Law, Wealth and Power in China : Commercial Law Reforms in Context [1 ed.] 9780203840924, 9780415587495

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Law, Wealth and Power in China

This book examines the law reforms of contemporary China in light of the Party-state’s ideological transformation and the political economy that shapes these reforms. This involves analysing three interrelated domains: law reform, power and wealth. The contributors to this volume employ a variety of perspectives and analytical techniques in their discussion of key themes including: commercial law reform and its governance of wealth and regulation of economic activity; the influence and authority of the Party-state over China’s economic activity; and the influence of wealth and the wealthy in economic governance and legal reform. Utilizing an interdisciplinary approach, Law, Wealth and Power in China presents analytical perspectives of new work, or new lines of thinking about the new wealth, power and law reforms of China. As such, critical boundaries are explored between legal and financial reforms and what these reforms signify about deeper ideological, economic, social and cultural transformations in China. The book concludes by asking whether there is a ‘China model’ of development which will produce a unique variety of capitalism and indigenous variant of rule of law, and examining the ‘winners and losers’ in the transition from a centrally planned economy to a market economy. Law, Wealth and Power in China will be of interest to students and academics of comparative law, Asian law, Chinese economics and politics, Chinese Studies, as well as professionals in investment banking, finance and government. John Garrick is a solicitor and the author and co-editor of a wide range of scholarly publications including several well-known Routledge Books on power relations and has worked extensively in both legal practice and academia in Hong Kong, the Middle East, North America and Australia.

Routledge Contemporary China Series

1 Nationalism, Democracy and National Integration in China Leong Liew and Wang Shaoguang 2 Hong Kong’s Tortuous Democratization A comparative analysis Ming Sing 3 China’s Business Reforms Institutional challenges in a globalised economy Edited by Russell Smyth and Cherrie Zhu 4 Challenges for China’s Development An enterprise perspective Edited by David H. Brown and Alasdair MacBean 5 New Crime in China Public order and human rights Ron Keith and Zhiqiu Lin 6 Non-Governmental Organizations in Contemporary China Paving the way to civil society? Qiusha Ma 7 Globalization and the Chinese City Fulong Wu

8 The Politics of China’s Accession to the World Trade Organization The dragon goes global Hui Feng 9 Narrating China Jia Pingwa and his fictional world Yiyan Wang 10 Sex, Science and Morality in China Joanne McMillan 11 Politics in China Since 1949 Legitimizing authoritarian rule Robert Weatherley 12 International Human Resource Management in Chinese Multinationals Jie Shen and Vincent Edwards 13 Unemployment in China Economy, human resources and labour markets Edited by Grace Lee and Malcolm Warner 14 China and Africa Engagement and compromise Ian Taylor

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15 Gender and Education in China Gender discourses and women’s schooling in the early twentieth century Paul J. Bailey 16 SARS Reception and interpretation in three Chinese cities Edited by Deborah Davis and Helen Siu 17 Human Security and the Chinese State Historical transformations and the modern quest for sovereignty Robert E. Bedeski 18 Gender and Work in Urban China Women workers of the unlucky generation Liu Jieyu 19 China’s State Enterprise Reform From Marx to the market John Hassard, Jackie Sheehan, Meixiang Zhou, Jane TerpstraTong and Jonathan Morris 20 Cultural Heritage Management in China Preserving the cities of the Pearl River Delta Edited by Hilary du Cros and Yok-shiu F. Lee 21 Paying for Progress Public finance, human welfare and inequality in China Edited by Vivienne Shue and Christine Wong

22 China’s Foreign Trade Policy The new constituencies Edited by Ka Zeng 23 Hong Kong, China Learning to belong to a nation Gordon Mathews, Tai-lok Lui, and Eric Kit-wai Ma 24 China Turns to Multilateralism Foreign policy and regional security Edited by Guoguang Wu and Helen Lansdowne 25 Tourism and Tibetan Culture in Transition A place called Shangrila Åshild Kolås 26 China’s Emerging Cities The making of new urbanism Edited by Fulong Wu 27 China-US Relations Transformed Perceptions and strategic interactions Edited by Suisheng Zhao 28 The Chinese Party-State in the 21st Century Adaptation and the reinvention of legitimacy Edited by André Laliberté and Marc Lanteigne 29 Political Change in Macao Sonny Shiu-Hing Lo 30 China’s Energy Geopolitics The Shanghai Cooperation Organization and Central Asia Thrassy N. Marketos

31 Regime Legitimacy in Contemporary China Institutional change and stability Edited by Thomas Heberer and Gunter Schubert

39 Intellectual Property Rights in China Politics of piracy, trade and protection Gordon Cheung

32 U.S.-China Relations China policy on Capitol Hill Tao Xie

40 Developing China Land, politics and social conditions George C.S. Lin

33 Chinese Kinship Contemporary anthropological perspectives Edited by Susanne Brandtstädter and Gonçalo D. Santos

41 State and Society Responses to Social Welfare Needs in China Serving the people Edited by Jonathan Schwartz and Shawn Shieh

34 Politics and Government in Hong Kong Crisis under Chinese sovereignty Edited by Ming Sing

42 Gay and Lesbian Subculture in Urban China Loretta Wing Wah Ho

35 Rethinking Chinese Popular Culture Cannibalizations of the canon Edited by Carlos Rojas and Eileen Cheng-yin Chow 36 Institutional Balancing in the Asia Pacific Economic interdependence and China’s rise Kai He 37 Rent Seeking in China Edited by Tak-Wing Ngo and Yongping Wu 38 China, Xinjiang and Central Asia History, transition and crossborder interaction into the 21st century Edited by Colin Mackerras and Michael Clarke

43 The Politics of Heritage Tourism in China A view from Lijiang Xiaobo Su and Peggy Teo 44 Suicide and Justice A Chinese perspective Wu Fei 45 Management Training and Development in China Educating managers in a globalized economy Edited by Malcolm Warner and Keith Goodall 46 Patron-Client Politics and Elections in Hong Kong Bruce Kam-kwan Kwong 47 Chinese Family Business and the Equal Inheritance System Unravelling the myth Victor Zheng

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48 Reconciling State, Market and Civil Society in China The long march towards prosperity Paolo Urio

54 Law, Policy and Practice on China’s Periphery Selective adaptation and institutional capacity Pitman B. Potter

49 Innovation in China The Chinese software industry Shang-Ling Jui

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50 Mobility, Migration and the Chinese Scientific Research System Koen Jonkers

56 Neoliberalism and Culture in China and Hong Kong The countdown of time Hai Ren

51 Chinese Film Stars Edited by Mary Farquhar and Yingjin Zhang

57 China’s Higher Education Reform and Internationalisation Edited by Janette Ryan

52 Chinese Male Homosexualities Memba, Tongzhi and Golden Boy Travis S.K. Kong

58 Law, Wealth and Power in China Commercial law reforms in context Edited by John Garrick

53 Industrialisation and Rural Livelihoods in China Agricultural processing in Sichuan Susanne Lingohr-Wolf

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Law, Wealth and Power in China Commercial law reforms in context

Edited by John Garrick

First published 2011 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Avenue, New York, NY 10016

This edition published in the Taylor & Francis e-Library, 2010. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk. Routledge is an imprint of the Taylor & Francis Group, an informa business © 2011 John Garrick The right of John Garrick to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patent Act 1988 All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Law, wealth and power in China : commercial law reforms in context / edited by John Garrick. p. cm. – (Routledge contemporary China series) Includes bibliographical references and index. 1. Commercial law – China. 2. China – Commercial policy. 3. China – Economic policy. 4. Investments, Foreign – Law and legislation – China. 5. Foreign trade regulation – China. 6. Law reform – China. 7. Socialism – China. 8. Democracy – China. I. Garrick, John. KNQ920.L39 2010 346.5107–dc22 2010016344 ISBN 0-203-84092-5 Master e-book ISBN

ISBN 978–0–415–58749–5 (hbk) ISBN 978–0–203–84092–4 (ebk)

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Contents

List of figures List of tables List of contributors Preface Acknowledgements List of abbreviations Introduction: wealth, power and law reform in the People’s Republic of China

xi xii xiii xvii xx xxi

1

JOHN GARRICK

PART I

Power and law reform in the People’s Republic of China 1

Market reform: reflections on China’s economic system

23 25

JONATHAN ANDERSON

2

In search of wealth and power: the character of the Chinese state and limits to change

53

YINGJIE GUO

3

Politics, society and the legal system in contemporary China

72

WILLIAM J. HURST

4

Power narratives and lessons from the Chinese Cultural Revolution: paradoxical backdrop to market liberalization and law reform ANDREW CHAN

89

Contents

x

PART II

The commercial law reforms 5

China’s civil and commercial law reforms: context and transformation

107 109

JIANFU CHEN

6

The regulation of foreign investment in China: seeking a level playing field?

