No Tiresome Competition Here

Hong Kong is about to get a law sometime later this year designed to regulate competition in an economy that has always prided itself on being red in fang and claw. But don’t look for much substance. The oligarchs of Hong Kong have always been largely exempt from the hard scramble of real competition and the powers that be are making sure that the final law is going to be more form than substance ‑ no review mechanisms for the control of mergers and acquisitions, no criminal sanctions and no consumer protection provisions.

Although this is a city famously regarded as a territory of free marketeers, that is largely a false perception perpetrated by right-wing American think-tanks which consistently declare Hong Kong to be a paragon of competitiveness. What the libertarian think tanks measure are free ports with low-tariff regimes and fully convertible currencies. In Hong Kong, taxes are low, government is small, trade is free and business, credit and labor markets are fully deregulated.

But the fact is that Hong Kong’s trading companies, particularly Hutchison Whampoa and Jardine Matheson, operate a duopoly that stifles competition in supermarkets, petrol stations and drug store chains. In the late 1990s, the oligarchs, aided by government policy, famously drove Carrefour, the French retailer, out of town and put an end to any chance of so-called big-box retailers like Wal-Mart or COSTCO that would save consumers money and give them choice.

Nor are Hong Kong’s property or share markets subject to competition. Government policy has kept both predominantly in the hands of a few of impossibly wealthy tycoons. Governmental regulations on health, safety and the environment, according to Hong Kong-based shareholder gadfly David Webb, are regarded as "burdens" from a business perspective. Any competition law, Webb says, is seen as a restriction the free exercise of monopolistic power.

Thus from the time Stephen Ip, Hong Kong’s Secretary for Economic Development and Labour, delivered his proposal to the Legislative Council on March 26 it was clear that the government’s new competition law would treat the business community with tender care. Negligible consideration is to be given to consumers and minority investors.

Ip made it clear, for instance, that the proposed law would not include merger and acquisition prohibitions, at least for the time being, and penalties imposed would be civil rather than criminal. No mention at all was made of the need to enact a parallel consumer protection law along with the new competition law.

“There is no economic justification for being in favour of a general competition law but not in favour of a mergers and acquisitions review,” says Peter Macmillan, founder and CEO of Lexton Asia, a regulatory consulting firm that specializes in competition policy projects, who made a written submission to government during the recently closed consultation period.

“The government’s proposal not to target potentially anti-competitive mergers and acquisitions is controversial,” McMillan told Asia Sentinel. “A merger is an ultimate form of collusion, but it is not likely to be subject to review, at least not at the outset. A number of people I’ve spoken to say that leaving out an M&A prohibition is a political compromise. Some businesses understandably resent any attempt to control who they can acquire. Others say that M&A is not a big issue in Hong Kong, so a law is not needed anyway. There is extra confusion here because they say we don’t have many hostile takeovers in Hong Kong.

“The reality is it’s not the hostile ones that proponents of a competition law worry about, but rather the friendly ones that promise to make it more than worthwhile for the parties involved because of anti-competitive effects.”

Thomas Cheng, a Hong Kong University law professor who specializes in competition laws and also wrote comments on the law, agrees, saying “I believe Hong Kong would benefit from a merger control regime.”

The Consumer Council Report published in November 1996 under the auspices of Chris Patten, the last colonial governor, clearly recommended dealing with mergers and acquisitions. However, that report did not persuade the Competition Policy Review Committee, whose June 2006 report, on which the new law is to be based, recommends that “The new law would not target market structures, nor seek to regulate ‘natural’ monopolies or mergers and acquisitions.”

Indeed, although the proposed new legislation would cover seven specified types of anti-competitive conduct, the complainant would have to first prove that both the “intent” and “effect” of the conduct in question would be to reduce competition significantly. This cumbersome requirement would likely deter complainants from taking on offenders. And even when an offender has been successfully indicted, he would only be required to pay civil penalties, less of a deterrent than criminal sanctions.

When the last British administration first broached the idea of introducing competition legislation, consumer interests were high on its agenda. Patten told the Legislative Council in 1992 that “across the board, the government will seek to join forces with the consumer council, as well as with you members of the legislative council to defend free markets and to give consumers the full redress against unscrupulous business practices to which they are entitled.”

But not once has the Competition Policy Review Committee’s report referred to the need to protect consumers from unscrupulous business practices, nor has a consumer protection law ever been recommended to go along with a competition law, despite this being common practice in other jurisdictions. Australia, for one, has been effectively operating the two laws in tandem for over 30 years.

As economic legislation, a general competition law’s goal is to achieve efficiency through the elimination of unfair and uncompetitive business behavior. And Hong Kong has been fortunate enough to have already achieved high economic success without the help of such a law, which, when enacted, would seek to ensure a fair and competitive market environment.

At the same time, on the other side of the market spectrum, consumers have a right to be guaranteed protection from unethical business behavior which, if unchecked, would only dent the free market mechanism.

Reports of mainland tourists being swindled by Hong Kong tour operators and retailers have become so widespread that even Beijing has been alerted. If such practices are allowed to thrive, the tourism industry will be the first to suffer. This is a case in point that demonstrates how unethical business conduct can damage the economy.

“Limiting extreme behavior must not stifle the natural, capitalistic drive of the business community, especially at the bigger end of town. At the same time, competition law should not fail to restrain abusive or collusive behavior that threatens the long-term efficiency of the marketplace,” Macmillan said in Lexton Asia’s submission. “I mention again that misleading or deceptive conduct is generally not prohibited in Hong Kong, even though we undoubtedly suffer from the same questionable practices as everywhere else. This lack of concern for consumer interests would be considered untenable and unjustified amongst most of our trading partners.”

If the SAR government is serious about enacting a substantive, balanced and effective competition law, it is high time for it also to consider enacting a parallel consumer protection law, as well as eventually including a mergers and acquisitions review mechanism in the law.