Who you gonna call? Hong Kong braces for first competition probe

[HONG KONG] Hong Kong's cartels and protected business communities are waiting for a knock on the door.

The city's first effort to impose a wholesale ban on anti- competitive activities became law in December, and the new Competition Commission set up to enforce the rules is expected to begin its first attacks soon. Executives are signing up for the latest legal service - an emergency hotline for when antitrust enforcers show up. A call will bring a lawyer within minutes.

In a city once praised by economist Milton Friedman as the model for free-market capitalism, business groups have for decades built up anti-competitive practices such as minimum- price agreements, sharing information among competitors and antitrust pacts designed to muscle out business rivals.

Countries that implement effective competition legislation add as much as 3 per cent to their growth rates, according to a study cited by the Organisation for Economic Co-operation and Development.

"There are certain clients taking compliance very seriously," said Adam Ferguson at law firm Eversheds LLP. Others are waiting to see if the Competition Commission "has teeth."

750 COMPLAINTS

It took 10 years to get the competition law passed in a city with a pro-business legislative council, where more than a third of the seats are allocated to trade and industry representatives.

Only under pressure from the World Trade Organisation, and after China adopted an anti-monopoly law in 2008, was a draft law prepared. Even then, it was watered down during negotiations, with an exemption for most mergers and acquisitions, and penalties limited to corporate fines and a block on directorships.

Still, the public wants action. The commission had received more than 750 complaints since mid-December, a spokeswoman said.

"The public has very high expectations the commission can help," said Lam Cheuk-ting, a senior member of the city's Democratic Party and a lobbyist against bid-rigging in the construction sector.

"The tycoons, the major companies of Hong Kong monopolise the market unfairly. It is very difficult for small enterprises to survive because of the unfair competition."

Lawyers are prepping clients to expect commission chairman Anna Wu Hung-yuk to begin public investigations soon.

"It's crucial for lawyers to be on site to keep track of what is being seized, to protect the company's rights and make sure the agreed protocol is followed by companies and the investigators," said David Fleming, a partner at law firm Baker & McKenzie, which offers a hotline that will summon a specialist immediately.

FIRST CASE

Lawyers are closely watching who the commission targets for clues on the sort of company profile it will go after and how it interprets an untested law.

"The commission would do well to make the first case they take a strong case," Mr Ferguson said. "They will want to take cases on that have obvious impact on consumers, but equally make sure it's legally watertight."

Calvin Qiu, senior associate at Berkeley Research Group, a consulting firm specialising in economics and competition, suggests people look at work done by the Hong Kong Consumer Council, a government body lacking punitive and investigative powers that Ms Wu once headed.

FINANCIAL SECTOR

In 2013, a council report said 84 per cent of 673 mid- to large-sized stores were controlled by two listed firms - Dairy Farm International Holdings and AS Watson, part of CK Hutchison Holdings - and there was "strong anecdotal evidence" that supermarkets pressured suppliers "to discipline" rival chains that compete on price.

The report said there was "no strong evidence" a single retailer held "a substantial degree of market power."

Spokesmen for Dairy Farm and AS Watson each said the companies supported competition.

The city's financial sector also could be in the cross- hairs, said Alex Gardner, a senior government analyst for Bloomberg Intelligence. At risk of being probed are sectors including interest-rate, foreign-exchange and credit-default trading; syndicated lending; and structured-product distribution.

Construction firms are "very alert about this as they don't know if they comply with the ordinance," said Stephen Lai Yuk- fai, managing director of advisory firm Rider Levett Bucknall and a board member of Hong Kong's Construction Industry Council. "People are now worried about discussing fees with competitors."

Hong Kong builders don't usually hold competitive tenders for subcontractors, but use firms they have a long-term relationship with.

GOLD PRICES

Gold merchants, including listed retailers Chow Tai Fook Jewellery Group and Luk Fook Holdings International, used to reference their bullion prices to a daily fix issued by two trade associations, said Padraig Seif, chief executive of Fine Metal Asia.

After the new law was passed, there's now more competition in retail gold prices, he said. Spokesmen for Chow Tai Fook and Luk Fook said the companies use international gold rates to set their prices.

In mid-March, the commission highlighted 12 trade associations after they all publicly stated they were reviewing business practices.

They included the Federation of Insurers, whose website lists units of AXA SA, PICC Group and Prudential Financial Inc. among 135 members. A federation spokeswoman said they were taking legal advice concerning two guidebooks covering relationships with insurance agents.

Another is the Institute of Surveyors, which warned members in November to ignore a longstanding industry minimum-fee remuneration chart as it might be "in contravention" of the law.

FREIGHT SHIPPERS

The city's more than 500 trade associations "must be careful not to organise or facilitate anti-competitive arrangements," Rose Webb, chief executive officer of the Competition Commission, said in a press release.

Some groups are hoping for exceptions to the law. The Hong Kong Liner Shipping Association, whose members - Maersk Hong Kong, Hanjin Shipping, Orient Overseas International - dominate seaborne freight in the world's fifth-busiest container port, submitted the first exemption application in December.

It argued that members need to continue sharing some information that helps quality of service, efficiency and the environment, according to a post on the commission website.

An exemption "would simply preserve long-existing shipping practices" that would help lines to make more sound business decisions in planning their shipping services, said OOCL spokesman Mark Wong.

While Tim Smith at Maersk said most liner shipping services in Hong Kong comprise collaborations between two or more lines that "achieve scale economies from operating larger more fuel and environmentally efficient vessels." Business associations looking for an exemption run a big risk, said Fleming, of Baker & McKenzie.

"You need to reveal detailed information about relevant business practices, and the commission could rule against the exemption and then use the information," he said.

BLOOMBERG