bluestar/ 108. Commission Decision No. COMP/M.6801 (Rosneft/TNK-BP), slip Elkem), slip op. ¶ 7 ( (Mar. 31, 2011). op. ¶ 7(Mar. 8, 2013). 182 un- were separate Suez and GDF EDF that concluded mission dertakings. States the respective recognized that explicitly the Commission would presuma- in the SOEs, which had voting power involved in many important to intervene the States the power bly give of execu- including the appointment commercial decisions, Commission of these entities. However, the tives to the boards the power by de jure control, noting that seemed undisturbed were limited. the State in these situations and the role of that is, focused on de facto control, Rather, the Commission competition SOEs in fact coordinated whether the underlying contrasts This focus on de facto control between themselves. foreign-con- approach to reviewing with the Commission’s of a trans- instance, during its recent review trolled SOEs. For Commission Rosneft, a Russian SOE, the action involving power to fact that the Russian Federation’s highlighted the removal of members of the control the appointment and factor indicating that it can board of directors is an important strategic decisions of Ros- influence the commercial and neft. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 24 29-JAN-18 15:35 cause any concern for the Commission in Neste/IVO and cause any concern for the Commission a problem in Rosneft’s pro- EDF/Segabel, why did it become answer may lie in the fact posed merger with TNK-BP? The of the Russian govern- that the Commission was suspicious decisions of Rosneft ment’s influence over the commercial it is difficult for the Com- and other SOEs. However, because of such coordination, it fell mission to obtain direct evidence control. This is tautological, back on the evidence of de jure in the cases involving but it seems to be exactly what happened Chinese SOEs as well. SOEs is China National about the independence of Chinese a proposed acquisition of Bluestar/Elkem (“Bluestar/Elkem”), Elkem by China National the Norwegian silicon producer Bluestar in 2011. 39755-nyi_50-1 Sheet No. 93 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 93 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 94 Side A 01/29/2018 16:12:32 183 The parties In addition, 110 112 118 The parties proffered three pieces of The parties proffered three pieces (2) the dividend policy of the SOEs is (2) the dividend policy of the 115 116 The parties in Bluestar/Elkem also noted The parties in Bluestar/Elkem and that SASAC does not interfere with the and that SASAC 117 They noted that the central SASAC has no au- SASAC has that the central They noted , which reports directly to the central SASAC. the central to directly reports , which 114 THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE ™ 111 Additionally, the parties argued that the level of state parties argued that the level of Additionally, the ¶ 18. ¶ 15. ¶ ¶25, 26. ¶ 15. ¶ 19. ¶ 20. ¶ 21. ¶¶ 14, 21. . ¶ 18. 113 Id. Id. Id. Id Id. Id. Id. Id. Id. The findings the Commission gathered during its own The findings the Commission 110. 111. 112. 113. 114. 115. 116. 117. 118. market investigation seem to support the parties’ position. market investigation seem to support market is highly fragmented First, the concerned underlying 2017] ChemChina had that ChemChina argued in Bluestar/Elkem The parties which central SASAC, of power independent decision-making of functions on behalf ownership exercises the basic essentially non-managing trustee. State as a the Chinese under management for SOEs that operate thority to appoint with rather, this authority resides exclusively regional SASACs; and local political organs. local governments \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 25 29-JAN-18 15:35 evidence to show the lack of state intervention in the SOEs: evidence to show the lack of state commercial information from (1) SASAC had never requested the commercial oper- the SOEs or in any other way influenced ations of the SOEs, that SASAC has limited capacity to oversee the SOEs. At that that SASAC has limited capacity 125 large central SOEs and time, the central SASAC oversaw employed only 800 people. strategic decision-making of the SOEs, such as approval of bus- strategic decision-making of the iness plans or budget. intervention in the industry sectors relevant to the transaction industry sectors relevant to the intervention in the is very minor not established by SASAC on a case-by-case basis but rather is not established by SASAC on a case-by-case SOEs, and (3) management is set consistently across all central that takes into account compensated based on a point-system various factors. also argued that local SASACs are independent from the cen- from the are independent that local SASACs also argued tral SASAC. the parties in Bluestar/Elkem submitted that SASAC’s key submitted that the parties in Bluestar/Elkem top man- to actions such as nominating functions are limited and ensur- the annual results of the SOEs, agement, reviewing permitted li- are operating within the ing that the SOEs cense. 39755-nyi_50-1 Sheet No. 94 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 94 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 94 Side B 01/29/2018 16:12:32 for The em- [Vol. 50:159 122 likelihood Third, custom- 120 AND POLITICS power of the State to influ- power of the State possible These findings suggest that local findings suggest These 121 INTERNATIONAL LAW ¶ 16. Second, almost all the state-owned firms in the mar- firms almost all the state-owned Second, The Commission pointed to the core legislation of The Commission pointed to the 123 ¶ 33. (stating that the Commission found no evidence that there ¶ 33. (stating that the Commission found ¶ 10 (emphasis added). ¶¶ 36–134. 124 119 See id. Id. Id. Id. Id. Similar issues arose during the Commission’s assessment Similar issues arose during the 119. 120. 121. 122. 123. 124. Commission Decision No. COMP/M.6113 (DSM/Sinochem), slip op. of a joint venture between Koninklijke DSM N.V (DSM), a of a joint venture between Koninklijke another SOE under the su- Dutch company, and Sinochem, the Commission was not pervision of central SASAC. Again truly independent from convinced that Sinochem was SASAC. 184 privately are of which many firms, than 200 more with owned. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 26 29-JAN-18 15:35 the State Assets Law and the associated information on the State Assets Law and the that the SOEs do not SASAC’s website as evidence suggesting the State to actually coordinate their commercial conduct, ei- coordinate their commercial the State to actually or facilitating such coordination.” ther by imposing ence the companies’ commercial strategy and the commercial strategy and the ence the companies’ SOEs, together with private domestic firms, appear to exercise domestic firms, with private SOEs, together Thus, had the constraint on ChemChina. effective competitive as it had in the same de facto standard Commission applied endorsed the EDF/Segebel, it should have Neste/IVO and reluctant to The Commission, however, was parties’ position. dealing with previous precedents do so. When summarizing overall assess- the Commission noted that the European SOEs, by the ment was “guided ket belong to the local governments, and ChemChina is the ChemChina governments, and to the local ket belong the central SASAC. that reports to only SOE ers in Europe did not believe that there was coordination believe that there did not ers in Europe the producers. among was any signs of coordiantion in the industries concerned). was any signs of coordiantion in the industries phasis on the “probabilistic” nature of the State’s power to in- phasis on the “probabilistic” nature the Commission’s decisional fluence these SOEs deviates from Indeed, unconvinced by practice in previous European cases. carried out a detailed the parties’ arguments, the Commission overlaps between Elkem’s assessment examining the product and other SOEs activities and the activities of ChemChina SASAC as well as the local under the supervision of central SASACs. ¶ 16 (May 19, 2011). 39755-nyi_50-1 Sheet No. 94 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 94 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 95 Side A 01/29/2018 16:12:32 185 The 127 The specific The 125 126 THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE ¶ 15 n.9. ¶ 15. ¶ 15 n.10. . ¶ 15 n.8. 128 Id. Id Id. Id. The aforementioned evidence gathered by the Commis- The aforementioned evidence gathered SASAC guides and pushes forward the reform and re- forward the reform and pushes SASAC guides the enterprises, advances of state-owned structuring in SOEs, enterprise system of modern establishment the stra- and propels corporate governance, improves the of the layout and structure of tegic adjustment the SASAC is responsible for state economy [and] of the state-owned assets fundamental management out draft laws and regulations of enterprises, works of the state-owned assets, estab- on the management and and regulations and directs lishes related rules work of local state-owned supervises the management to law. assets according 125. 126. 127. 128. sion in the case involving Sinochem suggests that SASAC has sion in the case involving Sinochem of the SOEs it su- the power to influence the decision-making pervises. SASAC had However, it provides no indication that limit competition between Si- actually done so in an effort to same industry sector. The re- nochem and other SOEs in the are mixed. On the one sults from the market investigation the possibilities for these hand, the Commission found that It is not entirely clear why the above language raised the Com- clear why the above language raised It is not entirely the normal as it appears simply to outline mission’s suspicion, addition, the management firm. In functions of a state-asset and a book by Barry Commission cited an OECD report decisions of Chinese Naughton suggesting that commercial Chinese State through both SOEs could be influenced by the in less formal ways. formal channels such as SASAC and 2017] decision-making. of power independent have \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 27 29-JAN-18 15:35 Commission noted that SASAC’s own official statements pro- Commission noted that SASAC’s regard. It further quoted a vided certain indications in this Report as indicating that sentence from Sinochem’s Annual Sinochem and the Chinese there was cooperation between enterprise, Sinochem Government: “As the key state-owned greater good of the national Group is dedicated to serving the and social pro- political stability, economic development, gress.” language was quoted by the Commission as follows: the Commission was quoted by language 39755-nyi_50-1 Sheet No. 95 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 95 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 95 Side B 01/29/2018 16:12:32 135 [Vol. 50:159 The Commis- 134 AND POLITICS At the same time, Europe- At the 131 But the Commission was no longer But the Commission 133 Respondents also noted that the trans- also noted Respondents Some respondents expressed concern expressed Some respondents 130 129 note 15. INTERNATIONAL LAW supra ¶ 25. ¶ 24. ¶ 43. 132 Id. Id. Id. Id. Id. The Commission revisited the same issue about the inde- revisited the same issue about The Commission Perhaps what most concerned the Commission was that Perhaps what most concerned the 129. 130. 131. 132. 135. 133. Zhang, 134. Commission Decision No. M.7850 (EDF/CGN/NNB Group of Com- It is possible that because nuclear power is such an important It is possible that because nuclear pendence of the SOEs in subsequent cases but ultimately left SOEs in subsequent cases but pendence of the of the SOEs of how to determine the scope open the question in its official decisions. 186 than with limited more might be independently to act SOEs private enterprises. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 28 29-JAN-18 15:35 action was part of Chinese SOEs’ attempt to gain more lever- to gain more SOEs’ attempt part of Chinese action was markets concerned. age in the based customers and one respondent in China indicated that and one respondent in China based customers to a certain do compete with one another Chinese suppliers degree. able to dodge the issue in EDF/CGN. Because CGN has little issue in EDF/CGN. Because CGN able to dodge the to exert the only way for the Commission turnover in Europe, enlarge the the EDF/CGN transaction was to jurisdiction over case. To do this, the Com- scope of the SOEs involved in this Law and its interim mea- mission pointed to the State Assets important business decisions, sures allowing SASAC to vote on or budgets. such as strategies, business plans, that the proposed joint venture and other Chinese SOEs could Chinese SOEs and other proposed joint venture that the co- and that such in the markets to coordinate have incentives is likely. ordination panies), slip op. ¶¶37–42 (Mar. 10, 2016). sion used these provisions as evidence that SASAC can influ- sion used these provisions as evidence the SOEs under its supervi- ence the commercial decisions of like all state investors, would sion. This is puzzling, as SASAC, rights to govern the SOEs it need to exercise its basic voting supervises. nuclear industry, a highly sen- the EDF/CGN case involved the Again, the Commission sitive and important industry sector. the State Assets Law, noting relied on the specific wording of promote the centralization that the Chinese government will industries that have bear- of state-owned capital in important and national security. ings on the national economic lifeline 39755-nyi_50-1 Sheet No. 95 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 95 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 96 Side A 01/29/2018 16:12:32 187 Sept. 360 ( AW . Joined Cases L , Such a strategic Thomas K. Cheng & but again, it is far 139 See 140 434, 437-58 (2016) (discuss- Italian Flat Glass ` a Italiana Vetro SpA v. Comm’n, 1992 As quoted by the Commission, As quoted NFORCEMENT 136 This seems to indicate that Chi- This seems to E 137 NTITRUST J. A , 5 A Neglected Theory of Harm: Joint Ventures as Facilitators of Collu- THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE International Comity Saves Vitamin C Defendant However, because the Commission has decided that the Commission has decided However, because ¶ 44. 138 Id. Id. Finally, the Commission pointed to the fact that CGN had Finally, the Commission pointed 140. basis for a finding of collective Economic links like this may form the 139. Group of Com- Commission Decision No. M.7850 (EDF/CGN/NNB 136. 137. 138. such a cartel would be A complicated issue, however, is whether Kelvin H. Kwok, sion Across Markets dominance as the General Court decided in dominance as the General Court decided T-68/89, T-77/89, and T-78/89, Societ E.C.R. II-01403. However, collective dominance is no longer the enforce- ment priority for the Commission in recent years. panies), slip op. ¶ 47 (Mar. 10, 2016). 