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Exclusive: Tough-talking China pricing regulator sought confessions from foreign firms

The national flag of China flutters behind a fence of the headquarters of the National Development and Reform Commission (NDRC) in Beijing,
The national flag of China flutters behind a fence of the headquarters of the National Development and Reform Commission (NDRC) in Beijing,

By Michael Martina

BEIJING (Reuters) - A senior Chinese official put pressure on around 30 foreign firms including General Electric and Siemens at a recent meeting to confess to any antitrust violations and warned them against using external lawyers to fight accusations from regulators, sources said.

The meeting is evidence of what many antitrust lawyers in China see as increasingly aggressive tactics to enforce a 2008 anti-monopoly law and highlight a worsening relationship between foreign companies and China's array of regulators.

Two sources who were at the July 24-25 closed-door meeting said the senior official showed in-house lawyers how to write what they called "self-criticisms" and displayed copies of letters from companies admitting guilt in past antitrust cases. Lawyers employed by some of those firms were in the room.

The two sources, and another source with direct knowledge of the meeting at a small hotel in Beijing, said the official who delivered the blunt remarks was Xu Xinyu, a division chief at the National Development and Reform Commission (NDRC).

One of the sources at the meeting said Xu noted, without being specific, that half of the companies in the room were either being investigated or had been probed by the NDRC. "The message was: if you put up a fight, I could double or triple your fines. This speech went way over the line," the second source who attended the meeting told Reuters.

The NDRC did not respond to questions from Reuters. Xu could not be reached for comment.

The agency has been at the forefront of a wave of investigations into how companies do business in China, especially into whether they effectively force retailers to sell their products at a minimum price.

On August 7 it announced fines totaling a record $110 million against five foreign milk powder firms and one Chinese producer for price fixing and anti-competitive behavior. Three other milk powder makers were investigated but not fined because, among other things, they carried out "self-rectification", the NDRC said at the time.

In-house lawyers from some 30 firms attended the July meeting, which was conducted in Chinese. It had been billed as a training session for multinationals to mark the fifth anniversary of the anti-monopoly law. Officials from the Ministry of Commerce as well as the State Administration for Industry and Commerce (SAIC), a regulator in charge of market supervision, were also at the meeting, but their presentations were overshadowed by Xu's speech.

His comments were perceived as threatening, and while other NDRC officials at the meeting may not have supported the way it was conveyed, Xu's message was consistent with the approach taken by other officials in private conversations with companies in recent months, the two sources at the meeting said.

They declined to be identified because they were not authorized to speak to the media, but word of the meeting has circulated widely in the antitrust community.

GLOBAL COMPANIES

The two sources said the following companies were at the hotel: GE, Siemens, Samsung Electronics, Microsoft, Volvo, IBM Corp, Michelin; Swedish packaging giant Tetra Pak; Intel Corp; Qualcomm; Dumex, a subsidiary of France's Danone and U.S. cable equipment maker Arris Group Inc.

Tetra Pak confirmed it was there but declined to comment further. Siemens said it was unaware of any meeting, as did Samsung and Volvo. IBM, Intel, GE and Microsoft declined to comment. Arris, Michelin and Dumex did not respond to questions while Reuters was unable to immediately reach Qualcomm. Reuters does not have a full list of firms at the meeting.

The government agencies held a separate training session for Chinese state-owned enterprises around the same time, one of the sources said, though it was unclear what was discussed.

The two sources said Xu did not explain why he didn't want foreign firms to hire external lawyers if they were probed.

Getting an admission of guilt from companies makes it easier for the NDRC because lawyers who have dealt with it said its capacity for legal analysis was weak and that few within its antitrust bureau had a background in law.

"They don't do analysis. They just do an interview and ask for an admission," said one lawyer from a leading antitrust firm in China who also had direct knowledge of the July meeting.

When one lawyer asked a question about the anti-monopoly law, Xu asked the executive to elaborate on his company's practices so he could determine on the spot if it was in violation or not, the two sources said. The lawyer clammed up, they said.

While Chinese regulators have said little to explain the motivations behind the various pricing investigations, state media have accused the foreign media of exaggerating the issue.

In a commentary on Monday, the official Xinhua news agency said such probes were routine in a market-oriented economy.

"The battle is not targeted at foreign companies. It is aimed at creating a fairer, cleaner and better-regulated environment for economic competition," the English language commentary said. "Probing and punishing ill-behaved companies will increase the confidence of international firms in the Chinese market, not the other way round."

WARY OF NDRC

Lawyers and sources familiar with the NDRC said Xu was elevated to the role of a division chief in its antitrust bureau after the agency, keen to keep pace with China's two other antitrust enforcers - the Ministry of Commerce and SAIC - added dozens of personnel in 2011.

At the same time, the NDRC is offering leniency for some companies in return for cooperation.

In the case against the milk powder makers, Swiss giant Nestle was among the three firms spared fines because it "provided important evidence and carried out active self-rectification", the NDRC said.

"I am happy that the NDRC is actively investigating, but they can't prohibit a company from hiring a lawyer," said the lawyer from the antitrust firm. "The NDRC is very powerful and some companies are afraid and willing to give up counsel."

A second China-based antitrust lawyer said foreign firms were frightened of challenging the NDRC by filing a judicial review in court, which could overrule an NDRC finding. While China's judiciary is not considered independent, experts regard it as more capable of detailed legal analysis.

"So far, no companies have challenged the NDRC for a judicial review because they are afraid of retaliation. (This) is the same reason why they would sign a confession letter," said the lawyer.

Daniel Sokol, a law professor and antitrust expert at the University of Florida, said that while Chinese firms had been targeted by the NDRC over antitrust issues, the uncertainty was making foreign investors especially jittery.

"The problem is that because it has so much power and because in various forums they have been focusing on foreign enforcement, this is definitely impacting business decision-making about further FDI into China," Sokol said.

(Additional reporting by Kazunori Takada in SHANGHAI, Norihiko Shirouzu, Matt Miller, Paul Carsten in BEIJING and Anna Ringstrom in Stockholm; Editing by Dean Yates)

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