English > Politics&Law>Antitrust Claim Puts State Agency on Trial

Antitrust Claim Puts State Agency on Trial

08-27 10:54 Caijing Magazine

A test case for China’s new antitrust law pits angry enterprises against a barcode system with a government investor.

By staff reporter Zhu Tao

One of the first targets for would-be monopoly busters under the Chinese government’s first law against unfair competition is, ironically, a government agency that may be untouchable.

Just days after the law took effect on August 1, six companies in Beijing and Shanghai sued the country’s quality inspection office for allegedly operating an administrative monopoly.

The dispute dates to 2005, when the State General Administration
of Quality Supervision, Inspection and Quarantine (AQSIQ) started aggressively promoting, and later enforcing, use of an electronic quality control system for producers.

The system was developed by China Credit Information Technology Co., which is 30 percent owned by AQSIQ. The government agency used its legal clout to mandate the system’s installation at more than 68,000 companies over the past year, boosting China Credit’s 2007 profits 589 percent to HK $6 million. 

But the legal fireworks may be more flash than bang. A Beijing court where the case was filed has yet to decide whether to hear the lawsuit. And legal experts say the new law may prevent courts from questioning any administrative monopoly.
PIATS Meets Resistance

The system at the center of the dispute is the Product Identification Authentication and Tracking System (PIATS). It creates barcode stamps with a set of printed bars and 16 numbers for electronically identifying products. PIATS was first promoted through an AQSIQ notice in 2005 posted on its Web site, www.95001111.com.

Plans call for PIATS to become a nationwide tracking and authentication system to control the production, sale and distribution of products. It allows wholesalers, retailers and customers to check products via phone, text messaging and the Internet.

AQSIQ pushed local branches of the Quality and Technical Supervision Bureau to actively promote the system starting in May 2005. It also said the first group of products required to adopt PIATS were those with “China Top Brands, inspection exemption, and manufacturing permits.”

A new requirement adding 69 products made by nine industries, including the food and home appliance sectors, to the PIATS system was announced by AQSIQ last November. It said PIATS barcodes must be on all packages for these products by the end of June 2008, and that more products would be included later to meet a goal of comprehensive coverage.

But the requirement met strong resistance from many companies, especially food firms and China Credit’s competitors.

Ma Yong, secretary-general of the Specialty Liquor Committee of the China Food Industrial Association, said heavy burdens are expected for more than 105,000 makers of the 45 food products falling under the latest AQSIQ rule. These include enterprises that need food production licenses as well as PIATS barcodes.

Ma’s association responded to the new AQSIQ rule in April, arguing it’s hard to understand why only large enterprises with high quality products are required to join PIATS, while more than 300,000 makers of counterfeit or low quality products are exempt.

The association also said PIATS has nothing to do with quality protection or safety control in food production, and thus cannot play a role in food supervision. What’s more, the information provided by a PIATS barcode – such as the name of the enterprise, trademark, durability details and other product information – is already printed on food packages according to the General Standard for the Labeling of Prepackaged Foods. Thus, Ma’s group argues, PIATS labels are redundant and unnecessary.

Administrative Profits

While questioning the value and feasibility of PIATS, affected enterprises also claim that commercial interests may be behind AQSIQ’s aggressive promotion of PIATS.

Caijing has learned that PIATS operator China Credit was jointly established in January 2005 by a company called CITIC 21CN Telecom, along with AQSIQ and China Huaxin Telecom.

CITIC 21CN Telecom, a subsidiary of Hong Kong-listed CITIC 21CN, owns 50 percent of China Credit. AQSIQ owns 30 percent, and China Huaxin Telecom – whose owner is China Telecom – controls 20 percent.

Caijing learned the registered capital of China Credit is 60 million yuan. This includes 30 million yuan cash from CITIC 21CN Telecom, 18 million yuan from AQSIQ, and 12 million yuan from China Huaxin Telecom. Their agreement said CITIC 21CN would advance AQSIQ’s capital portion without interest, and AQSIQ would return the cash partly through China Credit profits.