28, 2016, 12:47 PM EDT), https://www.law360.com/articles/845695/inter- national-comity-saves-vitamin-c-defendants. treated as compelled by the State and thus may be exempt from antitrust treated as compelled by the State and facts of the case. Notably, a law. This decision would turn on the specific defended its action on the Chinese vitamin company recently successfully defense in the United States. Ian basis of foreign sovereignty compulsion Simmons et al., 2017] govern- Chinese that the believed Commission the industry, of competition in coordinating a strategic interest ment had did not identify the Commission this industry. While firms in it nonethelessevidence of coordination, explicit found some alliance among of a strategic of the establishment evidence nuclear companies. Chinese \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 29 29-JAN-18 15:35 all Chinese SOEs operating in the energy sector are to be all Chinese SOEs operating in Chinese nuclear compa- treated as one entity, this may allow basis of single firm conduct. nies to defend themselves on the joint venture with CNNC, an- signed an agreement to create a for the development and other SOE in the nuclear sector, globally. marketing of a nuclear technology the creation of the China Nuclear Industry Alliance was “di- Alliance was Nuclear Industry of the China the creation synergy” government to achieve some rected by the [Chinese] compe- to eliminate detrimental or unseemly and is “designed market.” tition in export in export car- companies may be engaging nese nuclear power that they not sufficient evidence to conclude tels, but there is not make a single firm. Moreover, it would are acting like to so conclude—ifsense for the Commission Chinese these cartels, such do in fact engage in export nuclear companies 101 of the prohibited under Article conduct is clearly TFEU. link could be subject to antitrust scrutiny, link could be subject to antitrust 39755-nyi_50-1 Sheet No. 96 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 96 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 96 Side B 01/29/2018 16:12:32 LOG L. B [Vol. 50:159 The Com- EU Merger Con- 141 In particular, OMPETITION 146 C LUWER Adrian Emch, K , Europe Needs Tougher Response to AND POLITICS June 9, 2016), https://www.ft.com/ (forthcoming July 2016), https:// see also . ( EV IMES Ultimately, the transaction was Ultimately, the L. R . T note 17; 142 IN F , supra Law firm partners scurried to send alert Law firm partners The Commission left open the question of The Commission 145 143 OMPETITION INTERNATIONAL LAW Nuking Misconceptions: Hinkley Point, Chinese SOEs and EU Nuking Misconceptions: Hinkley Point, Chinese Sebastian Heilmann, . C UR E 144 see also , ¶ 49. ¶ 111. ¶ 50. Id. Id. Id. The EDF/CGN case caused a stir in the European anti- case caused a stir in the European The EDF/CGN 142. 141. Group of Com- Commission Decision No. M.7850 (EDF/CGN/NNB 146. Alan Riley, 143. 144. 145. French & Dodoo, content/98ec136e-6dd9-36c0-bc58-8b7635e21bb6 (arguing that it is critical for the E.U. to systematically deploy merger control procedures to prevent market distortion). ssrn.com/abstract=2778229; Nicolas Petit, Chinese State Capitalism and ssrn.com/abstract=2778229; Nicolas Petit, Western Antitrust Policy 15–16 (June 22, 2016), https://ssrn.com/abstract =2798162; China’s State-Led Investments panies), slip op. ¶ 48 (Mar. 10, 2016). ing how agencies must be cognizant of the manner in which joint ventures ing how agencies must be cognizant of can potentially cause competitive harm). (May 27, 2016), http://kluwercompetitionlawblog.com/2016/05/27/eu- merger-control-complications-for-chinese-soe-transactions/. Merger Law trust community. 188 on the Based single firm. like a are acting they clear that from the central SASAC decided that the Commission above facts, deci- investment with the strategic power to interfere has the SOEs, Chinese coordination between can facilitate sions and sector. in the energy regard to those at least with \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 30 29-JAN-18 15:35 how to treat other SOEs, including those that are not operat- SOEs, including those that are how to treat other by local gov- sector and those that are owned ing in the energy ernments. the potential implications of memos to their clients advising of scholars and commentators such decisions. Several European decision and called on expressly endorsed the Commission’s and more stringent approach the Commission to take a bolder investment. in scrutinizing future Chinese cleared because even if all Chinese SOEs in the energy sector even if all Chinese SOEs in the cleared because any com- entity, the deal would not pose are viewed as a single petitive concern. Alan Riley, a senior fellow for the Institute for Statecraft based Alan Riley, a senior fellow for the Commission should treat all in London, suggested that the mission therefore concluded that CGN and other Chinese that CGN therefore concluded mission a single entity, should be deemed the energy sector SOEs in the purpose should be aggregated for and that their turnover of merger notification. trol Complications for Chinese SOE Transactions 39755-nyi_50-1 Sheet No. 96 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 96 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 97 Side A 01/29/2018 16:12:32 189 ` ege Since all 149 The gist of Petit’s argu- The gist of Petit’s 148 This approach is akin to ask- is akin to This approach 147 note 146. note 146, at 11–13. THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE of the Chinese State to influence the SOEs—par- of the Chinese State to influence supra supra . at 2–3. Id Given the pervasive political control that the CCP exerted political control that the CCP Given the pervasive possibility 147. Riley, 148. Petit, 149. 2017] for the one entity as same sector, in the those not just SOEs, of merger assessment. purpose \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 31 29-JAN-18 15:35 ment is that Chinese firms operate as a Party-led syndicate that firms operate as a Party-led ment is that Chinese demand those super-trusts that fueled social is analogous to in the twentieth century. for antitrust regulation ing the Commission to treat all Chinese SOEs as constituting a SOEs as constituting all Chinese to treat ing the Commission Li University of a professor at the Nicolas Petit, China, Inc. in Belgium, went even further, suggesting that all Chinese further, suggesting went even in Belgium, re- as a single entity, be treated a CCP link should firms with ownership status. gardless of their Chinese SOEs and many large private domestic Chinese com- many large private domestic Chinese SOEs and proposal party organizations, Petit’s panies have established operating in treating the majority of firms would require firm. China as a single within the opacity of corporate governance over SOEs and and aca- understandable that policymakers these firms, it is independence of Chinese demics are skeptical about the that they have misinterpreted SOEs. The problem, however, is of focusing on the actual and misapplied Recital 22. Instead SOE, they have focused on influence exerted by a State on an the SASAC and the SOEs ticularly the structural links between the Commission in a dif- concerned. Indeed, Recital 22 places is correctly concerned that ficult position. While the regulator SASAC—and the CCP by extension—may be working behind strategies of those the scenes to influence the competitive of coordination is ex- SOEs within their control, evidence the Commission fell tremely hard to obtain. Consequently, control and used it to infer de back on the evidence of de jure with the standard that facto control. This is clearly inconsistent SOEs, jeopardizing its the Commission applied to European and nondiscriminatory reg- hard-earned image as an impartial the challenges that the ulator. As discussed in Part III below, 22 to SOEs are deeply Commission faced in applying Recital which the EUMR is built. rooted in the legal framework upon 39755-nyi_50-1 Sheet No. 97 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 97 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 97 Side B 01/29/2018 16:12:32 S AND- H SOE in , [Vol. 50:159 HINESE C Richard Schmalensee & Rob- The Theory of the Firm PPLYING TO AND POLITICS A 94, 96–97 ( AILS IN The Problem of Overinclusion RGANIZATION As such, the delineation of the boundary of of the boundary the delineation As such, note 39, art. 9. EUMR F EUMR O INTERNATIONAL LAW A. 150 supra HEN THE Chinese leadership has long embraced this logic, al- Chinese leadership has long embraced NDUSTRIAL BOOK OF I 151 As Holmstrom and Tirole have long demonstrated, com- As Holmstrom and Tirole have The EUMR applies to concentrations that have a commu- that applies to concentrations The EUMR 151. Bengt R. Homstrom & Jean Tirole, 150. EUMR, III. W ert Willig eds., 1989). petition is an effective safeguard on the performance of petition is an effective safeguard firms. 190 nity dimension. exert Commission to for the is a prerequisite an undertaking a assessment. Such the competitive and to conduct jurisdiction first, assumptions: premised on two however, is legal design, must have entity of the undertaking the ultimate controlling those firms coordinate competition among an incentive to to do so. and second, it must have the ability within its control; entities, normally make sense for commercial While this would when it could not be taken for granted those assumptions results in an especially for Chinese SOEs. This comes to SOEs, SOEs, where two independent Chinese overinclusive outcome treated as competing with each other, are who are actually concept of At the same time, applying the part of China, Inc. Chinese SOEs can lead to an underinclusive an undertaking to of the EUMR only covers acquisitions outcome. Currently, of minority interests control; it does not apply to acquisitions ownership and control that do not confer control. However, effects could arise even are not absolute, as anticompetitive minority inter- when the State only acquires a non-controlling fall outside the ambit est in a rival firm. Such cases, however, of the EUMR. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 32 29-JAN-18 15:35 lowing the entry of private capital into most economic sectors. lowing the entry of private capital with SOEs in liberalized As non-state firms intensively compete incentive to coordinate com- sectors, the government has little Thus, even if the CCP petition among SOEs in those sectors. SOEs, such control does not maintains political control over over competitive strategies. necessarily translate into control despite its power and influ- Additionally, the Chinese State, political power is highly cen- ence, is not omnipotent. While the economic rights of gov- tralized in the hands of the CCP, 39755-nyi_50-1 Sheet No. 97 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 97 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 98 Side A 01/29/2018 16:12:32 , N- 152 191 E HINESE : C OWNED - LAN P TATE S 26 (2011), http:// UT OF THE Id. NALYSIS OF O The answer, he argues, The answer, he HINA A N 153 C , A The history of Chinese eco- ROWING YLE According to Naughton, com- According to Naughton, 155 , G K 154 OLE (1995) (discussing how, even with no democ- & C APITALISM IN AUGHTON N C 103, 114 (2012). Understanding China’s Growth: Past, Present and Future at 200–43 how the entry of non-state ac- (explaining ARRY TATE B , 1978–1993 ZAMOSSZEGI THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE All prices and quantities were determined by a All prices and quantities were determined S S ERSPECTIVE 156 EFORM . P at 8–11. R TERPRISES AND NDREW See generally Id. See generally id. A CON Barry Naughton, a well-known expert on the Chinese a well-known expert on the Barry Naughton, When China embarked on market reform in 1978, the When China embarked on market The Utility Function of the Chinese State The Utility Function J. E 153. 154. 155. 156. Xiaodong Zhu, 152. CONOMIC sites.utexas.edu/chinaecon/files/2015/06/US-China-Commission_State- For instance, while Chinese sta- Owned-Enterprises-and-State-Capitalism.pdf. in 2010, the number of SOEs tistics indicate that SOEs exceeded 100,000 only 120 that year. Regional gov- controlled by the central government was numbers. ernments controlled all the remaining ratization and a limited period of political relaxation, Chinese economic ratization and a limited period of political progress was able to continue). 26 tors was critical for the overall process of marketization, as they helped en- sure the healthy development of the market sphere). E centrally planned system modeled after the former Soviet centrally planned system modeled at the time the Chinese econ- Union. There is little doubt that Inc., but such a business omy was run like a giant China, economy, has tried to resolve the puzzle of how China could to resolve the puzzle of how economy, has tried growth in the absence ofsustain high economic pro- adequate property rights. tection of individual 2017] there Consequently, highly decentralized. in fact are ernance gov- owned by local among SOEs of unity of interest is a lack of SOEs in China. for the majority which account ernments, SOEs problems in of rampant agency the existence Moreover, for the government challenge poses a significant at all levels even Therefore, these SOEs. comes to controlling when it coordinate competi- an interest to government has when the to achieve such. tion, it often fails 1. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 33 29-JAN-18 15:35 lies in the establishment of a competitive mechanism which of a competitive mechanism lies in the establishment on SOEs. imposes discipline petition from private domestic firms and foreign-invested petition from private state-owned incumbents and firms have exerted pressure on forced them to up their game. nomic reform attests Naughton’s theory. nomic reform attests Naughton’s controlled by the Chi- Chinese economy was predominantly nese State. 39755-nyi_50-1 Sheet No. 98 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 98 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 98 Side B 01/29/2018 16:12:32 note The ROWTH Control, 159 G supra [Vol. 50:159 To tackle Li, 157 Empirical evi- see also 160 1080 (1997) (demon- . RANSITIONS AND : T CON . E OL AND POLITICS CONOMY J. P E 422, 423 (1998) (explaining how the . EV Competition, Policy Burdens, and State-Owned HINESE . R This provided the impetus for China C The profits of Chinese SOEs declined note 157, at 425 (showing that, despite large note 157, at 425 (showing that, despite 162 HE note 157, at 424 (illustrating the process of eco- note 157, at 424 (illustrating the process The Impact of Economic Reform on the Performance of The Impact of Economic Reform on the Performance CON 151, 165–66 (2000). 161 , T . E ,1980-1989, 105 supra M supra A INTERNATIONAL LAW Wei Li, RANSITION , 88 AUGHTON . T N Decisions permitting SOEs to sell some of their out- SOEs to sell some of their Decisions permitting Justin Yifu Lin et al., Lin et al., Lin et al., at 425. CON 158 ARRY E See B See See Id. See generally , 8 158. 162. 157. 159. 160. 161. strating the improvements in the marginal productivity of factors and in TFP strating the improvements in the marginal Lixin Colin Xu, by investigating a panel of 272 state enterprises); Reform on Chinese State-Owned Enter- Incentives and Competition: The Impact of prises influence of the managers’ actions on the profitability of an SOE was secon- influence of the managers’ actions on the by the state). dary to the input and output prices controlled 161, at 1084 (explaining how the formerly monopolistic industrial structure, when broken up, led to increased competition as new players were able to enter the market). amounts of implicit subsidies, over forty percent of SOEs are operating at a amounts of implicit subsidies, over forty loss due partly to the dissipation of monopoly rent); Enterprise Reform 92 (2007). 192 the in- Because agency problems. serious with is beset model the Chinese govern- determined by output prices were put and the to evaluate for the government was impossible ment, it man- or to discipline management of the SOEs’ performance the firm’s profitability. simply observing agers by \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 34 29-JAN-18 15:35 sharply, however, as they could no longer derive monopoly sharply, however, as they could rents in many markets. puts to the market and to source some of their inputs from the and to source some of their inputs puts to the market firms, contributed to the growth of non-state market partially and village enterprises (TVEs). especially the township in the late 1990s, resulting to conduct a round of privatization nomic reform that led to the unexpected growth of non-state firms like nomic reform that led to the unexpected TVEs). successes of these TVEs in turn exerted significant competitive TVEs in turn exerted significant successes of these the Chinese SOEs, thus further triggering pressures on the deepen economic reform. government to dence shows that the managerial incentives and the total fac- the managerial incentives and dence shows that due to of SOEs were significantly improved tor productivity and the competitive the increase in management autonomy pressures from TVEs. this problem, the government introduced a series of SOE re- a series of SOE introduced the government this problem, of granting the 1980s, with the main agenda forms starting in profit and to motivate them to pursue autonomy to SOEs growth. Chinese State Enterprises 39755-nyi_50-1 Sheet No. 98 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 98 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 99 Side A 01/29/2018 16:12:32 163 165 193 (June 61, 66-67 . Managing Chi- TUD . S Barry Naughton, OL P see also , 50 45 (2014) (citing statistics Central SASAC’s clear Central SASAC’s AO 166 However, because prices M 168 VER O The growth of the SOEs signals The growth of 167 Bureaucratic Politics and China’s Anti-Monopoly note 12. ARKETS 671, 684 (2014); Yasheng Huang, , M supra note 57, at 2. L. J. L ’ ARDY note 65, at 42. note 165, at 694–96. supra NT I THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE R. L supra supra Aguiar et al., 164 ORNELL ICOLAS C See N Market reform is not yet complete in China, and SOEs complete in China, reform is not yet Market At the same time, other bureaucratic departments have At the same time, other bureaucratic , 47 166. Naughton, 167. 