130

HUI HUANG

7

China’s ‘dual track’ legislation on business organizations and the effects of the Anti-monopoly Law

142

XIANCHU ZHANG

8

China’s labour laws in transition

163

KAY-WAH CHAN

9

Secured financing in China

182

SU LIN HAN

PART III

Wealth and law reform: capitalism with Chinese characteristics?

197

10

199

Property, wealth and law reforms in China’s urban ‘revolution’ RICHARD HU

11

Women, enterprises and the state

218

MINGLU CHEN

12

Wealth and loss in changing economic times: reforms in bankruptcy and consumer protection laws

231

VIVIENNE BATH AND MARY IP

13

Where are China’s economic and legal reforms taking the People’s Republic: democracy with ‘Chinese characteristics’?

251

FENG LIN

14

Conclusion: law, wealth and power in China

272

RANDALL PEERENBOOM

Bibliography Index

294 325

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Figures

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 4.1 4.2 10.1 10.2 10.3

Who are the players? State ownership by GDP State ownership by sector, 2006 State share of employment State share of fixed assets State ownership by industry, 2006 State industrial ownership by region, 2006 State ownership in comparative context, 2003 State industrial enterprises State output and employment Market price formation in China Formal subsidies, 1985–2006 Chinese import tariffs Foreign access before WTO . . . and after Cultural Revolution and the Red Guards Franciscan nuns denounced in front of their Beijing nunnery on 24 August 1966 Annual urban population growth rates of China and the world, 1950–2050 Sold real estate floor area in China, 1987–2006 (in 10,000 m2) The percentage of top 10 richest businessmen from property development industry in China, 1999–2008

28 30 30 31 31 32 33 34 35 36 40 41 44 45 46 99 100 200 203 208

Tables

3.1 3.2

10.1 10.2 11.1 11.2

Procedures and objectives of different types of Chinese law Functioning of basic level criminal courts during the Maoist period as seen through their handling of counter-revolutionary crimes Number of cities in China in 1978–2007 Benchmark land law reforms in China Interviewees: family and CPC membership Interviewees: family and Party-state positions

74

77 202 213 220 223

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Contributors

Jonathan Anderson is Managing Director and Senior Global Emerging Market Economist for UBS Investment Bank. Before joining UBS in 2003, he worked at Goldman Sachs; he also spent eight years at the International Monetary Fund, including three years as Resident Representative in China and three years as Resident Representative in Russia. From 2003 through 2007, Jonathan was Chief Asian Economist for UBS, and was top-ranked in a wide range of broker polls including Asiamoney, Institutional Investor, The Asset and FinanceAsia. He is the author of The Five Great Myths About China and the World, and speaks fluent Mandarin Chinese and Russian. He received both his MA and PhD in Economics from Harvard University. Vivienne Bath is Director of the Centre for Asian and Pacific Law and Associate Professor in Law at the University of Sydney. Prior to joining the Faculty of Law, Vivienne was a partner in the international firm Coudert Brothers, working in the Hong Kong and Sydney offices and specializing in commercial law, foreign investment and commercial transactions in the People’s Republic of China. She previously practised as a commercial lawyer in New York and Sydney, and worked in the Federal Office of Parliamentary Counsel and is published widely in the area of Chinese law. She is a solicitor, New South Wales; barrister and solicitor, Australian Capital Territory; attorney, State of New York (USA); solicitor, England, Wales and Hong Kong; Member of the International Law Association; American Society of International Law and Vice-President of NSW Branch of the Australia-China Business Council. Andrew Chan is Associate Professor in the Department of Management at the City University of Hong Kong. He is widely published in Organization Studies, Journal of Organizational Change Management, International Journal of Human Resource Management and Asia Pacific Business Review and is the author of several books including the acclaimed Critically Constituting Organization (2000) and is a contributor to the Blackwell Encyclopedia of Sociology (2007) and the International Encyclopedia of Organization Studies (2008).

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Contributors

Kay-Wah Chan is admitted as a lawyer in Hong Kong, England and Wales, the Australian Capital Territory and New South Wales and has practised in Hong Kong. Currently, he is senior lecturer in the China Trade and Investment Law unit at Macquarie University, Sydney. He speaks and writes in Chinese and Japanese and has particular research interests in the legal systems of East Asian countries, Chinese law and Japanese law. He is a contributing author and co-editor of The Chinese Commercial Legal System (2008). Jianfu Chen is Professor of Chinese Law and Legal Globalisation and Head of the School of Law, La Trobe University, Melbourne. He has authored, co-authored and co-edited many volumes on Chinese law including From Administrative Authorization to Private Law: A Comparative Perspective of the Developing Civil Law in the PRC (1995); Chinese Law: Towards an Understanding of Chinese Law, Its Nature and Development (1999); and Chinese Law: Context and Transformation (2008) and is General-Editor of the CCH International loose-leaf service China Business Law Guide. Minglu Chen is currently a postdoctoral researcher with the Department of Government and International Relations in the School of Social and Political Sciences, University of Sydney, and an honorary associate of the UTS China Research Centre. Until June 2009, she was a lecturer in International Studies specializing in China Studies at the University of Guadalajara, Mexico, and is the author of Tiger Girls: Women and Enterprises in the People’s Republic of China (2008). John Garrick is a solicitor of the Supreme Court of New South Wales and former judge’s associate of the Supreme Court. Until 2006, he was in private legal practice with the major Sydney firm Ebsworth & Ebsworth, Lawyers specializing in commercial law. He is currently Senior Research Fellow at Macquarie University’s Graduate School of Management (MGSM) and Convenor of Business Law and Corporations Law at Macquarie University’s City Campus (Sydney). He is the author and co-editor of a wide range of scholarly publications including several well-known Routledge Books on power relations and has worked extensively in both legal practice and academia in Hong Kong, the Middle East, North America and Australia. Yingjie Guo is Associate Professor in Chinese Studies and Deputy Director of the China Research Centre at the University of Technology, Sydney. His research interests relate to wealth, power and nationalism in contemporary China and the domestic political impact of China’s WTO membership. He is the author of Cultural Nationalism in Contemporary China: The Search for National Identity under Reform (2003) and numerous publications on nationalism, wealth and democratization in China. Su Lin Han is a US-based attorney providing legal consulting services to corporate and not-for-profit clients on China-related matters. Her recent

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Contributors

xv

projects include a legal consultancy with the World Bank on a secured transactions reform and access to credit project in China. She is the editor of a book on comparative judicial systems and processes, written in cooperation with the Supreme People’s Court of China, and until recently, the editor and co-founder of China Law and Governance Review. Ms. Han is a native of Beijing and received her J.D. from the Boalt Hall School of Law, University of California, Berkeley, in 1991 and subsequently worked as a corporate attorney at Wilmer, Cutler & Pickering in Washington, DC, and the Hong Kong office of Cravath, Swaine & Moore of New York. Richard Hu is Assistant Professor of Urban Planning at University of Canberra. Dr Hu’s prior experience included being an urban researcher at the University of Sydney, an urban professional in China (in Shanghai and Beijing), America and Australia. He received his professional and academic training in urban planning and development at the University of Sydney and UC Berkeley with research interests being global cities, CBD transformations, urban competitiveness and city governance. Richard is a columnist of urban studies in China for Urban Planning International and Beijing Planning Review and has published widely on Chinese urbanization, urban transformation and urban problems. Hui Huang (Robin) is currently Associate Professor at the Faculty of Law, Chinese University of Hong Kong. Before this he was Senior Lecturer at the Faculty of Law, University of New South Wales, Sydney, Australia. He teaches and researches in the areas of corporate law, financial regulation and Chinese law and is an elected committee member of the China Commercial Law Society. He holds visiting positions at other prestigious institutions including Cambridge University, Columbia University and Tsinghua University. William J. Hurst is currently Assistant Professor of Political Science at the University of Texas, Austin, and was post-doctoral fellow in modern Chinese studies at the Faculty of Oriental Studies, University of Oxford (2005–7). Among his numerous publications are authorship of The Chinese Worker after Socialism (2009) and co-editorship of Laid-Off Workers in a Workers’ State: Unemployment with Chinese Characteristics (2009). His research examines political power and the restructuring of state enterprises in China. Mary Ip was a visiting scholar at Peking University’s Law Faculty and Nanjing University in 2003; a keynote speaker at the Shanghai Administrative Bureau of Commerce and Trade in 2005, and was commissioned by the French Ministry of Justice in 2006 (which also informed the Austrian Federal Ministry of Social Affairs and Consumer Protection). Dr Ip is an inaugural member of the China Focus Group of the Law Council of Australia and member of the China Working Group on Legal Services at the International Legal Services Advisory Council, Federal Attorney