In the announcement establishing China Credit, CITIC 21CN said it would advance capital to help AQSIQ acquire 30 percent of China Credit because of the value of the government agency’s commercial product database. The announcement emphasized the indispensable importance of this information in establishing China Credit.

AQSIQ set up a leading group to promote PIATS, with AQSIQ Deputy Minister Pu Changcheng assigned as group leader and China Credit Chairman Chen Xiaoying given a seat on the group. In addition, a PIATS promotion office was established with AQSIQ Deputy Minister Song Mingchang named director and Chen appointed as a deputy director.

This personnel arrangement aroused suspicion among some enterprises. Some asked, “How could a chairman of a holding company also hold an important post in a government office?”

But the doubts run deeper. According to AQSIQ, each enterprise that joins the system must pay 600 yuan annually to maintain of digital certificates. But critics have wondered whether the charges are administrative fees, or service fees. Payments must be made to a China Credit account at the Shanghai Pudong Development Bank.

PIATS promotion was slow between 2005 and ’07, and China Credit’s performance was mediocre. But AQSIQ’s mandatory measures ordering enterprises to use PIATS provided a kick-start from late 2007. As of August 14, more than 68,500 enterprises across China had joined PIATS, growing company profits by leaps and bounds.

Based on CITIC 21CN’s latest financial statement, China Credit’s annual turnover reached HK $6.27 million by March 31, up 589 percent from the year before.

The profit report provided ammunition for AQSIQ’s critics, and forced the agency to begin addressing the controversy.

At a press conference in April, AQSIQ said its 30 percent stake in China Credit would be transferred to CITIC 21CN. Caijing learned, however, the government agency continues to be a China Credit shareholder – a fact verified by a recent announcement by CITIC 21CN. AQSIQ later said the share transfer would take time since it involves listed companies.

What remains unknown is whether AQSIQ will profit from the share transfer, and how much it has earned over the years as a China Credit partner. Neither AQSIQ nor China Credit officials responded to Caijing’s requests for interviews.

Lawsuit’s Hazy Future

AQSIQ’s attitude has changed little since the lawsuit was filed.

This was evident when several AQSIQ officials including Yan Fengmin, deputy director of the agency’s General of Enforcement Supervision Department, met disgruntled representatives of the plaintiff enterprises in early August.

According to the plaintiff’s acting lawyer, Zhou Ze, AQSIQ expects the enterprises to withdraw the suit. In exchange, they would be invited to participate in operating PIATS by integrating their technology and resources with China Credit.

Yan disclosed that AQSIQ has been negotiating with the Ministry of Finance and National Development and Reform Commission in hope of establishing a national project to finance the operation of PIATS. However, the enterprises tuned down the proposal after doubting the feasibility of PIATS. They also questioned the idea of financing the project, asked AQSIQ to stop promoting PIATS, and demanded compensation.

Yan said he would convey the enterprises’ opinions to AQSIQ, although neither side’s position has substantially changed.

Caijing learned AQSIQ’s request for a third dialogue with the enterprises August 12 was rejected by the plaintiffs. The enterprises argue AQSIQ is a typical, administrative monopoly.

But it’s hard to say whether their claim will win support for their lawsuit in court.

Sheng Jiemin, a Peking University law professor and member of the committee that drafted the antitrust law, said the statute’s Article 51 may thwart the enterprises’ efforts to beat AQSIQ in court.

The article says the government’s Anti-Monopoly Law Enforcement Authority oversees the competitive behavior – or misbehavior – of other government agencies. That detail may force the Beijing court to reject the claim for being beyond its jurisdiction.

Yet the enterprises may find a ray of hope in the court’s delay. The law says a court must proceed with or reject a case within seven days of a complaint. The lawsuit against ASQIQ has been on the court’s desk far longer than that, with no official reply.

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