168. Zhang, 165. Angela Huyue Zhang, 164. OECD, 163. (2002). Law 23, 2006) (unpublished manuscript), https://www.nottingham.ac.uk/gep/ documents/conferences/2006/june2006conf/naughton-june2006.pdf. Top-Down Control: SASAC and the Persistence of State Ownership in China Top-Down Control: SASAC and the Persistence from the National Bureau of Statistics of China); from the National Bureau of Statistics nese Bureaucrats: An Institutional Economic Perspective nese Bureaucrats: An Institutional Economic 2017] 2000. and 1994 between of SOEs reduction massive in a listing by a partial privatization also underwent Large SOEs ex- foreign stock in domestic and their best assets some of changes. Chinese economy. presence in the a powerful still maintain is a vast country with a huge bureaucracy. Meanwhile, China its own bu- of the bureaucracy may have As each component is not necessa- the goal of the Chinese State reaucratic interest, of SOEs. it comes to the economic policy rily coherent when reform, it has is a product of China’s market Although SASAC department a powerful and vocal bureaucratic also emerged as of the SOEs. vying for the interests \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 35 29-JAN-18 15:35 are liberalized, the agency has very limited tools to achieve its are liberalized, the agency has very the strength of Chinese state capitalism, and the entrenched Chinese state capitalism, and the the strength of further enhance the inter- interest of these giant SOEs helps bureaucracy. ests of SASAC as a state asset management the Price Supervision and different policy goals. For instance, the National Development the Anti-Monopoly Bureau within is tasked with controlling and Reform Commission (NDRC) conduct. If prices price inflation and tackling anticompetitive the whole economic system are too high, this will destabilize that jeopardizes the le- and may even lead to political turmoil gitimacy of the governing party. objective is to encourage the consolidation of SOEs and turn the consolidation of SOEs objective is to encourage related to its champions,” as this is directly them into “national interest. own bureaucratic 39755-nyi_50-1 Sheet No. 99 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 99 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 99 Side B 01/29/2018 16:12:32 EARS Y EN T [Vol. 50:159 EXT N [SINA FIN.] (Nov. 9, AIJING C ELATIONS IN THE AND POLITICS R The Role of State-Owned Enterprises in the INLANG X ], CONOMIC Antitrust was then viewed as an effec- as then viewed was Antitrust E 172 169 HINA note 26, at 198–99. US-C INTERNATIONAL LAW The NDRC Is Investigating the Broadband Monopoly Issues of The NDRC Is Investigating the Broadband [ in , This is most evident by looking at the record of looking at the most evident by This is supra Fagaiwei Zheng Diaocha Zhongguo Dianxin He Zhongguo Liantong Fagaiwei Zheng Diaocha Zhongguo Dianxin 170 Other frequent targets are local SOEs, such as pre- are local SOEs, targets Other frequent On the other hand, power is fragmented within the power is fragmented within On the other hand, at 696 (noting that during the financial crisis in 2008, NDRC in- at 696 (noting that during the financial at 697–98. 171 Id. Id. 173 The utility function of the Chinese State is therefore of the Chinese State is The utility function Antitrust takes for granted that a controlling owner can Antitrust takes for granted that The Limits of the Chinese State 172. Zhang, 173. Fan Gang & Nicholas C. Hope, 169. 170. 171. CCTV, Chinese Economy 2011), http://finance.sina.com.cn/g/20111109/121510782543.shtml. pt. II, 7–10 (2013). highly complex. On the one hand, the government endorses On the one hand, the government highly complex. sectors has liberalized most of its economic competition and the Chi- decades. In those liberalized sectors, over the past few freely with allows non-State firms to compete nese government SOEs. 194 prices. to control aim \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 36 29-JAN-18 15:35 coordinate firms within its control. It assumes that the owner coordinate firms within its control. when the owner is a can dictate the firm’s actions. However, Chinese bureaucracy and each governmental department has and each governmental department Chinese bureaucracy promoting or limiting compe- its own departmental interest in advocates for the expan- tition for SOEs. SASAC, for instance, the monopoly positions sion of the State sector and endorses This is often at odds with held by the largest Chinese SOEs. from private com- market reform and discourages competition of other departments, panies. It also clashes with the objectives NDRC, which advocates for such as the antitrust unit within consumer welfare. 2. Chinese antitrust enforcement. For example, in 2011, NDRC For example, antitrust enforcement. Chinese China Telecom and into China its investigation announced in- SOEs in the telecommunication the two largest Unicom, dustry. mium white liquor manufacturers, gold retailers in Shanghai, manufacturers, gold retailers mium white liquor auto man- insurance companies, large cement manufacturers, on. ufacturers, and so vited many industry associations for chats, and bullied them to suppress vited many industry associations for chats, not satisfactory). prices to avoid inflation; the results were tive tool to discipline the high prices charged by firms, includ- high prices charged to discipline the tive tool ing SOEs. China Telecom and China Unicom Shexian Longduan 39755-nyi_50-1 Sheet No. 99 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 99 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 100 Side A 01/29/2018 16:12:32 EV 179 195 . R CON . E M A , A recent empirical 176 However, such a link is Hayek, Local Information, and Com- 178 Zhangkai Huang and his co- 177 1076, 1078 (2011). In 2008, local government’s share of In 2008, local government’s share 175 Indeed, if we measure degree of decen- Indeed, if we measure The Fundamental Institutions of China’s Reforms and De- The Fundamental Institutions of China’s Reforms ITERATURE note 9, at 111. 174 L Zhangkai Huang et al., supra CON THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE , J. E . at 111–12. , 49 ROEBER Id See generally K Id. Id. On the surface, the Chinese State seems highly central- the Chinese State seems highly On the surface, 175. 176. 177. 174. Chenggang Xu, 178. 179. manding Heights: Decentralizing State-Owned Enterprises in China manding Heights: Decentralizing State-Owned velopment (forthcoming 2017) (analyzing the manner in which local information af- fects decentralization of firms in a market economy). Notably, large centrally-owned SOEs only account for one Notably, large centrally-owned SOEs in China and control third of the total number of 2017] problems Two inherent nuanced. more is the question State, for difficult have made it extremely economy in the Chinese the and coordinate control to exercise effective the State (2) economy and Chinese the highly decentralized SOEs: (1) SOEs. that exist in agency problems the severe a. Economy The Decentralized on every level Party keeps a tight grip ized and the Communist power is con- But while political of the Chinese government. govern- most of the rights of economic centrated in Beijing, Chenggang delegated to local governments. ance have been de- the Chinese economy as a “regionally Xu has characterized a centralized, (RDA) regime,” where centralized authoritarian decen- State presides over a dynamic, one-party, authoritarian tralized economy. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 37 29-JAN-18 15:35 tralization by looking at statistics, China is the most decentral- tralization by looking at statistics, ized country on earth. from the government is authors found that when the distance has less direct oversight), farther (and hence the government (that is, managed by the SOE is more likely to be decentralized a lower level of the government). fiscal revenue and expenditure was forty percent and seventy- fiscal revenue and expenditure was the OECD average of three percent respectively, far exceeding percent. nineteen percent and thirty-two in strategic industries. muted when it comes to central SOEs study found that local information is key to understanding the study found that local information governance of SOEs in China. 39755-nyi_50-1 Sheet No. 100 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 100 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 100 Side B 01/29/2018 16:12:32 185 186 3 (May TORY OF S [Vol. 50:159 HE : T The central 187 First, local gov- First, local OAD R 181 Consequently, most Consequently, 180 HINESE Informally, local busi- Informally, local Local officials thus be- Local officials , C 183 184 AND POLITICS Formally, the success of the Formally, the success EELS 182 Thus, in the early 2000s, the H 188 MERICAN Crony Capitalism with Chinese Characteristics Crony Capitalism with Chinese Characteristics 8 (2011). , A note 181, at 5–7. note 9, at 99. HINA UNNE C INTERNATIONAL LAW supra supra J. D , OTORS IN at 2–3. at 2 (noting the economic benefits that party cadres can obtain at 2 (noting the economic benefits that at 3. ICHAEL ROEBER M M K Id. Id. Id. Id. Id. One example can be found in the automobile industry. One example can be found in Meanwhile, decentralization has been viewed as the driv- has been viewed decentralization Meanwhile, 181. Chong-En Bai et al., 182. 188. Bai et al., 180. 183. 184. 185. 186. 187. ENERAL 2014) (unpublished manuscript), http://cowles.yale.edu/sites/default/ that the decentralized political files/files/conf/2014/ma_song.pdf (noting to ameliorate the negative dynamic and economic system in China tends consequences of crony capitalism). G While each local government is incentivized to erect barriers government is incentivized to While each local the existence of competi- of entry to protect its own cronies, local governments coun- tion from cronies fostered by other from local protectionism. teracts the negative effects arising regulated sector where The automobile industry is a tightly with Chinese domestic foreign car makers have to partner market. SOEs in order to access the Chinese 196 assets. of all State half less than slightly \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 38 29-JAN-18 15:35 Chinese automobile market was dominated by a few large Chinese automobile market was come high-power incentive agents with vested interests in the incentive agents with vested interests come high-power thousands of Because China is a vast country, local businesses. each other. are in effect competing with local governments ness owners can reward officials with bribes and even grant reward officials with bribes and ness owners can the local business. them stakes in local businesses increases the tax revenues received by the lo- increases the tax revenues received local businesses and helps the expands the employment base, cal governments, for economic officials obtain political credit local government their jurisdictions. achievements in SOEs and State assets belong to local governments. State assets belong SOEs and de- economic growth, phenomenal behind China’s ing force support. lack of good institutional spite the from their interactions with the business sector). from their interactions with the business government initially wanted to foster three large state-owned government initially wanted to foster was not willing to grant li- automobile manufacturers and censes to other companies. ernments have incentives to foster their local businesses, which businesses, to foster their local have incentives ernments local leaders. are cronies of the 39755-nyi_50-1 Sheet No. 100 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 100 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 101 Side A 01/29/2018 16:12:32 197 IKKEI N , Michael 191 Local govern- Thus, the cen- Thus, local gov- 193 197 194 However, since the However, 189 One example of this failure One of them is Chery, which One of 196 190 (Sept. 28, 2015) (noting that the over- Overcapacity a Time Bomb for China’s Econ- OST P The Chinese Steel Industry’s Moment of Truth note 9, at 114. ORNING note 187, at 125–36. . note 26, at 208-9. Although the central government has repeat- Although the central government M supra THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE 195 , supra supra HINA , (July 7, 2016), https://asia.nikkei.com/magazine/20160707-De C . To be sure, both SAIC-GM and Chery are owned by SAIC-GM and Chery are owned To be sure, both at 125. at 125–36 UNNE ROEBER EV Id. Id. Id. K D Id. 192 OUTH R While decentralization has promoted China’s astounding While decentralization S , 194. 191. 195. 196. Zhang, 197. Wataru Kodaka, 192. 193. Shuaihua Wallace Cheng, 189. 190. SIAN capacity rate surpassed thirty percent in industry sectors such as iron, steel, capacity rate surpassed thirty percent in power generation equipment). glass, cement, aluminum, solar panel and ciphering-Duterte/Business/The-Chinese-steel-industry-s-moment-of-truth. omy A 2017] as such firms, foreign with partnered players who state-owned Com- Industry Shanghai Automotive between the partnership (SAIC-GM). General Motors pany and \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 39 29-JAN-18 15:35 the Chinese State, but they actually belong to different owners but they actually belong to different the Chinese State, and are fierce competitors. had unde- in the past few decades, it has also economic growth sirable consequences. government has faced se- The Chinese in many industry sectors. vere overcapacity among SOEs in these sec- edly tried to orchestrate competition tors, it has often failed to do so. Despite numerous attempts can be found in the steel industry. Chinese steel manufacturers, to reduce competition among remains. the severe problem of overcapacity 2000s, a number of small, startup car manufacturers, spon- manufacturers, startup car number of small, 2000s, a se- and become started to appear local governments, sored by to the large SOEs. rious rivals tral government recently encouraged the tie-up between Baos- tral government recently encouraged two large state-owned steel teel and Wuhan Iron and Steel, was started in 1997 by the Wuhan city government. in 1997 by the was started ernments have incentives to prop up SOEs even if they are ernments have incentives to prop terminally ill. ments are particularly reluctant to close down businesses, as ments are particularly reluctant and employment, which also this results in loss of GDP growth region. threatens the social stability in the Dunne, a veteran in the Chinese auto industry, told the tale of in the Chinese auto industry, told Dunne, a veteran of a new to beat SAIC-GM with the launch how Chery was able wanted to re- to the one that SAIC-GM had car model similar lease. 39755-nyi_50-1 Sheet No. 101 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 101 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 101 Side B 01/29/2018 16:12:32 The 200 [Vol. 50:159 This seems to sug- To the extent that 201 202 AND POLITICS In fact, ChemChina is the In fact, ChemChina 199 INTERNATIONAL LAW Clearly these two SOEs are not completely indepen- completely are not two SOEs these Clearly ¶ 16 n.6. 198 Id. Id. Id. Similarly, the Commission’s decision in the EDF/GCN Similarly, the Commission’s decision The cases that the Commission has investigated so far are Commission has investigated The cases that the 200. 198. 199. (China National Bluestar/ Commission Decision No. COMP/M.6082 201. 202. Commission Decision No. COMP/M.6113 (DSM/Sinochem), slip op. Elkem), slip op. ¶ 16 (Mar. 31, 2011). ¶¶ 15, 24 (May 19, 2011). 198 makers. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 40 29-JAN-18 15:35 these two SOEs do compete, it would be problematic to treat these two SOEs do compete, it would of antitrust assessment. them as a single entity for the purpose these SOEs may have been True, the competition among intervened, but it is unequivo- fiercer had the government not SOEs would also reduce com- cal that a merger between these petition. case—which energy sector as a single treats all SOEs in the entity—is fails to understand the unnecessarily broad and sector. The energy sector competitive landscape of the energy Chinese economy and falls is deemed highly important for the identified by SASAC. within the “key” and “pillar” industries that includes oil, gas, elec- Energy, though, is a vast industry renewable energy—manytricity, nuclear power, coal, and of dent from the Chinese State since the State can influence their can influence since the State the Chinese State dent from coor- could perfectly the government Yet, if merger decisions. were SOEs as if they these two competition among dinate the two need for these would be no subsidiaries, there its own place. merge in the first SOEs to in China. In of economic fragmentation also good illustrations silicon mar- the Commission found that the Bluestar/Elkem, head-to-head with SOEs engaging in ket is highly fragmented private firms. competition with the rest SOE in the silicon metal market; only centrally-owned belong to various local governments. of the SOEs all gest that the fragmented nature of the market makes it costly nature of the market makes gest that the fragmented these firms should it desire for the government to coordinate a similar phenomenon in to do so. The Commission identified evidence gathered during DSM/Sinochem/JV, though the that market investigation was mixed. evidence from the Commission’s market investigation also the Commission’s market investigation evidence from are effective local SOEs and private firms confirms that these on ChemChina. competitive constraints 39755-nyi_50-1 Sheet No. 101 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 101 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 102 Side A 01/29/2018 16:12:32 199 In OLITI- 208 P 93–94 (David HANGING C Even assuming S OLICY ’ Business Interest Groups 203 P HINA C ETROLEUM P 205 note 91. 204 Even though these SOEs continue 93–94. supra 206 NTERNATIONAL I S ’ note 65, at HINA note 163, at 24. , C THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE supra supra , 97. ONG In fact, some Chinese SOEs have captured industry In fact, some Chinese SOEs have K at ., at 36–37 the ratio of imports to GDP has increased (noting that O ARDY Id L B Id. 207 Agency problems are not unique to SOEs, but they are are not unique to SOEs, but Agency problems to SOEs, but they are Agency problems are not unique 204. 205. Milhaupt & Pargendler, 206. OECD, 203. 207. 208. L. Goldwyn & Jan H. Kalicki eds., 2010); Erica Downs, in Chinese Politics: The Case of the Oil Companies, in since China joined the WTO and that subsidiaries of foreign firms also sell to since China joined the WTO and that subsidiaries the domestic market). b. Agency Problems have for SOEs. As Milhaupt and Pargendler particularly severe to the there are many unique challenges succinctly outlined, enjoyed including the weak exit options governance of SOES collective ac- to shareholders and the by citizens as opposed the SOEs, as by the citizens in monitoring tion problem faced objectives and the well as the ambiguity of governmental means to achieve such objectives. Chinese SOEs due to the size particularly serious problems for of the entities. Many of the and unique bureaucratic status are among the largest com- Chinese SOEs in strategic sectors were spun off from panies in the world. These companies in turn dissolved and trans- large central ministries, which institutional, and person- ferred most of their administrative, nel capacity to the SOEs. 2017] Lardy, an Nicolas For instance, very fragmented. remain which in the coal mining notes that the Chinese economy, expert on SOEs as of 2011. there were 880 sector alone \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 41 29-JAN-18 15:35 to be subjected to regulation, the regulatory power over the to be subjected to regulation, the and the agencies often lack industry tends to be fragmented, to effectively monitor sufficient political clout and resources them. regulators and have come to dominate the government. regulators and have come to dominate the Chinese government would like to coordinate the compe- would like to coordinate government the Chinese be would the cost of coordination these SOEs, tition between exert competitive private firms high. Moreover, prohibitively by Lardy, trade libera- As pointed out on these SOEs. pressures competi- direct investment are also important tion and foreign the SOEs. tive constraints on 39755-nyi_50-1 Sheet No. 102 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 102 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 102 Side B 01/29/2018 16:12:32 , , 3 217 As One 215 213 [Vol. 50:159 (Mar. 2007), Moreover, 209 ISDOM W (Cheng Li ed., 2008); 121, 122 AND POLITICS ONVENTIONAL In China, the size of the SOE In China, the size C 212 EMOCRACY D UDITS OF 211 note 14, at 737–38. On the surface, the Chinese govern- On the surface, The better the assets an NOC acquires, . A 214 China’s Energy Governance: Perception and Reality China’s Energy Governance: Perception and note 57, at 7. 216 supra TUD It is thus no surprise that in practice, no surprise It is thus The Fact and Fiction of Sino-African Energy Relations S L 210 ’ note 208, at 16. note 15, at 441–45. supra INTERNATIONAL LAW , NT ROSPECTS FOR I : P supra supra , . 42, 50 (2007). at 442. at 446. at 447–48. AUGHTON ONG EC Id. Id. Id. Id. N K ENTER FOR S ANDSCAPE In a previous article on Chinese outbound investment, I on Chinese outbound investment, In a previous article L 209. 212. Zhang, 213. 210. Lin & Milhaupt, 211. 217. 214. 215. 216. Erica S. Downs, HINA https://cis.mit.edu/sites/default/files/documents/Cunning- ham0307Audit.pdf. Edward A. Cunningham, C CAL MIT C attributed empire-building as one important factor driving as one important factor attributed empire-building forays. Chinese SOEs’ overseas 200 SOEs and on rely heavily agencies regulatory situations, these policy questions. them for important defer to \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 42 29-JAN-18 15:35 SASAC finds itself lacking the political clout to effectively lacking the political clout SASAC finds itself SOEs. check these large ment seems to play a key role in coordinating the efforts of ment seems to play a key role in and natural gas assets; the these NOCs in their quest for oil NOCs, in their individual reality, however, is that it was those their forays overseas. capacities, that were driving the more likely it is to obtain diplomatic and financial assis- the more likely it is to obtain diplomatic for future investments. tance from the Chinese government matters. The bigger it is, the more powerful it becomes; the it is, the more powerful it matters. The bigger to obtain re- becomes, the easier it is for it more powerful it further and become even bigger. sources to expand Chinese SOEs still enjoy bureaucratic ranks, and the chairmen bureaucratic ranks, SOEs still enjoy Chinese status a bureaucratic SOEs enjoy fifty-three central of the top vice- SASAC or to a of the central to either the head parallel rank. ministerial China’s found in China’s oil and gas sector. example can be players in (NOCs) are the most active national oil companies overseas acquisitions. energy expert, the politi- pointed out by Erica Downs, a China by the amount of high qual- cal clout of an NOC is determined ity assets it possesses. 39755-nyi_50-1 Sheet No. 102 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 102 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 103 Side A 01/29/2018 16:12:32 220 223 201 Dec. ( Nov. 30, IMES . ( In fact, EL . T 221 IN R F OREIGN F Big is Beautiful? State-Owned En- 218 OUNCIL ON A series of policy documents Made in China: Beijing Plans New Wave 224 July 7, 2016), https://www.bloomberg. . . C Mar. 11, 2015), http://uk.reuters.com/ ( Xi Boosts Party in China’s $18 Trillion State ( UR E , EWS N EUTERS Some economists have warned that the Some economists R , 222 China Railway Strategy Goes Off Track, LOOMBERG THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE B , One example is the tie-up between two state-owned between two is the tie-up One example Id. Id. Id. 219 To rein in the rampant agency problems, President Xi To rein in the rampant agency Indeed, problems of coordination have motivated SASAC have problems of coordination Indeed, 221. 222. Wendy Leutert & Francois Godement, 223. 224. Keith Zhai & Yinan Zhao, 220. Tom Mitchell, 218. 219. Matthew Miller & Charlie Zhu, 23, 2014), https://www.ft.com/content/1b72fba0-875e-11e4-8c91-00144fea bdc0. 2016), http://www.ecfr.eu/publications/summary/china_state_owned_en terprise_mergers_under_xi_jinping7196. terprise Mergers Under Xi Jinping Company Sector article/uk-china-parliament-reform-idUKKBN0M70LL20150311. In any event, the European Union should have an interest in In any event, the European Union if they pose a threat to Euro- intervening in those transactions would have no ba- pean consumers. However, the Commission that Chinese SOEs are to be sis to do so if it adopts the view treated as one single entity. and improved leadership for Jingping has called for stronger the CCP over SOEs since 2016. 2017] NOCs Chinese among of coordination the lack explains This expansion. race for overseas in their SOEs in recent among large central consolidation to promote years. engaged in media, these two firms have According to Chinese overseas with each other in bidding cutthroat competition enhance their the transaction is expected to projects, and thus in the international arena. competitive strength \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 43 29-JAN-18 15:35 of State Firm Consolidation consolidation may even worsen the agency problem, as the even worsen the agency problem, consolidation may bargaining power and find Chinese government may have less corporate behemoths. it even more difficult to control these rolling stock companies, China CNR Corporation and CSR and China CNR Corporation companies, rolling stock China Railway Rolling Stock Corporation. Corporation, into have emerged granting the Party Committee within the SOEs have emerged granting the Party since 2015, China has witnessed a new wave of mergers among has witnessed a new wave of mergers since 2015, China another addition to the CNR/CSR merger, Chinese SOEs. In have taken between large Chinese SOEs ten mega-mergers con- such as shipping, energy, commerce, place in industries struction, and steel. 39755-nyi_50-1 Sheet No. 103 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 103 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 103 Side B 01/29/2018 16:12:32 E- D June Id. ( EGIME IMES [Vol. 50:159 R . T IN F , Why Rotate the Heads of YNAMICS OF [ D (Sept. 18, 2015), http:// HE ] ET : T Clearly, this is the govern- this Clearly, Top executives at large Top executives N AND POLITICS 225 228 EIJING APITALISM B C note 14, at 740 (discussing the rotation of note 14, at 740 (discussing the rotation EW While such rotation has obviously While such rotation RONY [N 227 C AN , supra S ’ A recent scandal at China National Petro- A recent scandal at China National W China Rows Back on State-Sector Reform IN 230 HINA angqi Yibashou Da Nuoyi, Weisha? J note 146, at 21, 30. INTERNATIONAL LAW , C IN EI X P supra ], In a recent book on corruption in China, Minxin In a recent book on corruption Lin & Milhaupt CAY INXIN 229 Some European academics have used this as an exam- academics have used this as an Some European M See Id. 226 172–73 (2016). 2016), https://www.ft.com/content/92e52600-31f7-11e6-ad39-3fee5ffe 229. 227. Riley, 228. Shu Wang, Y 226. 230. 225. Lucy Hornby, www.bjnews.com.cn/news/2015/09/18/378018.html. Central SOEs? 5b5b. com/news/articles/2016-07-07/xi-boosts-party-say-in-china-s-18-trillion-state- company-sector. 14, sectors). The authors examine top executives in the oil, energy, and telecom rotations are of directors or vice data suggesting that most of the corporate below Secretary of the Party CEOs, and the party rotations are for positions to time rotated top executives in Committee. But, SASAC has from the time and telecommunications. key industries including petroleum, energy 202 oversight. to exercise power more \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 44 29-JAN-18 15:35 Pei investigated fifty cases and found that the buying and sell- Pei investigated fifty cases and found is a widespread practice ing of appointments and promotions in Chinese SOEs. flouted the standard corporate law concept of the separate corporate law concept of flouted the standard overlooked western scholars have identity of the corporation, by a desire to move was primarily motivated the fact that the and corruption. curb nepotism ple of the Chinese government attempting to coordinate com- government attempting to coordinate ple of the Chinese them. petition among ment’s deliberate attempt to tighten political control over control to tighten political attempt ment’s deliberate does not necessarily and influence such control SOEs, but perennial challenge effects. The into anticompetitive translate be- strike the balance is how to Chinese leadership faced by in order to motivate to management autonomy tween granting ensuring good corpo- profits, and pursue growth and them to by manage- so that State assets are not looted rate governance SOEs it is well-known that top Chinese ment. For instance, party lead- their senior corporate and have routinely rotated ers. SOEs have enormous influence, and their most important SOEs have enormous influence, of personnel. As such, source of power lies in their control top executives to create a long tenure at a large SOE enables firm. Those within the net- large personnel network within the share their risks and illegal work collude with each other and profits. 39755-nyi_50-1 Sheet No. 103 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 103 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 104 Side A 01/29/2018 16:12:32 . 203 L.J The EGULA- UPPORT R 233 , S 81 (2006) . David Gilo et NTITRUST ERGER A CON Commission White M For joint ven- Competitive Effects of , 67 OMMISSION 236 . C see generally UR EVIEW OF RAND J. E Antitrust Issues Involving Mi- R ., E , at 12, COM (2014) 449 final , 37 , at 9, OECD Doc. DAF/COMP (2016); Organisation for Eco- Meanwhile, the Commission’s Meanwhile, the PMA ET AL Y 234 note 42, ¶ 56. ONCERNING THE C HAREHOLDINGS supra ATRICIA P S 231 For instance, if a minority shareholder has For instance, if a The Problem of Underinclusion The Problem 235 SSESSMENT INORITY note 53; B. A Steven C. Salop & Daniel P. O’Brien, M THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE see supra MPACT ¶¶ 59–60. However, there is currently a gap in addressing acqui- However, there I ¶ 59. at 170–73. TION EGARDING 232 Id. Id. Id. Abundant economic studies have shown that minority studies have shown that Abundant economic R Partial Cross Ownership and Tacit Collusion 234. Jurisdictional Notice, 235. 233. a White Paper proposing a In 2014, the Commission published 236. 231. 