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Chinese firms sue product safety agency

September 01, 2008|Don Lee | Times Staff Writer

SHANGHAI — China's product quality and food safety agency came under pressure last year after Chinese businesses exported tainted pet food and lead-laden toys. Now it is under fire from domestic companies.

In the last month, eight Chinese firms have filed lawsuits against the agency, accusing it of stifling competition by colluding with a business in which it had a financial stake.

The lawsuits could test China's new anti-monopoly law, which took effect Aug. 1. Among its provisions, the law prohibits abuse of government administrative powers that restrain competition, thus opening up for legal challenges the commercial activities of government bodies and officials.

The complaints by the eight companies, which supply product-authentication and tracking systems, were brought against China's General Administration of Quality Supervision, Inspection and Quarantine, or AQSIQ. The agency is a ministerial-level entity responsible for ensuring the quality and safety of many products, including food.

"This is more than just a lawsuit, it's an anti-corruption fight against AQSIQ," said Zhou Ze, the attorney at Beijing-based Zhanda Law Firm who filed the suits. "It will be a warning to other government agencies, helping them to improve operations and how they should use their public rights and power."

Zhou contends that since 2005, AQSIQ has been heavily promoting an electronic bar-code and Internet-based authentication system developed by China Credit Information Technology Co. Late last year the agency said that to improve product quality and safety it would require businesses in food and eight other industries to join China Credit's network. Network users are charged an annual fee and incur charges for specific services. As of July, nearly 67,000 companies had signed up with China Credit, AQSIQ reported.

AQSIQ owns 30% of China Credit, according to public filings with the Hong Kong Stock Exchange that were made by CITIC 21CN Co., a Hong Kong firm that owns 50% of China Credit. The remaining 20% is held by China Huaxin Telecom.

All three share in China Credit's profit, the filings show.

AQSIQ did not respond to telephone calls and a fax last week requesting comment. Local media have raised questions about the joint venture. Over the weekend, the agency said on its website that it did not invest any money in China Credit, nor did it earn a penny from it. AQSIQ said it had made plans to divest its stake.

Chinese regulations prohibit a government agency from being involved in a business operation, said Wang Xixing, professor of constitutional and administrative law at Peking University Law School. "It is definitely not allowed," he said.

Yet in practice, this remains a gray area in China. Some government operations have subsidiaries or affiliated entities that are engaged in commercial activity. The Ministry of Public Security, for example, has a research institute and under it is a company marketing traffic-control products.

In an interview, Zhou said he filed the first suit Aug. 1 on behalf of four Beijing businesses. He followed up with additional complaints for similar companies in Shanghai, Nanjing, Shenzhen and Guiyang.

Zhang Zeyi, general manager of one of the four Beijing companies, CSDN Alliance Information Technology Co., said that for the last three years he and the other plaintiffs had complained to AQSIQ about its selection of China Credit for the lucrative project.

"All the government [AQSIQ] employees, from top to bottom, are involved in promoting [China Credit's] system," Zhang said.

He said his company offered superior services. It was launched in 2002 with an investment of more than $8.5 million, Zhang said, but had lost significant sales since AQSIQ began pushing China Credit. This issue "is life or death for our enterprise," Zhang said.

Zhou, the attorney, said Friday that Beijing No. 1 People's Intermediate Court had not yet announced whether it would take up the case. But he said the anti-monopoly law had given his clients a fighting chance.

The law was approved last year after more than a decade of deliberation and delays. It prohibits certain acts of complicity between companies, such as price fixing, and establishes a merger review process. It sets penalties for noncompliance, although none are specified for cases of government administrative monopolies.

Wang, the Peking University professor, said he would not be surprised if the Beijing court decided not to hear the complaints against AQSIQ. He noted that last month a legislative committee deleted the electronic authentication code requirement from a national food safety law that was being drafted. That action, Wang said, may have been prompted partly by concerns raised in the lawsuits, and in that sense the anti-monopoly law may already have had an effect.

"This is a very important case," Wang said. "Even though the court may be reluctant to accept it, I think it will still create an effective model about a monopoly resulting from abuse of administrative power."

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don.lee@latimes.com

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