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Contributors

General’s Department. Her research interests focus on Chinese commercial law with an interdisciplinary approach and comparative methodology. Feng Lin, Barrister, is currently Director of the Centre for Chinese and Comparative Law and Associate Professor of Law at the City University of Hong Kong. His primary research interests are public law (constitutional law, administrative law), environmental law, comparative labour law and intellectual property law. He is widely published and his books include Chinese Constitutional Law, Administrative Law Procedures and Remedies in China, Strategic Moves in China’s Environmental Protection Laws. He is an expert member of the Technical Committee of the HKQAA. Randall Peerenboom is a Law Professor at La Trobe University and an associate fellow of the Oxford University Centre for Socio-Legal Studies. He was a professor at UCLA Law School from 1998 to 2007 and Director of the Oxford Foundation for Law, Justice and Society Rule of Law in China Programme. He has been a consultant to the Asian Development, Ford Foundation, EU-China, UNDP and other international organizations on legal reforms and rule of law in China and Asia, and is the co-editor-inchief of The Hague Journal of Rule of Law. He is also a CIETAC arbitrator, and frequently serves as expert witness on PRC legal issues. His recent sole-authored and edited books include Judicial Independence in China (2010); Regulation in Asia (2009); China Modernizes: Threat to the West or Model for the Rest? (2007); Human Rights in Asia (2006); Asian Discourses of Rule of Law (2004); and China’s Long March toward Rule of Law (2002). Xianchu Zhang is a Professor of Law and Associate Dean of the Faculty of Law, the University of Hong Kong, specializing in commercial law, Chinese law and comparative law. He has published on a wide variety of topics related to Chinese law. He currently serves as the Co-Director of the Hong Kong University-Peking University Legal Research Centre and is an arbitrator of the China International Economic and Trade Arbitration Commission (CIETAC) and a trustee of the Legal Education Trust Fund of Hong Kong. His LLB was taken at the China University of Political Science and Law and his MCL and J.D were taken at the Indiana University School of Law, Bloomington, USA.

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Preface

In December 2008, China celebrated 30 years of economic reform. In October 2009, China celebrated the 60th birthday of the People’s Republic. The common centrepiece of both celebrations was the journey to landmark prosperity. Indeed, the legitimacy of the Communist Party is ensconced in the success of its reform and ‘going out’ policy which has transformed China from a farm economy with a GDP of RMB 362.4 billion in 1978 to RMB 30 trillion in 2008. During the period July 2008 to September 2009, China invested US$20 billion to secure assets around the world. This commonly termed ‘Mao to Markets’ transformation of contemporary China is one of the most fascinating stories conceivable. When Mao died on 9 September 1976, two years of extraordinary political power struggle followed, seeing first an end to the Chinese Cultural Revolution and then, in 1978, the reform and opening up policy being launched. Just over 30 years ago it would have been almost unthinkable that such an immense one-party state could swerve so startlingly in a new direction and with sufficient force to sustain the momentum over several decades. By the date of the Beijing Olympics, on the 8th of August 2008, it appeared that the People’s Republic of China (PRC) had arrived as a modern ‘superpower’ playing a prominent role in helping world economic markets recover from the global financial crisis of 2008–09. At least that is how most popular media presents it, and use of the term ‘superpower’ largely goes unchallenged with respect to modern-day China. At the same time there has been a discreet struggle taking place in mainland China over justice, law and governance. China has been asking itself for some time now ‘What kind of legal system best suits its national circumstances?’ This book arises out of a series of scholarly seminars held during 2008 and 2009 which probed this question. The aim was to provide opportunities for legal scholars, scholar-practitioners and scholars generally interested in China’s transformation to a market economy with legal updates and cutting-edge research. Participants sought to be informed about and participate in discussion-leading research on the legal landscape – particularly for foreign investors in China. The initial idea behind the seminars was simply to generate informed discussion, reflection and networking opportunities for both scholars and

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Preface

practitioners from China and the West in relation to new opportunities arising from the dramatic changes taking place. This book capitalizes on these opportunities by including some of the most cutting-edge analyses from scholars from a range of host countries. On some topics further specialist input was sought to ensure the presentation of a comprehensive coverage of key issues. The advances of China over the past 30 years were, in part, made possible by its political system. This included coherency as government, industry and citizenry largely marched in step with each other. There has been acknowledgement from the Communist Party of China that legal reform is necessary to attract inbound Foreign Direct Investment (FDI) and to ensure the economy enjoys sustainable growth within a strategic paradigm. It takes time and patience to build this reform. Those seeking reformation should have the courage to challenge alleged deficiencies, and temper that with productive contributions in terms of analysis, skills and resources. This edited volume has sought to make such a contribution by presenting analytical perspectives of new work, or new lines of thinking about the new wealth, power and law reforms of China. As such, critical boundaries are explored between legal and financial reforms and what these reforms signify about deeper ideological, economic, social and cultural transformations in China. Exercising macro-control over the economy by means of law is a major characteristic of China’s socialist market economy. At the same time, there are limitations to rule of law. President Hu Jintao noted in his speech at the People’s Republic celebrations that ‘we must adhere to the Party’s leadership’. It would thus appear that any substantial political reform is not on the agenda. Yet China’s leaders have transformed much of their system to accommodate capitalism. Continued reform is promulgated in China’s political landscape. Some of the dramatic social changes are themselves occurring as a consequence of strategic legal reform. For instance, the emergence of the new rich in the PRC is both a profound and intriguing phenomenon with fierce debate ensuing as to whether China is in fact a ‘post-socialist’ state and if it may move towards some democratic reforms. Paradoxically, there is an emerging restoration of Mao’s legacy. Where legal disputes occur, Chinese courts will, as elsewhere, settle most of them, but not all of them. Some are excluded from judicial purview if they are considered ‘too sensitive’, such as land transfers, environmental complaints, tainted milk claims, international contract negotiations that may have breached national state secrets, and so on. The international business and legal community is vitally interested in the nature and standards of justice that can be expected when engaged commercially with mainland China. The selection of chapters that follow therefore seeks to maximize interpretive insights by adopting an interdisciplinary approach. This holistic nature of legal reform analysis – rule of law promotion or, conversely, of economic reforms, poverty reduction, a market economy, and so on – is now well accepted, most certainly in the law and development literature/industry.

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Preface xix Key motivational drivers behind the development of the volume came from the editor’s extensive professional, commercial and personal experiences in the Hong Kong Special Administrative Region and mainland China over many years of practice. Most recently, in 2007–10, I have taught approximately 3,000 Chinese students in company law and business law. Many are now scattered in various employment opportunities across China. This direct experience propelled me towards making a careful study of China’s law reforms to better explain differences between, for instance, the more codified approach of the People’s Courts in a one-party state and common law legal systems that rest heavily upon doctrines such as ‘stare decisis’ (case precedent) and the ‘separation of powers’ in democratic societies with a free press. Theoretically, therefore, the book is indebted to the methods of comparative law in a changing world, addressing legal and economic reforms against a background of China’s modernization since the end of the Cultural Revolution in the late 1970s. The issues covered include careful analysis of China’s acceptance of private entrepreneurs and the management of private property and wealth through its legal, economic, banking and commercial systems. Within its own borders, China’s reforms in these key areas evolve unrelentingly. China is learning quickly. Labour laws endowing worker entitlements similar to their counterparts in developed countries are forcing industrial reform in China’s manufacturing sector; resources are being redeployed from inefficient state-owned entities to private enterprise. Human capital is being up-skilled. These reforms signify monumental changes not only for China’s internal economy and social transformation but for world markets and international relations more generally. The accompanying ideological and policy tensions between a socialist past and emerging capitalist practices have created the most intriguing interpretive space. The selected inclusions offer expert, specialist views on particular aspects of the overall topic and, when brought together, add new empirical, legal, commercial and sociological insights into China’s strategic changes. Anyone or any company considering investing in China or that is involved in commercial contract negotiations is well advised to read carefully what they have to say. Solutions can only be formulated from a deep understanding of the challenges. Be informed. By inviting foreign firms to engage with its economy China invites advice to shape mutual objectives. Academics, professionals, industry, trade organizations, media, and governments have new opportunities to collaborate to form powerful voices with respect to wealth, power and law reform in the People’s Republic. John Garrick 10 April 2010

Acknowledgements

In addition to the contributors, this volume benefited from helpful suggestions at the outset. Each of the following is thanked for generously sharing ideas, information, connections and encouragement: Albert Chen (University of Hong Kong), Christine Chung (for her insightful feedback on the draft of the Introduction), Bruce Dickson (George Washington University), David S. G. Goodman (University of Sydney), Jianjun Zhang (Peking University), Kellee S. Tsai (Johns Hopkins University), Laurelle Wishart (for her superb assistance with a constantly evolving text), Qianfan Zhang (Peking University), Scott Kennedy (University of Indiana), Suisheng Zhao (University of Denver), Tianbiao Zhu (Peking University), Vivienne Shue (Oxford University) and Xiaowei Zang (University of Sheffield).