232. Gilo, TUDY FOR 559 (2000) (describing the opposite effects on competition that horizontal 559 (2000) (describing the opposite effects markets); and vertical acquisitions typically have on al., Paper Towards More Effective E.U. Merger Control Paper Towards More Effective E.U. Merger “targeted transparency system” specially designed to handle notifications of “targeted transparency system” specially the Commission’s proposal re- acquisitions of minority interests. However, and the new EU Compe- ceived fierce criticisms during public consultations stated in 2016 that she was not con- tition Commissioner Margrethe Vesteger As a consequence, the plan to tackle vinced that the EUMR needs changing. hold indefinitely. minority shareholding issue was put on (July 9, 2014). (employing economic theorems to explain how passive investments can lead (employing economic theorems to explain raise antitrust concerns). to coordinated anticompetitive effects and Partial Ownership: Financial Interest and Corporate Control Partial Ownership: Financial Interest and nomic Co-operation and Development [OECD], nomic Co-operation and Development [OECD], nority Shareholding and Interlocking Directorates (2008)30 (June 23, 2009), https://www.oecd.org/competition/mergers/ 41774055.pdf; S 2017] oil firms, state-owned the largest one of Corporation, leum firm, of the the former chairman Jieming Jiang, reveals how for- stole a vast the head of SASAC, briefly became who later the State. tune from \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 45 29-JAN-18 15:35 sitions of non-controlling interest at the E.U. level. interest at the E.U. sitions of non-controlling or if the the activities of the company, the right to manage and small, then even a mi- other shareholders are dispersed control. nority stake enables it to exercise Jurisdictional Notice also recognizes de facto control through also recognizes de facto control Jurisdictional Notice minority interest. shareholding in rival businesses can cause anticompetitive shareholding in harm. EUMR defines control as the power to exercise decisive influ- as the power to exercise EUMR defines control be deemed to Generally speaking, a firm will ence over a firm. half of the another firm if it owns more than have control over that entity. voting interest in 39755-nyi_50-1 Sheet No. 104 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 104 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 104 Side B 01/29/2018 16:12:32 , RACKER T [Vol. 50:159 NVESTMENT I LOBAL Worldwide Chinese Investment & G AND POLITICS HINA 238 : C ORG AEI. , However, falling short of establishing sole falling short of However, 237 INTERNATIONAL LAW ¶¶ 62–63. Id. Consider the following hypothetical. Suppose an acquir- Consider the following hypothetical. This has two implications for when the EUMR is applied for when the two implications This has dealing with minority The concern about the gap in 237. 238. Am. Enter. Inst. & Heritage Found., https://www.aei.org/china-global-investment-tracker/ (last visited Nov. 13, 2017). ing Chinese SOE has a subsidiary that competes with the target ing Chinese SOE has a subsidiary 204 situa- deadlock through be established can also control tures, com- block a strategic can a minority shareholder tions where decision. mercial \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 46 29-JAN-18 15:35 or joint control in the above circumstances, a minority investor circumstances, in the above or joint control of the EUMR. the jurisdiction fall outside would normally investor ac- State investors. First, if a State to acquisitions by a European but non-controlling interest in quires a significant control in not be deemed to have acquired firm, then it would a concentra- would not constitute that firm. The transaction if an SOE be subject to the EUMR. Second, tion and would not a firm that is but non-controlling right in holds a significant would be by private investors, that firm majority controlled than an SOE owned firm (POE), rather treated as a privately over a Eu- If the POE then acquires control under the EUMR. ultimate con- SOE would not be deemed an ropean firm, the of the same would not be regarded as part trolling entity and In the above two scenarios, undertaking as the European firm. a minority interest in a the SOE directly or indirectly acquires is completely outside the European firm, but its involvement scrutiny of the EUMR. by Chinese SOEs shareholding is not new, but acquisitions Chinese SOEs are now pose a particular competition worry. the world. In 2016, more than among the largest companies in the Fortune Global 500 List twenty percent of those who made were Chinese companies, thewere State- majority of which deep pockets but also the owned. These SOEs not only have support to engage in government’s political and financial face heavy regulations in overseas expansion. As these SOEs highly profit-driven in their the domestic market, they are also show interest in investing overseas expansion. These SOEs such as energy, high tech- in relatively concentrated industries, nology, utilities, and finance. Construction (2005-2017) 39755-nyi_50-1 Sheet No. 104 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 104 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 105 Side A 01/29/2018 16:12:32 205 THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE Minority shareholding is an increasingly popular means Some may be puzzled: if the Chinese State could lack the Some may be puzzled: if the Chinese Direct Acquisition of Minority Interest of investment for Chinese SOEs when they expand overseas. Annex I provides a list of the minority shares (less than fifty 2017] by acquisition The market. same product in the firm European com- for the target to incentives SOE could create the Chinese If the Chinese the relevant market. aggressively in pete less some of the target, the output prices and reduces SOE raises the competitors, but will move to its customers of the target’s from its subsidi- to a share of profits SOE is entitled Chinese when the effects, therefore, could arise ary. Anticompetitive in a concen- and ability to heavily invest SOE has the incentive inter- if a Chinese SOE has a minority trated sector. Similarly, prices and SOE may find it profitable to raise est in a POE, the its sales are its subsidiary. Even if some of reduce output of share of the target, it is entitled to a shifted to the European likely be- effects also become more POE’s profits. Coordinated SOE in both ownership of the Chinese cause of the common one may the European target firm. Indeed, its subsidiary and Commission, western regulators, such as the envisage that if SOEs over Chinese SOEs, then Chinese tighten their scrutiny overseas acquisitions to ob- may try to use POEs as vehicles for viate the Commission’s scrutiny. those SOEs in which it incentive and ability to coordinate not be even less likely for holds majority control, would it they only have minority in- SOEs to coordinate firms in which a fundamental difference be- terests? Not necessarily. There is regarding the coordination tween the Commission’s concerns shareholding by Chinese among Chinese SOEs and minority premise that the State (via SOEs. The former was built on the coordinate competition central or local SASACs) would SOEs, whereas the latter as- among ostensibly independent coordinate firms that it par- sumes that a single SOE would and the ability of SASAC to tially owns. Although the incentive SOEs belonging to multiple coordinate a large number of regions is ambiguous, as elab- levels of government in different and ability of a SOE to do orated in Part III(A), the incentive circumstances, as discussed so is firmly grounded in economic below. 1. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 47 29-JAN-18 15:35 39755-nyi_50-1 Sheet No. 105 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 105 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 105 Side B 01/29/2018 16:12:32 ORP OF : C [Vol. 50:159 RID Feb. 2, 2012), ( G Since 2011, it IMES TATE 241 Peter Wise & Leslie S . T IN F , REN, see also Its first acquisition was Its first acquisition 242 AND POLITICS China State Grid Quietly Builds Mediterranean https://www.ren.pt/en-GB/investidores/ Even though these Chinese SOEs did these Chinese Even though REN, , http://fortune.com/global500/state-grid/ (last , http://fortune.com/global500/state-grid/ 240 State Grid became an active investor in State Grid became Aug. 10, 2014), http://uk.reuters.com/article/utili- ( 243 State Grid is now the single largest share- State Grid is now the single ORTUNE INTERNATIONAL LAW F As shown in the list, some of the largest deals of the largest in the list, some As shown 244 , Annex I. Annex I. EUTERS R 239 , Two years later, State Grid spent $2.8 billion to ac- Two years later, State Grid spent ; Geert De Clercq et al., June 1, 2012), http://www.sgcc.com.cn/ywlm/mediacenter/ 245 Shareholder Structure, See infra SGCC Completes Acquiring a 25% Stake of SGCC Completes Acquiring a 25% Stake of Id. See infra Id. State Grid China’s State Grid to Take 25% Stake in REN ( State Grid, a Chinese SOE under the supervision of cen- SOE under the supervision State Grid, a Chinese 245. 242. 243. 244. 239. 240. 241. HINA https://www.ft.com/content/41a0c572-4dba-11e1-b96c-00144feabdc0 (ex- https://www.ft.com/content/41a0c572-4dba-11e1-b96c-00144feabdc0 plaining that State Grid is committed to helping REN expand both in Portu- gal and overseas). estrutura_acionista/ (last visited Nov. 24, 2017). Hook, visited Nov. 13, 2017). ties-mediterranean-china-idUKL6N0QB5NF20140810 (quoting a State Grid ties-mediterranean-china-idUKL6N0QB5NF20140810 just a passive financial investor. It official as saying that the “State Grid is not of CDP-Reti. This is not a financial will actively take part in the management investment, more like a strategic investment”); corporatenews/06/273922.shtml. Power Network C 206 Europe in have invested companies Chinese that percent) since 2005. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 48 29-JAN-18 15:35 quire a thirty-five percent interest in Cassa Depositi e Prestiti, quire a thirty-five percent interest not acquire majority control over the European assets, such assets, over the European majority control not acquire concerns. pose competition may nonetheless investments now ranks as a prime example. State Grid tral SASAC, offers and was public utility company by revenue the world’s largest List in 2016, company on the Fortune 500 the second-largest $50 billion in cash that year. generating over to participate in the firm’s Ren and sent senior executives management. share structure with holder in Ren, which has a fragmented and the rest held by seven in- thirty-five percent shares public vestors. made by Chinese firms in Europe in recent years are minority Europe in recent Chinese firms in made by SAFE’s $7.86 billion and including ChemChina acquisitions, in Pirelli. investment has made several high-profile acquisitions in Western Europe, high-profile acquisitions in Western has made several minority interests. all of which are stake in it purchased a twenty-five percent made in 2012, when energy net- Nacionais (Ren), the largest Redes Energeticas work in Portugal. 39755-nyi_50-1 Sheet No. 105 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 105 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 106 Side A 01/29/2018 16:12:32 207 AILY IKKEI LOBAL D N (Oct. EUTERS , G R , , COM HINA KATHIMERINI C E , , Notably, the NERA. 249 4, 247 State Grid’s minority acquisi- In late 2016, State Grid pur- In late 2016, State The deal was later blocked by The deal was later State Grid also actively partici- also actively Grid State 253 250 248 246 Global Energy Regulation: China’s State Grid State Grid’s expansion into Europe State Grid’s expansion 251 China Power Giant Gobbling Up Foreign Players China Extends Penetration of Greek Market State Grid Takes Stake in Greek Power Network State Grid Buys Stake in Italian Firm for $2.8 Billion State Grid Buys Stake in Italian Firm for $2.8 THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE So far, State Grid has boosted its overseas invest- So far, State Grid has boosted Jan. 25, 2017), http://asia.nikkei.com/Business/Companies/ 252 . ( EV Id. Id. of Belgium’s Eandis China State Grid in Talks to Buy 14 Percent (Aug. 1, 2014), http://www.globaltimes.cn/content/873704.shtml. R In the past year, State Grid attempted to make a further attempted to year, State Grid In the past 250. 251. Ilias Bellos, 247. 248. 246. Chu Daye, 252. Zheng Xin, 253. Shunsuke Tabeta, 249. NERA Econ. Consulting, SIAN IMES Jan. 8, 2017), http://www.ekathimerini.com/215103/article/ekathimerini 2016), http://www.nera.com/content/dam/nera/publications/newsletters /global-energy-regulation/NL_Global_Energy_Regulation_Issue%20209. pdf. China-power-giant-gobbling-up-foreign-players?page=1. ( /business/china-extends-penetration-of-greek-market. (Dec. 20, 2016), http://europe.chinadaily.com.cn/business/2016-12/20/ content_27716287.htm. A T (June 3, 2016), http://af.reuters.com/article/energyOilNews/idAFL4N18 V2WC. ment to over $10 billion in regions including Europe, South ment to over $10 billion in regions to increase its invest- American, and Asia, and it is expected ment to $50 billion by 2020. 2017] unit. grid energy an Italian to ac- it won a bid In June 2016, Western Europe. foray into gas Assets, a Belgian stake in Eandis percent quire a fourteen firm. and power distribution \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 49 29-JAN-18 15:35 pates in management, controlling two of the five seats on the the five seats on two of management, controlling pates in Italian grid. directors of the board of is highly strategic. According to China Daily, State Grid is According to China Daily, is highly strategic. power net- an ultra-high-voltage global “considering building and conti- electricity from country to country work to transmit to develop a goal that may cost $50 trillion nent to continent, by 2050.” Fails to Acquires Shares in Flemish Distribution Network Fails to Acquires Shares in Flemish Distribution tions in Europe seem to be the starting point for its ultimate tions in Europe seem to be the chased a twenty-four percent stake of ADMIE, a Greek power percent stake of ADMIE, a chased a twenty-four transmission company. Belgian authorities, citing a concern over the possible takeover citing a concern over the possible Belgian authorities, by Chinese investors of distribution networks deal would have given State Grid only three seats on the forty- given State Grid only three seats deal would have of directors. member board 39755-nyi_50-1 Sheet No. 106 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 106 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 106 Side B 01/29/2018 16:12:32 , at note supra supra [Vol. 50:159 Sovereign Wealth Elhauge, Gilo, Thus far, it is not far, it Thus see also 254 see generally AND POLITICS Firm Values and Sovereign Wealth Fund In- Sovereign Wealth Funds (SWFs) Sovereign Wealth note 232, at 568–84; Moreover, because SWFs possess su- Moreover, because SWFs possess 256 258 256, 274 (2010). supra . note 241. CON INTERNATIONAL LAW supra Ronald J. Gilson & Curtis J. Milhaupt, Ronald J. Gilson & Curtis J. Milhaupt, . E 1345, 1350–54 (describing the minimal oversight (2008) . IN EV Empirical studies have also found that SWFs are Empirical studies J. F there is a foreseeable risk that these networks would that these networks a foreseeable risk there is 257 255 , 98 . L. R See generally Second Report on the State of the Energy Union: Communication from the Second Report on the State of the Energy Union: Importantly, even if the SOE never casts a vote to sway if the SOE never casts a vote Importantly, even TAN S 258. Kathryn L. Dewenter et al., 257. 256. Salop & O’Brien, 254. State Grid, 255. and regulation to which the acquisition of significant, but non-controlling and regulation to which the acquisition stakes in domestic companies by portfolio investors affiliated with foreign governments are subjected). vestments Funds and Corporate Governance: A Minimalist Response to the New Mercantilism, Funds and Corporate Governance: A Minimalist 60 note 2 (outlining the anticompetitive effects that horizontal investing has note 2 (outlining the anticompetitive had on several different industries). 13, COM(2017) 53 final (Feb.1, 2017), http://eur-lex.europa.eu/resource. 13, COM(2017) 53 final (Feb.1, 2017), html?uri=cellar:16b10dae-e931-11e6-ad7c-01aa75ed71a1.0003.02/DOC_1& format=PDF. 53, at 8–28 how even very small stakes in competing firms by the (explaining manager can substantially lessen competition); Commission to the European Parliament, the Council, the European Economic and Commission to the European Parliament, the and the European Investment Bank Social Committee, the Committee of the regions 208 super-grid. power a global to build vision \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 50 29-JAN-18 15:35 not pure passive investors, and in many instances, they actively investors, and in many instances, not pure passive those firms’ or seek to influence monitor their investments commercial activities. proximity to the government perior information due to their policies in ways that may and are able to influence government firm generally react posi- benefit SWFs, investors of the target negatively to a SWF’s divest- tively to a SWF’s investment and compete with each other. compete competition minority investment could harm management, its invests in especially if the firm under certain circumstances, literature has As long-standing antitrust concentrated sectors. could cause without voting power shown, passive investment harm. anticompetitive entirely clear if the European firms that State Grid has in- State Grid has firms that clear if the European entirely net- distribution other, as energy compete with each vested in such However, when monopolies. to be natural works tend the European integrated within become more networks Union, pose a particular concern, as they regularly invest in minority concern, as they regularly invest pose a particular interests. 