China threatens heavier fines after milk powder probe

Reuters News
Posted: Aug 08, 2013 12:51 AM
China threatens heavier fines after milk powder probe

By Adam Jourdan

SHANGHAI (Reuters) - China threatened heavier fines against companies breaking the law on Thursday, a day after six milk powder producers were hit with a total of $110 million in penalties for price fixing and anti-competitive behavior.

Xu Kunlin, head of the pricing unit at the National Development and Reform Commission (NDRC), said the milk powder makers had deleted emails and told staff to avoid leaving a paper trail when discussing prices with retailers.

"(These actions) are a clear example of knowingly violating the law," Xu said in an interview with the People's Daily newspaper, the mouthpiece of the ruling Communist Party.

"From now on, if we discover firms knowingly breaking the law, then fines will be increasingly severe."

The NDRC fined six milk powder firms following a four-month investigation: Mead Johnson, France's Danone, New Zealand's Fonterra, Abbott Laboratories, Dutch dairy cooperative FrieslandCampina and Hong Kong-listed Biostime International Holdings.

All of the companies said they would not contest the penalties, which the official Xinhua news agency said were a record for China. Several also said they were committed to addressing the concerns raised by the government.

The NDRC is China's top economic planner and is also responsible for enforcing China's anti-trust rules on pricing.

It is carrying out separate pricing investigations into 60 foreign and local pharmaceutical firms as well as companies involved in gold trading. Those probes have yet to conclude.

Xu said the milk powder companies broke China's five-year-old anti-monopoly law by effectively setting prices at which retailers could re-sell their products.

They used methods such as contracts, direct and covert fines and rebates, as well as controlling and cutting supply to get retailers to comply, he said.

"If a retailer didn't abide by the producer's pricing rules or went below the set lower price, then it would be penalized and sustain losses," Xu said.


Foreign infant formula is highly sought after in the world's second biggest economy, where public trust was damaged by a 2008 scandal in which six infants died and thousands became ill after drinking milk tainted with the toxic industrial compound melamine.

China's infant formula market is set to grow to $25 billion by 2017 from $12.4 billion in 2012, according to data from Euromonitor. Foreign brands account for about half of total sales and can sell for more than double the price of local formula.

In a commentary, Xinhua said China had not discriminated against foreign firms with its investigation, adding there were now fewer loopholes to allow multinational companies to earn "easy money" in China.

It also rebuffed speculation the probe was aimed at boosting domestic milk powder brands against foreign rivals.

Three other firms, Nestle-owned Wyeth, Japan's Meiji Holdings and Zhejiang Beingmate were probed but were not fined because "they cooperated with the investigation, provided important evidence and carried out active self-rectification", Xinhua earlier quoted Xu as saying.

However, lawyers said this example was unlikely to mean foreign companies in China would increase the disclosure of any illegal activity under the anti-monopoly law to local regulators since reporting procedures were less established than in Europe or the United States.

For example, in Europe, a regulator would record the exact date and time any disclosure was made and then that would be taken into consideration when deciding penalties, said Marc Waha, a Hong Kong-based antitrust lawyer at Norton Rose Fulbright.

"The impetus to self-report contraventions of anti-competition law is still low, partly because the procedural rules in China are still uncertain," said Waha.

"Yes, it is a milestone, but it is a milestone on a long path and we are still very far away from companies thinking about self-reporting as they would in Singapore, Malaysia, Japan, Korea or Taiwan."

(Additional reporting by Ben Blanchard in BEIJING and Shanghai Newsroom; Editing by Dean Yates)