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Abbreviations

AIC AML AWE CCA CJV CPC CPPCC ECL EJV EU FDA FDI FECL FIC FIE GATS GDP GFC GITIC GPCL GPCR IP LTC M&A MICs MOFCOM MOFERT MOFTEC NDRC NPC NPL NYSE PBOC

Administration of Industry and Commerce Anti-monopoly Law Association of Women Entrepreneurs China Consumer Association contractual/co-operative joint ventures Communist Party of China China’s People’s Political Consultative Conference Economic Contract Law equity joint ventures European Union US Food and Drug Administration foreign direct investment Foreign Economic Contract Law Federation of Industry and Commerce foreign investment enterprises General Agreement on Trade in Services gross domestic product global financial crisis Guangdong International Trust and Investment Corporation General Principles of Civil Law Great Proletarian Cultural Revolution intellectual property Law on Technology Contracts Mergers and Acquisitions middle income countries Ministry of Commerce Ministry of Foreign Economic Relations and Trade Ministry of Foreign Trade and Economic Co-operation National Development and Reform Commission National People’s Congress non-performing loan New York Stock Exchange People’s Bank of China

xxii

Abbreviations

PLA PPCC PRC PSB RMB ROE ROIC SAIC SASAC SAT SCNDR SELA SFDA SME SOE SPC SRC TRIPS TVE VAT WFOE WTO Xinhua Yuan RMB

People’s Liberation Army People’s Political Consultative Conference People’s Republic of China Public Security Bureau Renminbi (PRC currency) return on equity return on invested capital State Administration of Industry and Commerce State Asset Supervision and Administration Commission State Administration of Taxation State Commission of National Development and Reform Self-Employed Labourers Association State Food and Drug Administration small and medium-sized enterprise state-owned enterprise Supreme People’s Court China Securities Regulatory Commission Trade Related Aspects of Intellectual Property Agreement Town and Village Enterprise Value Added Tax Wholly Foreign Owned Enterprises World Trade Organization New China News Agency = US$0.146490; 1 US$ = 6.82640 China Yuan RMB (Bank of China exchange rates at 12 March 2010)

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Introduction Wealth, power and law reform in the People’s Republic of China John Garrick

Theorizing China’s legal reforms This book examines the law reforms of contemporary China in light of the Party-state’s ideological transformation and the political economy that shapes the reforms. This involves analysing three interrelated domains: law reform, power and wealth. Of these three domains, law reform constitutes the primary theme of the book, and the focus of analysis is on commercial law which governs wealth creation or regulates economic activity. ‘Power’ refers to Partystate control, as authority and influence, over economic activities; and ‘power relations’ as enacted within the holistic process of economic governance, law reform, law-application and law-adjudication. ‘Wealth’ is viewed as shorthand for wealth creation and the influence of the wealthy in economic governance and legal reform. Of particular concern is the nexus between wealth and power as each affects, and is affected by, the law reforms. Each domain is examined within various specialized contexts for expert insight. In the analysis, political economy plays a primary role in examining the issues of economics, wealth and power. Diverse perspectives are used including the techniques of comparative law to acquire a better understanding of the rule of law in a rapidly evolving legal system. Readers are challenged here to consider the validity of populist capitalist perceptions that a successful market economy must be governed by political and regulatory systems as exist in capitalist societies. Or that China’s reforms could be a fait accompli by wholesale adoption of key aspects of other countries’ systems. Of note is that China’s ‘economic miracle’ has solidified over the past three decades, under a communist-socialist regime without substantive, transparent, democratic commercial law systems. The various contributors recognize that not all incompatible laws have been revised or amended. Some key laws are still to be developed, and implementation of some new laws remains problematic. China continues ‘crossing the river by groping for stones’. The legal reforms of this economic powerhouse have implications too significant for the global community to ignore. This publication thus examines, analyses and encourages stakeholders to participate in shaping China and subsequently our future. Some topics are simply

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too broad to accommodate within this single volume and thus a follow-up volume is planned to address practical and ideological dilemmas faced by the authorities administering China’s vast taxation system, environmental laws, IP challenges and the issues associated with reforming business and company laws (see Garrick forthcoming). Balancing the needs of a market economy with the needs of a Party that is historically indebted to a socialist ideology is indeed a delicate act. The unprecedented scope of transformation, the challenges and opportunities embodied in China’s reform evolution are super-complex. The impact on society is multi-dimensional. There are profound interconnecting cause and effect relationships. For example, economic restructuring has caused rapid urbanization: from 18 per cent to 48 per cent of the population during 1978 to 2008 respectively. In turn, there has been structural change in the employment of labour, and deployment of natural and capital resources. The structural changes have necessitated the rapid development of new legislation covering foreign investment regulation, property, contract, tax, companies, bankruptcy, consumer protection, etc. This publication utilizes an interdisciplinary approach, encompassing academic and practice disciplines of law, economics, banking and finance, government and management to present a comprehensive study. Mao’s revolution extended beyond his lifetime. As the founder of the PRC in 1949, he began this nation’s socialist ambitions. The next significant milestone was Deng Xiaoping’s promulgation of Gaige Kaifang – Economic Reforms and Openness policies – at the Third Plenum of the Eleventh CPC Congress. There was landmark economic progress from 1949 to 1989. There was also a great deal of sacrifice and needless bloodshed during the Great Leap Forward, China’s Cultural Revolution, and again at the Tiananmen Square protests. The protesters represented growing anger by China’s citizens about wealth disparity, environmental pollution, corruption and unemployment which accompanied economic reform. Citizens of China and abroad are now more informed and united in their concerns of these problems. The current leadership has acted on some of the concerns with various economic and legal reforms that are examined in the following chapters. Deng’s vision of ‘socialism with Chinese characteristics’ has radically progressed under the administrations of Jiang Zemin and Hu Jintao. Continued legal reform was compulsory for World Trade Organization (WTO) membership (member since 2001), and the Communist Party of China (CPC) Politburo has demonstrated its understanding of the critical contribution of legal systems to sustainable economic growth. Marx (1973: 532) also anticipated that the government infrastructure and services, non-market in character and funded out of taxation, would eventually become ‘marketized’: According to Marxism, the economy is the base of a nation, and determines the superstructure with politics and culture at the core; the

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superstructure in turn exerts great negative or positive impacts on the economic base. In essence, the superstructure must – it has no choice but to adapt to the changes of the economic base.1 This is part and parcel of the changes imposed on the superstructure – the priority deployment of national resources to earn wealth, and distribution of wealth to support the nation’s welfare. Socialism and capitalism are in this sense ‘collaborators’ rather than binary oppositions. Appropriate legal systems strengthen the integrity of the entire structure, enabling sustainable societal progress. A coherent legal framework provides transparency and predictability, strengthens the superstructure with integrity and confidence. Economic progress and legal reform are thus interdependent.

To get rich is glorious: from subsistence to wealth creation China’s transformation from Mao’s agrarian command economy to today’s socialist market economy is the stuff of legends. Deng Xiaoping’s inspirational ‘to get rich is glorious’ aphorism became a national aspiration from 1978. It still echoes in the heartbeat of China’s current thriving private sector. Between 1979 and 2008, China’s annual GDP growth averaged 9.8 per cent (approximately three times the world average) and it has lifted its ‘share of world industrial production from about 2 per cent to 13 per cent in just 20 years’.2 Four hundred million Chinese were lifted above the international poverty line from 1979 to 2009.3 Chinese citizens’ bank savings ‘increased 220-fold, from 21 billion yuan (roughly U.S. $2.5 billion) to 4,628 billion yuan (about $560 billion) [from 1979–97]. Never in history had so many people made such economic progress in a single generation.’4 On his first trip to China, President Obama urged China: ‘to shoulder the burden of leadership that both our countries now carry. I will tell you, other countries around the world will be waiting for us.’5 Indeed, China is pivotal to global welfare in terms of recovery from the global financial crisis (GFC), tackling climate change, containing nuclear proliferation and resolving world hunger. This is the power and obligation that accompany her ‘economic miracle’. China’s economy is safeguarded by US$2.4 trillion foreign exchange reserves (year ending 2009).6 ‘The Chinese own more U.S. government debt than any other nation – about $800 billion worth. And the U.S. pays China $50 billion a year just in interest.’7 In 2009, global GDP declined by 2.2 per cent whereas China’s GDP increased by 8.7 per cent.8 Notable new mantles for China include ‘largest car market in the world with 13.6 million vehicles sold’.9 According to Morgan Stanley Asia chief, Stephen Roach, ‘What we are seeing is that the Chinese command-and-control system can actually work more effectively than other market based systems in times of economic stress.’10 When Deng Xiaoping said, ‘It doesn’t matter if a cat is white or