39755-nyi_50-1 Sheet No. 106 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 106 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 107 Side A 01/29/2018 16:12:32 , . , 3 209 . & NST supra I CON E UND F HINA Id. EVELOPMENTS IN CIC often ac- EALTH D 264 W 260 , U.S.-C ECENT and, notably, does not : R AACKE 265 OVEREIGN 19 –22 (2013). D. H WEN SWFI –S ORPORATION , Am. Enter. Inst. & Heritage Found., C OVERNANCE & O 1, 21 (2015). . See G EV ESER -W CIC’s operation is very opaque with little CIC’s operation L. R NVESTMENT L ’ I 261 OCH THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE TRATEGY AND State as an Entrepreneur: A Study of the Investment Contractual State as an Entrepreneur: A Study of the Investment HINA , S In Europe, CIC has invested in real estate, energy, In Europe, CIC N. K RANSNAT , C N As such, even if an SWF possesses no formal voting no formal SWF possesses if an such, even As ’ 263 For instance, CIC made a purchase of thirty percent stake in GDF For instance, CIC made a purchase of thirty at 258 (finding on average a statistical significant positive abnor- at 258 (finding on average a statistical Based on the data collected by the American Enter- collected by the American Based on the data ACOB Id. Id. Fund Rankings: Tracking the Activity of Sovereign Wealth Funds, Pensions, Fund Rankings: Tracking the Activity of Sovereign I Id. 259 U. T OMM Take China Investment Corporation (CIC) for example. Corporation (CIC) Investment Take China 262 .C 262. 264. 265. 263.by American Enterprises Institute This is based on the data collected 261. 259. 260. Li Jing, EKING ERFORMANCE EC http://www.swfinstitute.org/fund-rankings/ (last visited Nov. 13, 2017). http://www.swfinstitute.org/fund-rankings/ S & the Heritage Foundation. note 238. Endowments and Other Public Funds Suez in 2011, a seven percent interest in a French satellite fleet operator Suez in 2011, a seven percent interest Eutelsat in 2012, a nine percent investment in British Thames Water in 2012, a ten percent interest in Heathrow Holding in 2012, an acquisition of the entire radio frequency power company from the Dutch NXP Semi in 2016, and an eleven percent acquisition in British National Grid. P P 2017] ment. the fourth- from China, the fund ranked As the official SWF largest in 2016. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 51 29-JAN-18 15:35 prise Institute and the Heritage Foundation, CIC has invested the Heritage Foundation, CIC prise Institute and in- energy, real estate, and agricultural widely in the financial, dustries. and transport industries. utilities, technology, public disclosure about its investment activities. However, in- about its investment activities. public disclosure some by intelligence agencies has revealed formation gathered in in recent years. Since its establishment of its footprints over- been aggressively making investments 2007, CIC has seas. interest in a firm, management could have an incentive to ca- an incentive could have in a firm, management interest the SWF’s long-term as the loss of SWF’s preference, ter to the ad- the market and a bad signal to could send investment stock performance. the firm’s versely affect simply adopt a passive investment strategy. Since 2010, CIC has simply adopt a passive investment mal return of 1.5% upon SWF acquisition announcements and a statistical mal return of 1.5% upon SWF acquisition -1.4% upon SWF divestment an- significant negative abnormal return of nouncements). quires a significant interest in targets, Terms and Level of Control of China’s Sovereign Wealth Fund in Its Portfolio Firms Terms and Level of Control of China’s Sovereign 39755-nyi_50-1 Sheet No. 107 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 107 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 107 Side B 01/29/2018 16:12:32 For in- [Vol. 50:159 268 266 This is because CIC’s close This is because AND POLITICS 267 note 258, at 274. note 262, at 30 (noting that the compa- supra supra , Thus, to determine an SWF’s actual in- Thus, to determine 270 AACKE Subsequently, GDF Suez entered into several Subsequently, GDF & H INTERNATIONAL LAW note 260, at 85. note 260, at 79–80. 269 ESER -W supra supra at 81; Dewenter et al., OCH Id. Id. K Moreover, despite the fact that in most circumstances CIC that in most circumstances despite the fact Moreover, The policy debate on Chinese state capitalism has so far The policy debate on Chinese state Indirect Acquisition of Minority Interest 267. Jing, 268. 269. Jing, 270. 266. nies in which CIC appointed management include Teck Resource, a Cana- nies in which CIC appointed management AES, a US energy group in which it dian company in which it owns 17.2%, firm in which it owns 25.1%, owns 15%, Shanduka Group, a South African firm in which it owns 10%). and Heathrow, a British transportation 210 in which four companies of the boards over influence gained more. ten percent or a stake of it has acquired in its portfolio, over companies control rights has limited be- to exert influence that CIC is able have suggested scholars rights. formal corporate yond its Chinese state- projects with leading high-profile cooperation owned energy firms. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 52 29-JAN-18 15:35 connection with the Chinese government is often viewed as an the Chinese government is often connection with especially asset for its portfolio companies, important strategic the Chinese contemplating expansion into when the latter are with other Chinese SOEs. market or partnership However, as Milhaupt and been fixated on Chinese SOEs. “[D]rawing a stark distinc- Zheng note in an insightful article, on the ownership of enter- tion among Chinese firms based Chinese state capitalism . . . prise (SOE versus POE) to frame institutional environ- misperceives the reality of that country’s fluence over a portfolio company, competition regulators can- company, competition regulators fluence over a portfolio of the SWF. the formal corporate rights not solely rely upon to invest in highly concen- Indeed, if Chinese SWFs continue risk that this would trated markets, there will be a foreseeable similar to those gener- give rise to anticompetitive concerns Wrestling with the con- ated by U.S. institutional shareholders. is unhelpful, as it cept of China, Inc. in those circumstances about the anticompetitive eschews the fundamental question effects of State ownership. 2. stance, after CIC’s investment in GDF Suez in 2011, the two investment in GDF Suez in stance, after CIC’s in the Asian- a plan of strategic cooperation firms agreed to Pacific region. 39755-nyi_50-1 Sheet No. 107 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 107 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 108 Side A 01/29/2018 16:12:32 CN . 211 ORG . HINA C , 275 6 (Sept. 2014), http:// . NST I Beyond Ownership: State Capital- Making Ownership Matter: Prospects AULSON 665, 668 (2015). P To be sure, since the State’s fi- , Economists have estimated that Economists have Mixed ownership enterprises Mixed 278 . L.J. 274 272 EO G note 272, at 1–2. , 103 supra Since 2014, Chinese governments at all levels Since 2014, Chinese governments This reform intends to bring further market dis- This reform intends to bring further THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE Chinese state capitalism is manifested in a highly is manifested capitalism state Chinese 276 277 271 at 2. According to an annual industrial survey, MOEs ac- industrial survey, to an annual According Id. Id. Id. Party of China on Some Decision of the Central Committee of the Communist Id. 273 Indeed, there is a trend that the line between SOEs and a trend that the line between SOEs Indeed, there is 273. 274. 275. 276. 272. Marshall W. Meyer & Changqi Wu, 271. Curtis J. Milhaupt & Wentong Zheng, 277. Meyer & Wu, 278. Jan. 16, 2014), http://www.china.org.cn/china/third_plenary_session/20 www.paulsoninstitute.org/wp-content/uploads/2017/01/PPM_Making-Own ership-Matter_Meyer-and-Wu_English_R.pdf. Deepening the Reform Major Issues Concerning Comprehensively for China’s Mixed Ownership Economy ( 14-01/16/content_31212602.htm. have started to adopt guidelines and plans to convert SOEs have started to adopt guidelines into MOEs. POEs will become increasingly blurred in China. At the Third increasingly blurred in China. POEs will become the Chi- CCP Central Committee in 2013, Plenum of the 18th and advo- endorsed the market economy nese government to pro- ownership reform, which is intended cated for mixed and pri- and mutual fusion between public mote cross-holding vate capital. 2017] . . . .” ment \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 53 29-JAN-18 15:35 ism and the Chinese Firm MOEs constitute about forty percent of the Chinese economy about forty percent of the Chinese MOEs constitute and industrial value added. in terms of assets their financial per- ciplines to the SOEs, thereby improving formance and productivity. diverse form of ownership. Although Chinese SOEs have un- SOEs have Although Chinese of ownership. diverse form not many of them did privatization, several rounds of dergone firms instead became State assets and sell off their completely ownership. with mixed econ- the Chinese presence in have a substantial (MOEs) omy. of industrial percent of the total number counted for twenty to 2010. firms from 2004 nancial interest in the MOEs has been diluted, the State’s con- nancial interest in the MOEs has However, the Chinese trol over the firms has been weakened. It not only plays the role of an State is not an ordinary investor. and a regulator. Thus, the investor, but also of a financier an MOE could far exceed State’s power and influence over can wield over a firm. what a common minority shareholder 39755-nyi_50-1 Sheet No. 108 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 108 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 108 Side B 01/29/2018 16:12:32 , [Vol. 50:159 According to the New 280 FGC is forty-nine percent Sept. 16, 2016), https://www.ny AND POLITICS ( 279 IMES Rush of Chinese Investment in Europe’s High- N.Y. T , First, San’an Optoelectronics, also based in First, San’an Optoelectronics, also Germany Withdraws Approval for Chinese Takeover of Aixtron Germany Withdraws Approval for Chinese Takeover 281 INTERNATIONAL LAW Oct. 24, 2016), https://www.nytimes.com/2016/10/25/business ( Id. IMES Consider the following hypothetical. Suppose that Firm A that Firm Suppose hypothetical. following the Consider such a risk, as il- A recent Chinese investment highlights 281. 280. Paul Mozur & Jack Ewing, 279. Paul Mozur, times.com/2016/09/17/business/dealbook/china-germany-takeover-mer ger-technology.html. Tech Firms Is Raising Eyebrows /dealbook/germany-china-technology-takeover.html?_r=0. N.Y. T 212 signif- Firm A holds a local SASAC. controlled by the is an SOE of B, while the rest interest in Firm non-controlling icant but B ac- that Firm investors. Suppose is held by private its stock A C. Meanwhile, Firm Firm control of a European quires sole with that competes Firm D, subsidiary, has a wholly-owned will consider to the EUMR, the Commission Firm C. Pursuant market, de- independent competitors in the Firm C and D as Firm A’s ownership by Firm A. However, spite the common be- in Firm B will soften the competition minority interest a highly con- D, especially if they operate in tween Firms C and to exert such Notably, Firm A may be able centrated market. but also in- directly through its ownership, influence not only or attrac- alternative means such as financing directly through that Firm E, opportunities. Suppose tive strategic cooperation B finance its of Firm A, offers to help Firm another subsidiary provided by for the cheap financing acquisition. In return Firm B agree to the strategic Firm E, the other shareholders of thus further facilitating and alliance between Firms C and D, these two firms. This exam- reinforcing the collusion between posed by minority state own- ple shows the risk of coordination more resources than private ership as the Chinese State has firms to facilitate collusion. Fujian Grand Chip Invest- lustrated in Figure 1 below. In 2016, acquire Aixtron, a German ment Fund (FGC) attempted to semiconductor equipment maker. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 54 29-JAN-18 15:35 held by Xiamen Bohao, another fund controlled by Xiamen held by Xiamen Bohao, another other fifty-one percent is held municipal government, and the by Liu Zhengdong, a Chinese citizen. been a big customer of Aix- the same province as FGC, has York Times, a web of intricate relationships was suspected to York Times, a web of intricate relationships be behind FGC. 39755-nyi_50-1 Sheet No. 108 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 108 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 109 Side A 01/29/2018 16:12:32 213 Fur- This 286 16 (Aug. 283 ULLBRIGHT F OSE IXTRON A R , ORTON 2015 Annual Report of N , [ President Obama Blocks Proposed Chinese Acquisi- helped FGC finance the deal. helped FGC finance 285 and was also an owner of Sino IC Leas- and was also an (Dec. 31, 2015), http://quote.morningstar.com/ 287 note 285. TAR S THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE supra , Moreover, Sino IC Leasing, in which San’an has a IC Leasing, in which San’an has Moreover, Sino ORNING 284 M In 2015, San’an suddenly canceled a large order at the large order a canceled suddenly San’an In 2015, There might be nothing wrong with these links be- nothing wrong with these links There might be Aixtron Id. Id. Id. Results Aixtron Investor Presentation: First Half 2016 ], 282 288 286. Larry G. Franceski et al, 288. 282. 283. 284. 285. 287. 11, 2016), http://www.aixtron.com/fileadmin/images/investors/visuals/Q2 -2016_Result_Presentation_final.pdf. tion of Controlling Interest in German Chip Maker tion of Controlling Interest in German Chip San’An stock-filing/Annual-Report/2015/12/31/ t.aspx?t=XSHG:600703&ft=&d=4f68f406ad678af6a497b38a7f9a3d25. (Dec. 2016), http://www.nortonrosefulbright.com/knowledge/publications /145144/president-obama-blocks-proposed-chinese-acquisition-of-control ling-interest-in-german-chip-maker. 2017] tron. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 55 29-JAN-18 15:35 ing. of Aixtron, and a potential acquirer tween a large customer about relationships raise serious questions but these intricate Indeed, these of these companies. the actual independence local and na- common ownership by various multiple layers of Bohao, a provide the structural link between tional State funds and San’an, a large cus- minority shareholder of the acquirer, of those SOEs is tomer of the target. Yet, the involvement in the European Union, as probably outside antitrust scrutiny in the parties involved. they only hold minority interest last minute, causing Aixtron’s stock prices to crash. stock prices causing Aixtron’s last minute, five percent interest, sparked speculation that FGC had coordinated with San’an to with San’an FGC had coordinated speculation that sparked to were able price crash. Reporters the abrupt orchestrate and between Bohao of interest some commonality identify and a relationship financial including a preexisting San’an, in fund based a State-run investment shareholder by common Xiamen. ther, a national State-investment fund held an eleven percent State-investment fund held an eleven ther, a national interest in San’an 39755-nyi_50-1 Sheet No. 109 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 109 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 109 Side B 01/29/2018 16:12:32 FOR . Majority% NST I [Vol. 50:159 INKS IN THE L ERCATOR Sino IC Leasing M 5% 11% invested Fund National State- National , San’An Customer TRUCTURAL Massive national and local EAL AND POLITICS S 289 D Financing While this may suggest that the 291 Aixtron IXTRON A Made in China 2025: The Making of a High-Tech Local State- (2016) (written testimony of Jimmy Goodrich, The Aixtron transaction is an example invested Fund (local WNERSHIP AND 290 Acquisition O Unknown% Unknown% INTERNATIONAL LAW Bohao state-invested fund) TATE ¨ ubbeke et al., FGC 1: S China’s 13th Five-Year Plan: Opportunities & Challenges for the U.S. Semi- China’s 13th Five-Year Plan: Opportunities Id. Liu This transaction also highlights the risk of coordination This transaction also highlights IGURE 51% 49% 289. 