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China's antitrust campaign tightens as authorities widen focus
Li Ruikang

The rapid growth of internet companies is among the many positive byproducts of the COVID-19 pandemic, but at the same time the turbo-charged tech giants have captured unwanted attention as China ramps up its antitrust drive after over 10 years of maintaining a laissez-faire policy.

Last week, the State Administration for Market Regulation (SAMR) reportedly opened an inquiry into China's biggest online housing broker KE Holdings. While the firm quickly dismissed the report as hearsay, it was among dozens of other online platforms that were instructed last month by the SAMR to rectify their potentially monopolistic behavior.

'Choose one from two'

One of the practices underlined by the SAMR, popularly known as "choose one from two," has been the focus of a series of antitrust investigations that have been recently opened. It stands for a tactic by which a company forces merchants to list their products only on its platforms.

KE Holdings, which also owns an online housing platform where individual property owners and real estate developers can put up their property listings, is suspected of having employed the tactic to sign up exclusive users, allowing it to squeeze its competitors out of the market.

A KE Holdings Inc.'s logo printed on an outdoor advertisement bulletin. /Xinhua

A KE Holdings Inc.'s logo printed on an outdoor advertisement bulletin. /Xinhua

"In cases like this, developers are given fewer options to list their offers," said Jiang Liyong, senior partner of Gaopeng & Partners, a Beijing-based law firm specializing in economic and antitrust laws. 

"If they are compelled to make transactions only on one platform, it would undoubtedly give the company the leverage to raise commission rates, while both buyers and sellers would have to bear more costs."

But these practices are not by nature against the law. According to Jiang, they are sometimes legitimate means for companies to expand their market reach.

"The company's market status determines the legality of such practices. Only when the company is big enough would they fall under the purview of antitrust laws," he explained.

Market share as an indicator

In 2020, KE Holdings' online housing platform BEKE secured a share of 12-13 percent in the housing intermediary market, which some argue does not necessarily indicate a dominant market status. 

But Jiang said looking at the issue this way would be an oversimplification. He noted that the market status of one company varies substantially when measured in markets that are more specifically demarcated.

"If we look at BEKE's market share in China's tier-one cities, where property prices are notably higher and real-estate trading is much more concentrated, it would be an entirely different picture," Jiang said. 

The skyscrapers in Beijing's Central Business District (CBD), China, March 4, 2020. /Xinhua

The skyscrapers in Beijing's Central Business District (CBD), China, March 4, 2020. /Xinhua

"Demarcating markets is not easy. It requires sophisticated expertise as well as high levels of inside knowledge."

Other factors necessitating probe 

The market share of a company is generally considered the starting point of an anti-monopoly probe, but antitrust authorities have also begun to regard other variables.

If typical behaviors stand out, usually defined by the damage they have caused to the market, an investigation may jump start from there, skipping the process of identifying the company's market status, said Wang Xianlin, professor of KoGuan School of Law at Shanghai Jiao Tong University and director of Research Center for Competition Law and Policy.

"There is the logic that if the company has not achieved a dominant position, its use of tactics such as 'choose one from two' would be meaningless," he added.

"Choose one from two" is not the only practice that has come under the scrutiny of Chinese market regulators. The behaviors that SAMR instructed companies to rectify last month also included taking advantage of big data to raise prices and other price-setting techniques that may cause unfair competition or hurt consumers' interest.

On Saturday, the antitrust agency imposed a fine of 1.5 million yuan (over $235,000) on community-based group-buying platform Shihuituan over its use of below-cost subsidies to cannibalize the market. The firm, which had been fined twice before, was also deemed to have cheated consumers by putting up fraudulent advertisement.

A photo of the community-based group-buying APP Shihuituan on a cell phone. /CFP

A photo of the community-based group-buying APP Shihuituan on a cell phone. /CFP

"While the anti-monopoly law does not have provisions to address these practices, they are equally targeted by antitrust authorities," Jiang said. "Once the company is found to be abusing its market dominance, in Shihuituan's case meaning the advantage of sitting on massive cash flow and online traffic, market regulators would mobilize other statutes such as the civil code, economic laws to regulate the market."

Quest for market dominance

The myriad tactics adopted by IT companies have made it difficult for market regulators to weed out unfair competition, which some believe is inevitable given the distinctive attributes of the internet economy – high concentration of both capital and online traffic.

In recent years, dominant companies in the broader IT sector have penetrated the narrower, more specifically demarcated markets with massive capital injection, while the enormous volumes of online traffic they already enjoy help consolidate their market dominance. 

Tech giants such as Alibaba and Tencent are among the ones believed to have chalked up sizable portions throughout the internet sector, and merger deals initiated by them are becoming a recurring theme hard to be dismissed by market regulators.  

Last December, a merger between Huya and Douyu, China's two biggest video game live-streaming platforms, brought spotlight on Tencent, which respectively owns 37 percent and 38 percent of them each. The deal, if completed, is poised to give Tencent the market power that's nearly unrivaled in this specific sector, but it has been put to a halt as market regulators are catching up to review the case.

Video game players at an e-sports cafe in Fuyang, China, November 5, 2015. /CFP

Video game players at an e-sports cafe in Fuyang, China, November 5, 2015. /CFP

Given that deals like this have long existed both in China and abroad, observers say antitrust authorities are trying to insert remedies to limit the concentration of such market power.

"From the perspectives of economics, the internet market in China has entered a 'rebellious phase,' like the one that every child has to go through when they become teenagers," Wang noted.

"Competition within the sector has gone from one that is relatively free, more diverse to one between established businesses and outsize corporations," he added. "To fend off the prospect of a market in disorder, it is necessary for the authorities to look closely into these matters."

Strengthening antitrust law 

To solidify the legal basis of enforcement against monopolistic behaviors, China's State Council issued in February antitrust guidelines on the country's platform economy. Two months later, the anti-monopoly campaign reached its height as the SAMR slapped Alibaba Group Holding, owner of the biggest online shopping platform Taobao, with a record fine of 18.2 billion yuan (about $2.8 billion).

The lobby of Chinese e-commerce giant Alibaba's research center on the "AIsland" of Zhangjiang Science City in Pudong New Area, Shanghai, China, July 3, 2020. /Xinhua

The lobby of Chinese e-commerce giant Alibaba's research center on the "AIsland" of Zhangjiang Science City in Pudong New Area, Shanghai, China, July 3, 2020. /Xinhua

"While China is stepping up its antitrust drive, it is also being cautious in punishing companies that have shown the tendency to achieve a monopoly status," said Wang, who is also a member of the expert consulting team for the State Council's Anti-Monopoly Commission.

China's antitrust law stipulates that the amount of fine imposed upon a company in breach ranges from 1 to 10 percent of its revenue in the previous year. In 2015, U.S. semiconductor giant Qualcomm was fined 6.8 billion yuan (about $1 billion) by Chinese antitrust authorities, which accounted for 8 percent of its 2013 revenue in China, while the fine Alibaba received made up only 4 percent of its income in 2019.

"To avert unfair competition while maintaining market vitality, I believe we should combine the typically ridged enforcement methods with more flexible approaches," Wang noted.

"The aim is to provide a guidance for companies to follow, not pushing them to a corner."

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