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black as long as it catches the mouse’, he was putting economic growth above ideological ‘purity’. In relation to wealth, the private sector is responsible for about three-quarters of economic output and employment in China. Private business people have amassed vast wealth in the post-Cultural Revolution years with 25 per cent of global growth between 1993 and 2001 located in China – ‘fuelling the emergence of a global middle class’ (Zang 2008: 55). Zang (ibid.: 54) points out, however, that the so-called Chinese ‘middle class’ and their family members probably do not at this stage even exceed 4 per cent of the total PRC population (i.e. approximately less than 45 million, or less than 0.74 per cent of the world population of 6.1 billion in 2001). Wealth distribution has become a topic of angst for Chinese workers. In 2005, 29.1 per cent of the rich (those with cash assets of US$1 million in addition to home-ownership) in the Asia-Pacific Region were from the PRC, and each had average cash reserves of some US$5 million (ibid.: 55). Furthermore, twenty of the 946 billionaires cited by Forbes in 2007 were from the PRC. This is ‘acknowledged wealth’, but there are critical questions about the amount of ‘hidden wealth’, especially with regard to the conspicuously wealthy, government officials and also with respect to wealth and gender. The question of whether law reform has improved accounting of personal assets and income is examined in Parts II and III. China’s market transformation has been variously described as social, cultural, economic, ideological and political. The causes of the transformation have been even more variously ascribed to ‘marketization’ (Heikkila 2008: 59), urbanization (Hu 2008: 145), industrialization and globalization (UNCTAD 2005) and even technological (Gao 2008: 200). In addition, political control over economic development policy has loosened and liberalized. But the Party’s control over political power on issues such as ideology, official promotion and propaganda was actually strengthened after the 1989 pro-democracy movement. The central government’s power over tax was increased through tax reform in the 1990s, orchestrated by the Vice Premier and later Premier Zhu Rongji. Such facets of political transformation in the PRC are important issues to our ‘nexus theme’ of wealth, power and law reform. One theory is that macro-level influences are best viewed as interconnected, with none having any overarching claim to ‘causing’ the monumental changes taking place in the PRC. Yet, what often attracts the gaze of China commentators in the West are those visible signs and symbols of change: the conspicuous lifestyles of the new rich, the Manhattan-style glamour of new city skylines, ‘vanity projects’ and iconic benchmark constructions built for the Beijing Olympic Games, the Chinese ‘space-walk’ of 2008, the glossy celebrations for the 60th anniversary of the founding of the People’s Republic and the economic reforms that have delivered the new rich their wealth and, in some cases, their power. Analyses have thus tended to centre on visible aspects of the economic reforms which in turn have been underpinned by massive urbanization. In fact, the level of urbanization in China in 1978 was

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less than 20 per cent of the population. Now it is 40 per cent, fuelled by rural migrants who have been the main source of urban population growth. This is partly because natural urban population growth is restrained by the national policy of the one-child family plan. By the year 2020 it is anticipated to be 60 per cent – ‘almost defying the very laws of nature’ (Heikkila 2008: 48).11 Against this policy backdrop it is hardly surprising that legal transformation is taking place now. But is it all about China becoming economically prosperous? Or is there more to it? How are the new legislations being promulgated and implemented? How are key institutions responding? What actually happens on the ground? These questions touch on super-complex issues. This is because of the experimental characteristics of ‘reform and opening’, the hybrid nature of reform measures that combine socialism and capitalism (black cat and white cat), Keynesianism and neo-liberalism, and the fluid and transient state of affairs in economic and legal reform. What is examined is therefore not a simple, homogeneous or stable phenomenon; it does not easily fit single discipline-based theories. As such, the framework of the book might be theoretically classified as ‘postmodern’ with a post-Marxist, post-Keynesian political economy, a social theory influenced by Foucauldian insights into power (and the discourses that seek to legitimize that power), and comparative law and grounded theory (which examines any emerging patterns or models followed by explanations of these). Such an approach is focused by examining the influence of power/wealth on law reform and of government perceptions of the types of law reforms that are required at this particular historical moment. Critically, this perspective asks how such perceptions are ‘forged’ discursively and politically through the lobbying power, guanxi (connections, influence) of the new rich, the current rhetoric in political force/fashion, the impact of global economics on the internal directions of the reform process. Indeed, who precisely are the main beneficiaries of commercial law reform? As for the specific law reforms themselves, the various contributors have been encouraged to use different theoretical perspectives to make their points. But readers please note: the thrust of the book was never to be too theoretical on the one hand, or ‘blackletter legal’ on the other hand. Rather, it considers from different points of view what happens to law reform as a socialist market economy expands and with China becoming more enmeshed with the global economy.

From politics in command to rule by law: the increasing importance of law in the PRC The politicization of wealth, commodification of political power and guanxi China’s ‘opening up’ has spotlighted key issues relating to the politicization of wealth, the commodification of political power (that is, the exchange of authority/right for a price) and also government/governance, law-making, lawapplication and law-adjudication. These forces are opaque and inherently

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foster grievous risks in so far as they can corrupt the supply and demand mechanism of the market economy for selfish inequity. Beyond theory, these forces can be the determinants of ‘life and death’. They can be broadly categorized as cultural and political. ‘Guanxi’, born of the ancient Chinese culture promoting respect for community, has been corrupted by opportunists. There has been much commentary on the practice of guanxi in negative terms, as pertains to transactions in China. Interpersonal relationships are very important to the Chinese culture and guanxi pervades virtually all aspects of life. Opportunists are, however, using guanxi to change the ‘rules of the game’ – mid-game. Just as in other countries where laws regulate the use of firearms to protect citizens and commerce, law reform and education can contain the improper use of guanxi in China. The Communist Party of China (CPC) elite has evolved back to the altruistic feudal conspiracy it replaced 60 years ago. Within this hierarchy are China’s princelings (descendants of the ‘Eight Immortals’) and those endorsed by the princelings. All three officers appointed in 2009 to the rank of full general in the People’s Liberation Army were children of senior party leaders. Xi Jinping, whom many expect to be the next president, is the son of a revolutionary hero. Eight or nine of the 25-member Politburo are princelings (defined as having a parent or parent in-law who held the rank of vice-minister or above), according to Cheng Li, an expert on Chinese elite politics at the Brookings Institution. In the previous Politburo there were only three.12 These princelings wield extraordinary control in China’s political and judicial systems, in addition to the nation’s critical and most profitable industries. They are virtually the Board and executives of China Inc. Pan Wei (2006: 3) asserts that there is rampant corruption in China that stems from ‘the contradiction between China’s newly installed market system and the Party-state’s unchecked power’. He adds that the Party possesses the final say over the judicial, legislative and executive branches of government and over the media, markets, universities and particularly the promotion of officials: ‘Moreover, economic decentralization has led to the feudalization of administrative power, and power monopoly of the party has become the personal power monopoly of each chief administrator’ (ibid.: 3). Against such a backdrop of guanxi, power and corruption, Pan Wei argues a case for a ‘consultative rule of law regime in China’ – rejecting any embrace by China of a multi-party (US-style) democracy. He argues forcefully that democracy is not an inevitable result of political liberalization. Among others, Suisheng Zhao (2006: 54) points out that any transition to democracy will occur only if the ruling elite, or a substantial proportion within it, perceive the potential advantages of a shift from liberalization to fundamental democratization to outweigh the risks of trying to sustain authoritarian