290. 291. Jost W F Zhengdong Sources: NY Times and other media outlets conductor Industry: Hearing on China’s 13th Five-Year Plan Before the US-China conductor Industry: Hearing on China’s 13th Econ. & Sec. Review Comm’n Industry Association) [here- Vice President of Global Policy, Semiconductor inafter Goodrich Testimony]. among Chinese SOEs. Since 2014, the Chinese government among Chinese SOEs. Since 2014, the development of a robust has been aggressively promoting with the goal of becoming domestic semiconductor capability a leader in the industry by 2030. 214 \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 56 29-JAN-18 15:35 Superpower and Consequences for Industrial Countries state funds were raised to finance the investment and acquisi- state funds were raised to finance tions in this sector. of the overseas acquisitions by such State-sponsored funds, of the overseas acquisitions by financing to facilitate with the government providing generous to support from the such a move. For instance, in addition FGC also received financing National State-investment fund, in Xiamen and the Agri- from the China Development Bank cultural Bank in Shanghai. 39755-nyi_50-1 Sheet No. 109 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 109 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 110 Side A 01/29/2018 16:12:32 215 294 LECTRONIC E Goodrich Testi- San’An Might Par- HINA [ [C AO see also B IANZI D Because Aixtron has some assets in Because Aixtron has some assets HONGGUO Apr. 10, 2016, 4:00 PM), http://www.spiegel. Z 295 ( , Chinesischer Aixtron-Investor: Herr Liu versteht die Chinesischer Aixtron-Investor: Herr Liu versteht ] Nov. 3, 2016), http://www.reuters.com/article/ ( Liu has kept a very low profile during the Liu has kept a very NLINE U.S. Commerce Chief Warns Against China Semiconductor U.S. Commerce Chief Warns Against China 292 O cking, Chinese Aixtron Investor: Mister Liu Does Not Understand the Chinese Aixtron Investor: Mister Liu Does Not ¨ O EUTERS A number of Chinese news reports have sug- A number of Chinese [ R THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE , 293 PIEGEL S 53 (2016), https://www.merics.org/en/merics-analysis/papers- note 289. . ], David B TUD Id. Aisiqiang San’an Guang Dian Huo Can Yu Shougou See supra S (May 26, 2016), http://semi.cena.com.cn/2016-05/26/content_32 Notably, the potential competition issue among these Chi- Notably, the potential competition The Aixtron deal also illustrates the difficulties antitrust the difficulties deal also illustrates The Aixtron ] 293. 294. 292. 295. David Lawder, EWS HINA German Fear de/wirtschaft/unternehmen/aixtron-investor-liu-zhendong-spricht-erstmals- that the remaining percentage of ueber-plaene-a-1115032.html (explaining State, something that raised con- FGC is indirectly in the possession of the decision for Aixtron were the deal cerns regarding who would be making the to go through). ticipate in Acquiring Aixtron mony, us-usa-china-trade-semiconductors/u-s-commerce-chief-warns-against-china- semiconductor-investment-binge-idUSKBN12Y0EG; deutsche Angst nicht on-china/made-in-china-2025/. 9842.htm. Investment Binge N C gested that the real supporter behind Mr. Liu is Huaxin Fund, gested that the real supporter behind semiconductor industry. another State-owned fund in the by the U.S. and German gov- nese entities has been addressed The U.S. government ernments on national security grounds. aggressive expansion into the has been vigilant about China’s semiconductor industry. 2017] the behind acquisition the is facilitating government Chinese evidence of explicit hard to identify it is extremely scenes, also difficult to obtain funds. It is among these communication has coordi- that the government evidence to show sufficient activities. nated their For ex- face in handling a similar transaction. regulators would SOE’s invest- difficulty is the opacity of the ample, one such is majority- On first impression, FGC ment in a transaction. how- Liu, a Chinese businessman; controlled by Zhengdong West about been much suspicion in the ever, there has shares indeed control the fifty-one percent whether Liu does he owns on paper. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 57 29-JAN-18 15:35 that he has a glance at his resume shows acquisition, and mining business—itmostly invested in clear why is not entirely semiconduc- expand his investment into the he would want to tor industry. 39755-nyi_50-1 Sheet No. 110 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 110 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 110 Side B 01/29/2018 16:12:32 , [Vol. 50:159 OMPLEMENT When Pepsi was The German gov- The German C 298 296 AND POLITICS (Sept. 10, 2013), https://www.sull EVIEW AS A R LLP 297 ECURITY ROMWELL S Obama Blocks Chinese Takeover of Tech Group Aixtron Obama Blocks Chinese Takeover of Tech Group Germany Withdraws Approval for Chinese Takeover of Tech Germany Withdraws Approval for Chinese & C Oct. 24, 2016), https://www.ft.com/content/f1b3e52e- INTERNATIONAL LAW ( ATIONAL Dec. 2, 2016), https://www.ft.com/content/0c940900-b8e2- IMES ULLIVAN ( S . T IN F Shuanghui International Receives CFIUS Clearance for Its Purchase of Smith- IMES IV. N , As analyzed in Part III, the application of the concept of III, the application of the concept As analyzed in Part . T 298. 297. Guy Chazan, 296. Shawn Donnan, IN crom.com/siteFiles/Publications/SC_Publication_Shuanghui_International _Receives_CFIUS_Clearance_for_its_Purchase_of_Smithfield_Foods.pdf. 99b0-11e6-8f9b-70e3cabccfae. field Foods 11e6-ba85-95d1533d9a62. Group F an undertaking to SOEs could lead to both overinclusive and to SOEs could lead to both overinclusive an undertaking to this There is no easy solution underinclusive outcomes. to simultane- require the Commission problem, as it would under the expand the concept of control ously narrow and existing legal impossible to achieve within the EUMR, which is framework. that can But the EUMR is not the only legal tool From a competition law address the Commission’s concern. regulators is whether the Chi- perspective, what most concerns block of ownership from Eu- nese State will acquire a critical significant market rope that would allow it to accumulate Such an acquisition not power in a particular product market. but it could also pose a only generates antitrust concerns, when the acquisition threat to national security, especially the supply of a strate- would allow a single State to monopolize gic product or service.the line be- It should be noted that sectors is increasingly tween strategic and non-strategic States, the Committee on blurred. For example, in the United investigated acquisitions of Foreign Investment (CFIUS) has chains. meat-processing firms and cinema 216 States the United by was blocked deal the United States, the security grounds. on national government \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 58 29-JAN-18 15:35 rumored to potentially acquire Danone, a dairy company and rumored to potentially acquire Danone, ernment also withdrew its approval for the transaction, citing transaction, approval for the also withdrew its ernment detail elaborated in review. As about national security concern com- as an important review can serve security below, national with issue potential anticompetitive to address the plement Chinese state ownership. 39755-nyi_50-1 Sheet No. 110 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 110 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 111 Side A 01/29/2018 16:12:32 217 July 24, ( ELEGRAPH T 299 , If Chinese SOEs are If Chinese SOEs 300 France Flouts the Pepsi Challenge note 26, at 825-6. THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE supra There are several obvious advantages of using national se- advantages of several obvious There are Second, using national security review helps maintain the Second, using national security review 300. Zhang, 299. Franck Riboud, 2005), http://www.telegraph.co.uk/finance/2919479/France-flouts-the- Pepsi-challenge.html. 2017] politi- a huge it generated France, pride in of national a source government. within the French cal backlash concerns regarding anticompetitive to address curity review it al- same State. First, to the by SOEs belonging coordination com- in a more its investigation regulator to conduct lows the its fu- flexible manner without compromising prehensive and involving over potentially important cases ture jurisdiction a rigid out in an earlier paper, however, SOEs. As I pointed SOEs could concept of an undertaking to application of the consequences. lead to unintended \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 59 29-JAN-18 15:35 deemed a single entity, then the Commission would not be entity, then the Commission deemed a single or mergers in cartels among Chinese SOEs able to intervene actively invest that many Chinese SOEs between them. Given to European or export their products in European countries in interven- would have an interest markets, the Commission power com- For instance, if Chinese nuclear ing in such cases. the European market, the panies collude when they sell to protect the welfare of the Commission should intervene to existing position consumers in Europe. But, the Commission’s such legal action, as the Chi- in EDF/CGN would jeopardize themselves on the basis nese nuclear companies could defend firm’s conduct. that the coordination was a single legal position. A logical logical coherence of the Commission’s require the Commission to interpretation of Recital 22 would jure, control when it analyzes focus on de facto, rather than de seems to be applying a SOEs. However, the Commission test in cases involving Chi- double standard. It used the de jure in cases involving European nese SOEs and the de facto test insists upon using a de jure SOEs. Indeed, if the Commission SOEs, then it should treat all approach to deal with Chinese Chinese SOEs—regardless in which they oper- of the sectors owned by the local or cen- ate, regardless of whether they are of whether they actually com- tral government, and regardless pete with each other—as entity. Clearly such a con- one single with the economic reality in clusion is a stark contradiction 39755-nyi_50-1 Sheet No. 111 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 111 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 111 Side B 01/29/2018 16:12:32 OMPETI- J. C There is [Vol. 50:159 . 96, 112–17 , 6 302 TUD S EGAL Xinzhu Zhang & Vanessa see also U. J. L AND POLITICS EKING P Problems in Following EU Competition Law: A Problems in Following EU Competition Law: , 3 301 INTERNATIONAL LAW 477, 486–90 (2009) (explaining the rationale used by . Chinese Merger Control: Patterns and Implications Part III(B)(2). CON Angela Huyue Zhang, TION See infra See Finally, national security review reduces the risk of poten- Finally, national security review reduces Furthermore, experts in charge of national security would charge of national experts in Furthermore, L. & E 301. 302. Yanhua Zhang, (2011) (discussing the large role that MOFCOM plays in each review and the (2011) (discussing the large role that MOFCOM few checks and balances that are in place); MOFCOM in blocking the Coca-Cola/Huiyan merger). Case Study of Coca-Cola/Huiyuan tial retaliation from the Chinese State. When the Commission tial retaliation from the Chinese Chinese firms, it should ex- tightens its antitrust scrutiny over kind. China adopted an Anti- pect that China will respond in a comprehensive Monopoly Law in 2007 and established that of the European Union. merger review system similar to can not only exert jurisdic- Therefore, the Chinese authority the acquisition of a Chinese tion over transactions involving transactions involving firm, but can also intervene in offshore record of the Chinese anti- European firms. The enforcement the Chinese merger review trust authority has shown that to impose remedies on large agency has significant discretion has not shied away from offshore merger transactions and dubious grounds. blocking a transaction, even on 218 would approach de jure the speaking, Practically today. China many resulting in for businesses, an undue burden also create merger notifications. and unnecessary superfluous the to assess to antitrust regulators superior position be in a and political to navigate its complex of a State and motives State’s ability in order to determine the economic institutions would also its influence over its SOEs. This to actually exert Chinese SOEs to capture those cases in which allow regulators to acquire Eu- subsidiary as a vehicle employ a non-controlling Chinese State the concern that the ropean assets. Importantly, a certain coordinate its SOEs to monopolize can strategically but also market is not just about economics, product or service competi- the Aixtron transaction illustrates, about politics. As see on the not be able to rely on what they tion regulators may entity of who is the ultimate controlling surface to determine means SOE can exert influence via various the acquirer. An may actually and even an entity that seems privately-controlled be controlled by an SOE. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 60 29-JAN-18 15:35 also the risk that the Chinese government may react strongly also the risk that the Chinese government 39755-nyi_50-1 Sheet No. 111 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 111 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 112 Side A 01/29/2018 16:12:32 A- UR- 219 EAL 10 S EVEL- & N D OREIGN OUNCIL D . C INDING UR F E NTEREST , I ACT NVESTMENT IN ETTING THE I G : A F OPERATION AND - ATIONAL ., GAO-08-320, F O FF , N C OREIGN (Oliver Borgers, ed. 2012). O F NVESTORS I (2010); 305 ERGERS s 7 (European Parliament Briefing CONOMIC : M E The Scramble for Europe OREIGN EGULATING F EVIEW R ROCEDURES CCOUNTABILITY R A P T ’ OLICIES OV Political Impact of Chinese Foreign Direct Investment in Political Impact of Chinese Foreign Direct Investment EVIEW P URISDICTIONS WORLDWIDE RGANISATION FOR R NVESTMENT note 38, art. 346. (July 2011), http://www.ecfr.eu/page/-/ECFR37_Scram U.S. G I 26 J DENTIFICATION OF THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE . 1 cois Godement et al., AWS AND supra EL The European Union in general endorses free The European OREIGN R : L (2008); O 303 Some policymakers are therefore concerned that the Some policymakers are therefore NVESTMENT , F TIONAL VEY OF OPMENT ON ECURITY IN [OECD], I I See generally 304 S At the same time, despite the advantages of national se- the advantages time, despite At the same OREIGN F 305. Sophie Meunier, 304. TFEU, 303. OUNTRIES HROUGH NVESTMENT the European Union on Transatlantic Relation Paper, 2012), https://scholar.princeton.edu/sites/default/files/meunier_fi nal_0.pdf; Fran¸ C ble_For_Europe_AW_v4.pdf (“China is buying up Europe. Its automobile ble_For_Europe_AW_v4.pdf (“China is and taken a life-saving stake in manufacturers have bought MG and Volvo Saab. Its transportation firms are acquiring, leasing or managing harbours, airports, and logistical and assembly bases across the continent. Its develop- ment bank is financing projects in Europe’s periphery much like it does in Africa.”). I T 2017] The difference, review. security national of tightening to the than much wider net review casts a is that merger however, a burdensome as the former involves security review, national only intervenes while the latter screening process ex ante national security. threat to deal poses a serious when the control is currently no foreign investment curity review, there may exist Although such investment control at the E.U. level. vary widely level, investment security regimes at the national have such as France and Germany across Europe. Countries security con- reviews used to address established investment Hungary, Ice- Belgium, the Czech Republic, cerns, whereas investment the Netherlands do not have any land, Ireland, and consid- to public order and essential security measures related erations. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 61 29-JAN-18 15:35 trade, and it only allows its Member States to retain the right allows its Member States to retain trade, and it only on public on foreign investment based to impose restrictions those restrictions do not re- security considerations, as long as or a disguised restriction on sult in arbitrary discrimination trade. current patchwork of FDI rules at the E.U. Member State level current patchwork of FDI rules at as some Member State au- risks sparking a race to the bottom, money and abandon at- thorities may rush to attract Chinese tempts to screen security concerns. 39755-nyi_50-1 Sheet No. 112 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 112 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 112 Side B 01/29/2018 16:12:32 The 306 [Vol. 50:159 Sept. 28, 2016), http:// ( In 2016 alone, two Chi- In 2016 alone, ERALD July 29, 2016), https://www.the Hinkley Point C in Doubt After Brit- AND POLITICS ( 308 H This case shows that even if (Sep. 27, 2016), http://deredactie.be 311 Midea, a Chinese electronics Midea, a Chinese Belgian authorities allegedly re- Belgian authorities EWS 307 ORNING 309 UARDIAN N G M , Hinkley Go-Ahead After ‘National Security’ Safe- Hinkley Go-Ahead After ‘National Security’ China’s Midea Receives U.S. Green Light for Kuka China’s Midea Receives U.S. Green Light for UNDAY S LANDERS “Mysterious Letter” Warns Against “Chinese Danger” in- “Mysterious Letter” Warns Against “Chinese Belgian Spies Urge ‘Extreme Caution’ on China Citing Aus- F , Dec. 30, 2016), http://uk.reuters.com/article/us-kuka- Sept. 15, 2016), https://www.ft.com/content/0cde26b6- INTERNATIONAL LAW ( ( IMES This caused a Belgian Minister for energy to re- This caused a Belgian Minister EUTERS . T 310 R IN , F Id. , In practice, such fear seems exaggerated. Recent acquisi- Recent exaggerated. seems such fear In practice, Similarly, in the face of growing protectionist backlash Similarly, in the face of growing 307. Andrew Ward et al., 310. 311. Latika Bourke, 309. Michael Torfs, 308. Edward Taylor et al., 306. Graham Ruddick & Jamie Grierson, www.smh.com.au/world/belgian-spies-urge-extreme-caution-on-china-citing- australias-ausgrid-decision-20160927-grpwn8.html. guardian.com/business/2016/jul/28/hinkley-point-c-to-go-ahead-after-edf- board-approves-project. guards /cm/vrtnieuws.english/News/1.2779200. tralia’s Ausgrid Decision volving State Grid Deal, m-a-mideamidea-group-idUKKBN14J0SP. 7b66-11e6-b837-eb4b4333ee43. Takeover ish Government Delays Approval 220 been sectors have in the strategic Chinese companies tions by level. For instance, Member State scrutiny at the subject to nu- to build several with CGN wanted to partner when EDF con- government the British plants in Britain, clear power transaction. review of the of intensive ducted rounds \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 62 29-JAN-18 15:35 verse his support for the deal. company, had to obtain clearance from both Germany’s Direc- obtain clearance from both Germany’s company, had to it acquired Trade Control and CFIUS when torate of Defense robot company. Kuka, a German security stumbled in Europe due to national nese investments blocked State first deal, the city of Antwerp concerns. In the distribution acquisition of Eandis, a power Grid’s attempted Belgium. company based in ceived intelligence from the Belgian State Security Service from the Belgian State Security ceived intelligence the CCP, and the Chinese warning of links between State Grid, military. Belgium has not established a formal national security review Belgium has not established a formal can still block a deal on alter- regime, the Belgian government native regulatory grounds. German government with- against Chinese investment, the of Aixtron in October drew its approval for the acquisition deal eventually received the green light from the British gov- from the British the green light received deal eventually potential remedies imposed to address ernment, with certain concerns. national security 39755-nyi_50-1 Sheet No. 112 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 112 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 113 Side A 01/29/2018 16:12:32 , 313 221 The European Parlia- 316 Chinese Takeover of Norway’s Opera Fails, July 18, 2016), http://www.reuters.com/arti ( In another 2016 deal, a consortium of In another 2016 315 314 Chinese Companies Embark on Shopping Spree in Europe note 296. EUTERS note 297. R , supra THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE supra (June 6, 2011), http://online.wsj.com/article/SB100014240527 According to existing German law, the German Eco- the German law, German existing to According . J. T Id. 312 As illustrated above, national security review has provided As illustrated above, national security S ALL 316. John W. Miller, 312. Chazan, 313. 314. Donnan, 315. Stine Jacobsen & Paul Carsten, cle/us-opera-software-m-a-china-idUSKCN0ZY0CA. 48704355304576214683640225122.html (quoting Commissioner Tajani as W a much more intrusive and flexible intervention into Chinese a much more intrusive and flexible that the Chinese State investment in Europe. To the extent assets in Europe and accumu- can acquire substantial strategic late in significant market power, or even become a monopoly certainly trigger national the E.U. or global market, this would States or other countries such security review by E.U. Member the interests of the European as the United States. That said, might not entirely align, Union and some of its Member States a Member State may wel- and there could be a situation where European Union does not. come Chinese investment while the European Commissioner In 2011, Antonio Tajani, a former called for an E.U.-wide for- for Industry and Entrepreneurship, European know-how and eign investment review to protect technology from Chinese investors. 2017] 2016. be is vague and can or security” of “public order The concept Nota- sectors. number of industry to cover a large interpreted on a global companies operate bly, as many multinational not only vet- of European assets are scale, Chinese acquisitions but also in in the European Union, ted by target countries example is such as the United States. A good other countries exerted Aixtron deal where CFIUS the previously-mentioned assets the transaction on the basis of Aixtron’s jurisdiction over in the United States. \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 63 29-JAN-18 15:35 Alternative Proposed ment echoed such concerns and called for a European body to ment echoed such concerns and nomic Ministry has the authority to review any deals where any deals authority to review has the nomic Ministry the percent of at least twenty-five investors acquire non-E.U. if must block the deal company and of a German voting right order or security.” public a threat to Germany’s it “poses Chinese investors failed to acquire Opera Software, a Norwe- failed to acquire Opera Software, Chinese investors the requisite because it did not obtain gian browser company, approval from CFIUS. 39755-nyi_50-1 Sheet No. 113 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 113 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 113 Side B 01/29/2018 16:12:32 [Vol. 50:159 note 305 (dis- However, such supra 318 However, the establish- However, 317 AND POLITICS Godement et al., ONCLUSION see also V. C note 305, at 9 (explaining the need to strengthen supra INTERNATIONAL LAW P7_TA(2012)0218 (2012). . OC . D Meunier, See ARL Despite decades of market reform, China remains a State- of market reform, China remains Despite decades response to Chinese The Commission’s recent regulatory . P 318. 317. China: Unbalanced Trade?, Resolution of 23 May 2012 on EU and UR cussing the use of E.U. subsidies as a way to ensure equal competition). the monitoring of foreign investment, particularly with regard to China, on grounds of competition policy); saying, “The time to fireproof your house is before it catches fire . . . . [w]e saying, “The time to fireproof your house in Europe, and why.”). want to be sure we know who is investing E dominated economy in which the CCP maintains pervasive in which the CCP maintains dominated economy of the story. SOEs. But, this is only one side control over its in a dynamic private sector Market reform has also resulted SOEs in liberalized sectors. which competes fiercely with to its sheer size, its vast and Moreover, the Chinese State, due decentralized economic intricate bureaucracy, and its highly than what is commonly system, has a different utility function and there is a limit on assumed about a commercial entity, western policymakers and what the State can do. Too often, academics ignore this facet. During its anti- acquisitions illustrates such a misconception. involving Chinese trust review of the merger transactions its analysis on the possibil- SOEs, the Commission has focused its SOEs. This assessment ity of the Chinese State influencing voting power in its SOEs, it misses the point. If a State retains their commercial deci- will always have the power to influence of their nationalities. sions. This is true for all SOEs, regardless a State can control SOEs, but The real question is not whether 222 by for- investment of strategic evaluation ex ante an conduct to CFIUS. similar eign companies, \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 64 29-JAN-18 15:35 ment of such an E.U.-wide body analogous to CFIUS is likely to to CFIUS is likely body analogous such an E.U.-wide ment of States some Member from significant opposition be met with gov- to the E.U. their jurisdictions reluctant to cede who are con- empowered to is already Since the Commission ernment. that have suggested E.U. level, some review at the duct merger tool to policy could be a convenient E.U. competition of Chinese FDI. strengthen the monitoring should not be an excuse for the Commission to block invest- excuse for the Commission to should not be an improper antitrust grounds. ments based on 39755-nyi_50-1 Sheet No. 113 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 113 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 114 Side A 01/29/2018 16:12:32 223 In this regard, the Commission ap- regard, the Commission In this 319 THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE Part II(C). See infra Thus far, the Commission has focused on defining the has focused the Commission Thus far, 319. 2017] European cases involving in previous Indeed, it does. whether the facto control by focused on de Commission SOEs, the scruti- control when to de jure it shifted its standard State, but cases. nizing Chinese \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 65 29-JAN-18 15:35 pears to be applying a double standard to Chinese SOEs. standard be applying a double pears to The problem, Inc. involved in the transaction. scope of China, owner- there is no clear distinction between however, is that a bright-line for Chinese firms. Consequently, ship and control underinclu- result in both overinclusive and approach would the from an economic standpoint, sive outcomes. Moreover, has less- coordination by the Chinese State extent to which than a is a quantitative question, rather ened competition to the acqui- a thoughtful response qualitative one. Therefore, to shift its SOEs would require the regulator sitions by Chinese the ef- the undertaking to understanding focus from defining is far from an State ownership. This, however, fects of Chinese current approach towards easy task. Since the Commission’s carries grave legal risks for it- dealing with Chinese SOE cases for businesses, I cau- self and causes significant uncertainties policy too broadly in re- tion against deploying competition Instead, national security viewing Chinese SOE acquisitions. complement to antitrust review could be employed as a useful review. 39755-nyi_50-1 Sheet No. 114 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 114 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 114 Side B 01/29/2018 16:12:32 [Vol. 50:159 INORITY M AND POLITICS UROPE BY I Portugal (2006-2015) E Energias de Forme Acciaio NNEX Compagnia Italiana IRMS A F CQUISITIONS OF A NTERESTS IN I HINESE C INTERNATIONAL LAW Quantity IST OF L Bank Bank Heavy China China China Chinese in Share Aviation Shandong Merchants Henan Civil 20% NH Hoteles Tourism Spain Year Investor Millions Size Target Sector Country 2011 Three Gorges2012 $3,5102012 21%2012 CIC Sinochem2012 State Grid2012 $2602012 $510 SAFE $920 35% CIC2012 Sinopec 25% 9% $2002012 $1,500 Thames Water2012 $490 Siat 10% Three Gorges REN Energy 49% CIC $470 Utilities Talisman Energy Veolia Water 7% Portugal 2013 49% $930 Energy $730 Energy Britain Utilities Energy Eutelsat2013 Renovaveis 25%2013 10% Britain Belgium Heathrow Holding2013 Britain SAFE Portugal Technology Transport SAFE Energy Kion2013 HNA France $110 Britain $5302013 $840 Portugal Fosun 49% $310 49% Real estate2014 One Angel Square 40% Real estate Dongfeng $360 Germany CMA CGM UPP Group $1,100 Britain 46% Transport Real estate 14% $220 Club Med France Britain 35% Pugeot Cargolux Airlines Tourism Transport Transport Luxembourg France France 2006 Development $8002007 Development 1% $3,0402007 Anglo-American2008 3% Ping An2008 Metals2009 SAFE $2,7002009 SAFE Barclays2009 Britain 4% CIC $2,8002010 CIC $2,010 Unicom2011 2% Finance China Unicom2011 $370 1% Fortis CIC $1,000 $5002011 $450 Britain Fosun2011 1% Total 1% 1% 19% $960 CIC BP Finance Songbird Estates SAFE $120 Telefonica Telefonica Diageo 2% Real estate $3,240 Energy Belgium 10% Technology $720 Apax Finance Technology Britain 30% Energy Folli Follie Spain France 3% Spain Finance GDF Suez Britain Munich Re Other Britain Energy Britain Finance Greece France 2012 Germany Zoomlion $240 40% Real estate Italy 224 \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 66 29-JAN-18 15:35 39755-nyi_50-1 Sheet No. 114 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 114 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 115 Side A 01/29/2018 16:12:32 225 Czech Czech Czech Republic Republic Republic Group Group City Football Thomas Cook THE ANTITRUST PARADOX OF CHINA, INC. OF CHINA, PARADOX ANTITRUST THE China Speed Asset Management Midea Midea Midea CITIC Hotels Hotels Hotels Hotels Electric Jin Jiang Jin Jiang Jin Jiang Jin Jiang Shanghai and SAFE 26% Investment Investment Guangdong Guangdong Guangdong ChemChina 26, China Power China China Media Shandong Hi- Friedmann Pacific 20162016 CEFC2016 $1,020 40% J&T Finance $280 Finance $150 3% 3% Accor Kuka Tourism France Germany 2016 ChemChina2016 $360 12%2016 Mercuria $110 Energy 2% Switzerland $140 Accor 5% Tourism Kuka France Germany 2015 Capital and $400 13%2016 $450 6% Accor Britain Tourism France 20152015 CEFC CITIC2015 $100 Minsheng $670 5% $130 25% Royal Albert Docks J&T Finance 34% Real estate Luxaviation Finance Britain Transport Luxembourg 2015 Fosun2015 CEFC2015 $140 $100 5% 5%2015 $430 J&T Finance 4% Finance Accor Hotels Tourism $170 Tourism Britain 5% France Kuka Germany 201520152015 SAFE SAFE $1,220 $7,860 $820 2% Intesa Sanpaolo 2% Finance Unicredit Pirelli Italy Finance Transport Italy Italy 20142014 Fosun2014 $14020142014 19%2014 SAFE $4402014 SAFE2014 SAFE BHF $170 33% $5602014 SAFE $520 Fosun2014 49% $110 40% EneMalta2014 SAFE $280 Ansaldo Energia 2% Finance2014 SAFE State Grid $110 2% Statkraft Telecom Italia Energy2014 $630 2% $2,500 Energy Germany SAFE 23% Technology $140 Prysiam 35% 2% Energy Tom Tailor Italy $100 Malta 2% Italy Fiat CDP Reti Technology Generali Mediobanco Britain 2% Other $190 Italy Transport Energy Finance Finance Germany Saipem 25% Italy Italy Italy Italy Energy Italy Transport France 2017] \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 67 29-JAN-18 15:35 39755-nyi_50-1 Sheet No. 115 Side A 01/29/2018 16:12:32 Side A 01/29/2018 Sheet No. 115 39755-nyi_50-1 39755-nyi_50-1 Sheet No. 115 Side B 01/29/2018 16:12:32 [Vol. 50:159 note 238. 320 supra AND POLITICS Portugures Banco Commercial INTERNATIONAL LAW Am. Enter. Inst. & Heritage Found., Jiangsu Shipping Rotterdam consortium See China OceanChina Euromax Terminal 320. 2016 Fosun $180 17% Finance Portugal 201620162016 COSCO State Grid $1,440 $350 $140 49% 24% 35% Public Power Nidera Energy Netherlands Greece Transport Netherlands 2016 Shagang led2016 $2,960 49% CIC Global Switch Technology $1,780 11% Britain National Grid Energy Britain Source: American Enterprise Institute & the Heritage Foundation Source: American Enterprise 226 \\jciprod01\productn\N\NYI\50-1\NYI103.txt unknown Seq: 68 29-JAN-18 15:35 39755-nyi_50-1 Sheet No. 115 Side B 01/29/2018 16:12:32 Side B 01/29/2018 Sheet No. 115 39755-nyi_50-1