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one-party rule. His point is that political liberalization without democratization does not address the root of China’s political problems referring to an underlying ‘crisis of legitimacy’ (ibid.: 55). Multi-party democracy is not visible on the political horizon; however, the CPC knows when to bend, so as not to break, and internal evolution is occurring. ‘Corruption’ is not an automatic derivative of the princelings’ undemocratic control of China Inc. It is, in part, a matter of China’s ‘corporate governance’. How safe is it to do business in China? How do executives of foreign enterprises obey the laws that would prevent prosecution such as mining company Rio Tinto executive Stern Hu and his colleagues have recently faced in Shanghai No. 1 Intermediate People’s Court? What precisely are the applicable laws of commerce? Can companies protect their employees with waivers as reported by The Wall Street Journal,13 before starting negotiations with state-owned enterprises (SOEs)? Mr Hu and his three colleagues were detained in July 2009, formally arrested in August 2009, and formally indicted in February 2010. No bail was allowed. The defendants’ lawyers learned of the indictments from a Xinhua News’ announcement; there was no date for trial included in the media announcement. The four Rio Tinto executives now face lengthy jail sentences, having been found guilty of corruption. The full set of reasons why they are in jail is complex and may never be fully known as parts of the trial were conducted in camera (privately). But this case definitely shows at least one thing: companies need to be very careful when doing business in China. China is dependent on the global community. Food and energy imports are essential to ensure staples for citizens and industry. Foreigners (companies and individuals) with technologies, skills, and capital are critical to China’s social and economic continued well-being. One of the main reasons it continues to support US government debt, is that the US economy is still the world’s largest economy; China’s economy is dependent on international trade and global trade would partially collapse if the US economy stagnated into depression. China also acknowledges its need to secure more overseas resources to secure its own supply systems. ‘The rule of law’ constructs the framework of transparency, accountability, predictability, verifiability, enables stakeholders to determine risk/benefit, develop systematic processes enabling improvements, and so on. China has progressed beyond an agrarian society, the inherent objectives of rule of law are necessary to regulate the complex interactions that have resulted from radical social, economic and political reform over the past three decades. An effective legal system that can mould the Marxist model of ‘base’ + ‘superstructure’ with integrity appears to be critical to China’s future. A formal ‘rule of law’ appears to be a necessity when China’s companies and firms interact with the outside business world. However, China’s cultural traditions and social structures have always provided valuable alternatives

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such as the use of guanxi, negotiation and commercial arbitration. With regard to guanxi, which requires no legal enforcement (and accepts no legal constraints), when set against Western notions of an enforceable contract, this form of connectivity does not comfortably co-exist with laws or rules that do not stem from the guanxi logic and moral underpinnings. It does not co-exist comfortably with codes of conduct or disciplinary requirements of government, organizations or the professions. On the one hand, guanxi is antithetical to good government and something law reforms target. On the other hand, it continues to thrive as a normal part of business life, affecting in significant ways both governance and legal reform. Alternative approaches indebted to guanxi clearly have their limits and problems and these are explored in turn by contributors in the following chapters. They manifest themselves in various ways in China’s extensive commercial and civil law reforms. With the focus on connections between law, wealth and power, this volume is particularly concerned with those aspects of law reform critical to China’s economic and social transformations. Specifically included are chapters addressing contract, property, foreign investment law, commercial and competition law, secured transactions law reform, labour law, bankruptcy and consumer protection law, and China’s electoral law reforms. The book does not attempt to cover the range of commercial and civil law reforms that could be applicable. We have been selective and some significant areas of law reform (including pivotal areas such as taxation and the environment) have not been included in this volume as they are specifically addressed in a separate forthcoming volume. The current volume examines the commercial law reforms in their broader context. For instance, underlying questions are: Have the legal reforms become contested terrain in which different classes and social groups make their interests known? What roles are being played by government authorities in the application of specific law reforms? How are the various new social groups (such as the new rich and foreign investors) influencing law-making processes? How do they make their preferences known and push their interests forward? Does the state still exercise total control over both making and adjudicating laws governing SOEs and private enterprise? Will the law reform process serve to secure China’s wealth in the global economy? What may happen to the reform processes in the event of prolonged economic downturn? Can the reforms contribute to more sustainable growth and development? Is political change inevitable? Or, could it be that the very seeds of future calamity are being sown? To answer such questions we examine the 30 years following the Communist victory in 1949. Since then, China’s centrally planned economy has included a clear division between rural and urban China (controlled through the strict Hukou – household registration system) and the conversion of cities into ‘Stalinist manufacturing centres’ (Hu 2008: 147). Based purely on manufacturing output, this strategy could be interpreted as somewhat successful. But on more general criteria, Mao’s strategy was not successful – otherwise,

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there would have been no necessity and legitimacy for Deng Xiaoping’s reforms. In 1992, Deng’s ideology of building a ‘socialist market economy’ was enshrined as the Communist Party’s Guidelines and adopted in the Constitution in the following year’s National People’s Congress. Jiang Zemin and Hu Jintao have subsequently implemented the largest scale of urban infrastructure development ever known: new urban development zones, airports, expressways and ports. Then in 2001, China joined the World Trade Organization. This landmark symbolizes (at least to some degree) the realization of Deng’s policy of ‘Reform and Opening Up’. Important issues hidden behind China’s new urban glamour relate to who are the winners and losers, how power relations have shifted, and some lack of transparency as to what are the main driving forces. This is precisely where the theme ‘wealth, power and law reform’ fits into the discourse of China’s urban age. Richard Hu in Chapter 10 in this volume explores in detail how the introduction of private property law reforms into socialist China has affected its population – with awesome urban growth. This growth is on a scale not only unprecedented in human history, but unlikely to be paralleled by any nation in the future, given China’s magnitude of both population and land. Nor is the reform and opening up process over and settled with the McKinsey Report (2008) indicating that by 2025–30, China will have a GDP 500 per cent larger than it is today with an urban population of one billion and 221 cities of more than one million (ibid.). The CPC was carried to power by the anger of the masses over disparities between rich and poor, the elite and the workers. This is foremost in the minds of the CPC, as its leaders call constantly for a ‘harmonious society’. Policies have, to date, fallen short on priority issues such as closing the disparities in living standards between urban and rural communities. Urban residents’ incomes were 3.33 times their rural counterparts in 2009, the gulf widening from 3.31 times in 2008 (National Bureau of Statistics 2008). China became the second largest luxury market in the world, but GDP per capita remains under US$4,000 per annum. A government policy document issued in February 2010 called for reform of the ‘Hukou’ system, which would enable most of China’s 150 million migrant workers and their families to be eligible for the same benefits of education, health insurance and other services as urban citizens. Another priority issue causing major distress is the expropriation of assets at less than fair market value by authorities. In Shanxi, 2,000 small mines have been ‘rationalized’, that is, compulsorily acquired by the Shanxi Government, for efficiency, health and environmental concerns. Most of these small mines are now incorporated into the operations of SOEs. Initially the ex-mine owners were not aware of their rights or were afraid to take action. China’s largest law firm, Dacheng Law Office is acting on behalf of a group of these ‘dissidents’. Dacheng claims the government’s actions violate the Chinese Constitution, contract law and mineral law. The firm further claims that its

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clients are only being paid 30 per cent of the real value of the business, or effectively the price of exploration licences handed out during the first decade of the century, without taking into account capital investment or current commercial contracts. The price paid is determined by a valuer retained by the Shanxi Government (the lawyers argue an independent valuer should be used). While there may not be much public sympathy for these comparatively wealthy mine owners, the conflict symbolizes the scenario of land appropriation that has happened to poor farmers for decades. For this volume, the case is further revealing in that China’s legal system has developed to the point where a large law firm is prepared to take on a top-level regional government. Some may interpret this as progress; others may see it as merely another power-play. The promising expectation of China’s urbanization has simultaneously revealed some disadvantages as Chinese cities face challenging problems well known to developed world cities, including pollution, environmental degradation, extreme traffic jams, congestion, housing issues, arguments over heritage loss, competition for limited resources, glaring new inequalities between rich and poor, alienation, and so on. In the boom of urban development, selling land becomes, arguably, the most important source of revenue for local governments. Here again, the connection between power and money is well known. It is well known world-wide. Equally well known is that the interests of the urban poor are, at times, wantonly impaired in the face of boom times. The CPC was carried to power by mass dissatisfaction from the general population. The Party has thus prioritized policies to close the disparities that endanger a ‘harmonious society’ (Wen Jiabao’s report to the Eleventh National People’s Congress).14 Yet, despite all the talk, the gulf between urban and rural incomes continues to widen. Urban residents made 3.33 times more than their rural counterparts in 2009 according to the government’s statistics bureau.15 The corruption allegations are, of course, very serious as illustrated by the crackdown on corruption in Chongqing led by the Politburo member Bo Xilai.16 In relation to the interconnected themes of wealth, power and law reform, property development is of central significance. It raises fundamental questions for China’s political and legal reformers: about the introduction of private property, the concessions given to private entrepreneurs and speculators to develop land, how China is to move from ‘comparative growth’ to ‘competitive growth’ and whether the growth can be ‘sustainable’ in the next phase of China’s urban age. These are substantial challenges for government in the PRC and how the CPC responds will have global implications. The ways power and wealth are exercised, and the law reforms that are introduced to address these issues, will of course, be pivotal.

Regulating wealth: new rules for the game of wealth creation When China committed itself to enter the WTO in 2001 it simultaneously committed to reforming its legal system and to translating all laws into one or

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more of the WTO languages (English, French and Spanish). China agreed that its trade-related laws would become WTO-compliant in protecting and upholding the principles of free trade.17 The question of whether China should specifically adopt the Western concept of the ‘rule of law’ was not a part of the agreement although a rule of law was required. After all, the WTO is an embodiment of rule of law as well as of free market liberalism. As such, rule of law principles and concepts are embedded in the agreement that China signed. The legal reforms listed in the WTO regulations extend to protecting the principles of free trade and human rights and the well-being of citizens. While the WTO agreement encourages openness and social interests such as democracy and equality before the law, human rights and freedom of speech remain side issues. For instance, the Chinese government may be content to allow legal norms of an international organization like the WTO to serve as a significant guide for domestic legal modifications. However, it is unlikely to allow a similar situation to develop with regard to the laws of foreign domestic states (for example, major trading partners such as the USA or Japan) directly shaping Chinese law reform on some domestic issues – even though the WTO has incorporated significant elements of American administrative law. While Chinese laws have certainly borrowed from the USA, Japan, Germany and other countries, it would seem that selections depend on whether the particular foreign law suits the Chinese government’s current purposes. Western societies have tended to hold the view that law ought to ‘transcend’ economics and politics (supported by the doctrine of the separation of powers between the judiciary and politicians and government officials) so that it serves as a guarantee that all are equal in the eyes of the law. In China, Marxist legal theory placed the proletariat in a position of political power through the Communist Party with the law being essentially an instrument of the Party to serve economic development and social policy (Tan 2005). Indeed, some aspects of the PRC’s legal system may have originally been borrowed from Soviet experience, but China’s long history and Confucian traditions have structured the social order of deference based on hierarchy, collectivism, face protection, respect for tradition or age, and egalitarianism. These features help create China’s own brand of socialism and are reflected in contemporary Chinese law reforms. China’s brand is a hybrid socialism that has its legal system overseen directly by its political leaders. Theoretically, what becomes interesting on this ‘overseeing’ point is what may happen if China’s booming market economy faced a prolonged downturn. For instance, to what extent would the Party respect the ownership of private property, contract law and due process of law if things went wrong? It could be argued, for example, that the apparent move of the PRC toward a capitalist market economy rests upon the assumption of a continuous ‘growth model’. But there are clearly limits to both the theory and practice of the continuous growth model. The world witnessed a virtually unprecedented

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financial meltdown during the second half of 2008 and there are now alarming environmental signs related to the over-exploitation of natural resources – including pollution, global warming, water shortages, contamination and secure food production problems. The maintenance of a capitalist-type market economy tied to private ownership, rewarding private entrepreneurship, and realizing contractual obligations requires a coherent, consistent legal and regulatory framework. It is not only economic sustainability at stake if these are not in place. The influence and growth of the legal and accounting professions in China The Washington Congressional Executive Commission on China annual report (2006) points out that there has been an increase in the numbers of lawyers in China and that these are heavily concentrated in the economic area. Indeed, the concentration of lawyers tends to be in areas where the state has been prepared to relinquish a level of control. Blazey and Govind (2008: 148) assert, however, that ‘the greatest problem facing the entrenchment of the rule of law in China is the arbitrary nature of government bodies. Local governments continually hamper attempts to establish consistent application of laws throughout the country.’ Why this arbitrary nature of the exercise of local power has been tolerated generates much debate. One recurring theme is the nexus between the great profits available to some officials in the privatization process and accompanying corruption. On this point there is a broad consensus emerging – that something has to be done about corruption in China. Whether this problem can be resolved by recourse to the ‘rule of law’ or the ‘rule of virtue’ is also disputed (Jeffreys 2008: 242). The increasing number of foreign commercial law and accounting firms in China is similarly limited to the economic area and the overseas training of Chinese lawyers and accountants is mainly concerned with these areas (i.e. tax law, business law, finance and accounting). The same cannot be said of administrative law with the ‘numbers of lawyers in this area remaining low and the Party indirectly discouraging participation in this area’ (ibid.: 148). Given that administrative law is arguably the most critical when establishing a system that respects the rule of law, this remains a telling signal that the Party is in no hurry to relinquish its power over the legal system. Arguably the lack of transparency in Chinese administrative law may become an obstacle to further WTO implementation in that the local use of normative documents, the absence of a central point for regulation and coordination of laws and regulations and the overall lack of autonomous legal authority are said to contribute to ‘protectionism’ (Ostrey 2008: 150). Ostrey’s claim about protectionism is that Chinese bureaucrats often have little understanding of legal process and, as a result, their enforcement of trade-related laws and regulations is ‘discretionary’ and riddled with inconsistency, with administrators even intervening in the judicial decision-making

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process to expand a local or private interest. Such inconsistencies may have the effect of clouding transparency in court processes and are suggestive of a point in the system whereby the new rich may be able to exert some local pressure or influence. This needs more specific research to confirm such an hypothesis. In this terrain, Xiaowei Zang’s (2008: 54) field research is valuable. He explains that when people talk of the new rich in China, they invariably refer to ‘private entrepreneurs’. He points out that this is not surprising since ‘private entrepreneurs have accumulated a large amount of wealth and have come to play a high profile role in the Chinese economy . . . and have been intriguingly linked to powerful government officials and cadres of the Communist Party of China’ (ibid.).

Challenges to further law reforms Mixed interpretations of ‘the rule of law’, the ‘reinvention’ of ideology and post-socialist ethics This Introduction has thus far considered various points of view on the nexus of wealth and power and how this has shaped – and is shaped by – China’s law reform process. One point that is clear is that while much has been ‘up for grabs’ throughout the Gaige Kaifang years, including the capitalist-style economic reforms, dramatically increased contact with the outside world resulting in massive social changes, urbanization, increased mobility between regions, new styles and attitudes, one area has not been ‘up for grabs’: an explicit political component. Although Gaige Kaifang has similarities to the Russian concepts of ‘Perestroika’ and ‘Glasnost’, the Chinese terms do not include the opening of the political system in the manner of Gorbachev’s reforms. The Chinese leadership learned key lessons from the unravelling of the former Soviet Union and it has been determined to avoid chaos in the reform process. At the same time, this ‘determination’ creates dilemmas and this is so with the promotion of the concept of the ‘rule of law’. For centuries, the Chinese have regarded the law as an instrument of state control, a way for those in power to regulate the behaviour of their subjects and punish those who step out of line. The CPC shared the same view, adding the Marxist notion that the law should be a weapon used by the proletariat in class struggle. As mentioned earlier, after Mao’s death, a competing vision of the law has emerged with a modern legal system required for a market economy and engagement in world trade (Pan Wei 2008: 271). Now, however, people have also begun to think of the law as a check on the power of government officials, a guardian of individual rights and that judges should rule impartially (instead of just following the Party’s orders). They have begun to expect that everyone, even government officials, could be held accountable in court. Not so long ago, as William Hurst and Andrew Chan point out in Chapters 3 and 4 respectively, such ideas would have been highly subversive. Yet the Party itself has helped

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foster this rising legal consciousness by repeatedly telling the public of its commitment to the rule of law. Herein is a conundrum that this book directly addresses, and symbolic of the conundrum is that judges are appointed by the Party and required to carry out the Party’s orders. They preside over cases but generally do not have the authority to decide them ‘at least not those deemed to be “controversial”, “politically sensitive” or in the public spotlight’ (ibid.: 280). Instead, they make recommendations to a Party committee, and the Party committee determines the verdict. The bottom line is that local officials still appear to assert much control over local courts.18 Judicial reform and the authority of the CPC To promulgate civil and commercial law reform generally and to comply with the requirements of the WTO specifically, China has absorbed a range of international legal norms. These are hybrid norms imported from external legal sources and the extent to which the legal reform process extends to the domestic legal system is, as mentioned, variable at best. This gives rise to a number of challenges, including to judicial reform and judicial interpretation. The use of ‘borrowed’ laws brings with it some startling challenges. Peerenboom (2007a) notes that legal effectiveness cannot be divorced from local culture and dynamics and that the emerging era of capitalism in China has not followed the same path as Western nations (in that in the West they are closely aligned with liberal democratic principles). Understanding historical influences such as Confucianism on Chinese society and the law is fundamental to understanding the contemporary legal reforms of the PRC. Confucianism, which focuses on ethics and moral virtue, historically took precedence over the law. The exercise of codified law would only be required as a last resort in cases where the social order was upset. Viewed through a Confucian lens, this exercise of law was conceived as related to a disruption of the moral, natural and cosmic order and as part of a continuing sequence. Peerenboom’s (2007a) arguments are made in the context of evaluating the benefits of globalization and democratization with the normative values of the West set against Beijing’s determination to retain its cultural and political integrity. A key question emanating from this suite of considerations is whether it is possible for China to adopt international commercial law, or at least laws that are compatible with international law, without sacrificing something critical such as an important ethical value, or perhaps some of the political authority of the CPC. On the other hand, perhaps the terms ‘Eastern’ and ‘Western’ have become (or are at least becoming) redundant. They are often terms presented as binary oppositions and this presentation is no longer helpful. For instance, Chinese and Anglo approaches to law each contain richness and deep indebtedness to the social narratives that have constructed them. Hong Kong’s legal system has, for example, functioned smoothly for many years and is based on

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the British common law approach. While China is on a path of opening its doors, rapidly urbanizing and industrializing, expanding its economic base and international influence, the leadership has publicly called for a harmonious way forward. Reforms of the Chinese legal system including the judicial branch of the Chinese government would appear to be a central element of the ‘harmonious’ pathway the CPC currently promotes in its political rhetoric. But ‘harmony’ and ‘hybridism’ do not easily co-exist. It is reasonably foreseeable that each will face continuing challenges: challenges to coherence, judicial interpretation, consistency, transparency, uniformity, legal education and training and, at the same time, reforms that are both politically palatable and work ethically and culturally. Consistency, transparency and the lobbying power of the new rich That China’s economic growth has come to depend, to a significant degree, on the inward flow of foreign investment engages China’s legal system with a new set of additional challenges. Foreign investors come with expectations, benchmarks, corporate compliance standards learnt from other commercial arenas and include some social values. Google is an example. China’s ‘scientific reform’ aims to implement internationally accepted processes that improve commercial transparency and accountability. Such reform processes will never be without significant challenges and the chapters that follow carefully examine these challenges. They include policy shifts with respect to the balance between privatization and SOEs, the new roles played by the emergent professional middle class – such as private entrepreneurs, lawyers, bankers, accountants and the so-called ‘empowered managerial class’ (Yep 2003) and the ‘tiger-women’ entrepreneurs of the new China (Chen 2008). China’s legal profession has not always been a favourite source of advice. There is a logical explanation for this. In general, going to court in China has been (and still is) an absolute last resort and the Party continues to make the sensitive decisions. The conventional understanding in commercial agreements is that if problems occur within joint ventures, they will be settled through dialogue and negotiation. As mentioned earlier, guanxi (connections) are used in Chinese businesses as much as possible: it is very important to know who is who; it is important to use networks when working on investments and, likewise, when solving commercial or contractual ‘legal’ disputes. Well-developed networks and connections are very important – as is the case virtually everywhere. As Minglu Chen argues in Chapter 11 in this volume, relationships count for much. But if it comes to having to settle a dispute, a preferred method of problem solving is often ‘alternate dispute resolution’ – using one’s networks to negotiate, conciliate or even arbitrate – rather than relying on the formality (and public exposure) of a court case. The Chinese civil and commercial legal system is therefore examined by Jianfu Chen in Chapter 5 to help contextualize the broad theory underpinning China’s civil and commercial legal reforms. Feng Lin in Chapter 13 and

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Randall Peerenboom in Chapter 14 then consider where those reforms appear to be heading, whether they are sustainable and what their global implications may include. Legal education and training The outcomes of the People’s Court have not always been regarded as predictable. This is because commercial cases have, in the past, been influenced and sometimes determined by political rather than legal grounds since judges and other court officials have been answerable to Party structures. Because of this element of ‘unpredictability’, business people have often sought other remedies without further burdening the state’s court facilities. Although the legal profession has expanded, Western-style legal departments are not commonplace throughout China, notwithstanding that some larger state-owned corporations, such as Baosteel, have their own legal departments and have appointed people to General-Counsel roles.19 When operating in the Western commercial world, however, Chinese companies have rapidly learnt that they frequently need to involve Western-trained lawyers and tax accountants early and prominently in transactions. Whether this is a good thing or not is a moot point, but in contemporary Western commercial contracting, full-scale due diligence is generally required and having people who can write the documentation is absolutely essential. Ironically, China’s businesses that have recently acquired this understanding may have what in Chinese dialectics is termed ‘a backward advantage’ (Hu 2008: 154). The notion behind the term ‘backward advantage’ is that when China was emerging from the years of Cultural Revolution and after the death of Chairman Mao, ‘backwardness’ (as Andrew Chan points out in Chapter 4) paradoxically provided an opportunity for China to develop faster and better – by exploiting the developed world’s experience and, more importantly, avoiding where possible its mistakes.

Structure of the book In the chapters that follow, the various authors examine such issues and dilemmas in the separate parts commencing with ‘Power’. Part I considers the impact of China’s Gaige Kaifang in terms of its emerging economic power and the dominant government discourses that seek to ‘legitimize’ One-Party state rule. In Chapter 1, Jonathan Anderson offers an optimistic commercial appraisal of China’s economy following its decades of reform. He asserts, from his unique vantage point of Managing Director of UBS International Bank – one of the few foreign banks with a licence to trade in China – that it is much more useful and accurate to think about today’s China as a predominantly market economy with a few state-induced distortions, rather than a traditional socialist system with a mere market veneer. This, in turn, implies

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a more stable and sustainable growth outlook than the casual observer might assume. His arguments chronicle the astonishing economic development of China since the late 1970s to its recent emergence as a leading world economic power. Readers may find this chapter particularly valuable for the detailed data (past and present) and projections about the economic context in which the law reforms are set. His chapter poses central questions about whether China really could be moving towards being as liberal an economy as his data imply. Yingjie Guo’s Chapter 2 then questions whether or not the changes constitute a substantive transformation from one economic-political system to another in a linear way or, as in official CPC communications, whether it is a retreat from more to less advanced stages of socialism. He refers to the potential of what analysts call ‘transitional phenomena’ (i.e. the abnormal or hybrid features of the Chinese state, market and legal system) as long-lasting or even permanent. As such, he calls into question the assumptions of transition and argues that some forward projections based on such assumptions may be misguided and misleading. Guo critically relocates the analysis of China’s current transformation out of transitional frameworks suggesting that hybridism be taken seriously instead of being treated as something transient. In Chapter 3, William J. Hurst examines legitimizing discourses of the CPC with regard to law reform. This is a critical chapter offering a functional approach to theorizing how we might view China’s law reforms. He raises critical questions about power relationships between politics, society and law reform, reminding China scholars that its legal system is not just a moving target as it reforms over time, but that it is also a differentiated collection of subsystems. He highlights politicized administrative cases to show divisions between levels of the Chinese state apparatus – as well as the degree to which such cases depend on a system that is far from any apolitical ideal. In what is a ‘must read’ chapter, Hurst argues that thinking about the Chinese legal system in a disaggregated manner can enable scholars to better assess specific reforms to particular areas of law. In Chapter 4, Andrew Chan then turns the spotlight on the narratives of power with a specific focus on the ‘lessons’ of history coming out of the Chinese Cultural Revolution. He refers to contemporary Chinese politics against a history of contradictions that includes the paradox of the Chinese Communist Party that comes from its creative ability to paint and repaint (or paint over) the canvas of popular opinion and discourse about CPC history. In Chan’s words, this ability is ‘like the re-painting and painting over of the picture of Dorian Gray (by Oscar Wilde)’. As history is written by the victors, Mao learnt from Stalin who ‘wrote over’ the Soviet Communist Party history; so too did Comrade Mao rewrite CPC history when he became emperor. Chan asserts that a fatalistic error of Mao (who ironically deviated from MZD thought) wasted China and its people over the 10 years (1966–76) according to the official CPC assessment of the period when the Cultural

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Revolution is said to have taken place. However, Chan points out that many scholars now argue that the devastation may have only lasted three years or even less but that there are critical lessons to be taken from these years for today’s law reform process. Overall, the chapters of Part I point out that the almost breathtaking shift to markets, privatization, urbanization, modernization and law reform has been accompanied by a sense of bitterness, described by Zang (2008: 58) as ‘wealth hatred’ towards the overtly new rich in China, and a so-called ‘moral collapse’ (the pursuit of wealth for wealth’s sake; endemic corruption, and the like). The socialist republic previously had an ‘embedded’ moral doctrine, viz: ‘from each according to one’s abilities, to each according to one’s needs’, with the state responsible for social welfare. The shift to a private sector economy and experience of new wealth are clearly not without deep underlying social, moral and ethical challenges and dilemmas. Part II focuses on China’s civil and commercial law reforms, commencing with Jianfu Chen’s analysis of the concepts of legal personality, contract law and property ownership. In Chapter 5, Chen’s arguments focus later discussion by making the positive assertion that the civil and commercial legal reforms to date are not merely cosmetic (allowing China to benefit from engagement with international world trade agreements) but a solid foundation for rule of law has been laid, one that can be built upon by future generations. Hui Huang, Xianchu Zhang, Kay-Wah Chan and Su Lin Han then investigate in turn the regulation of foreign investment in China, the ‘dual track’ legislation and new anti-monopoly laws governing business organizations, the changing nature of China’s labour laws and the governance of large-scale international financial transactions with China. Together, these writers overview key areas of Chinese commercial law, sharpening our attention on the meanings underlying the law reforms and on developments in foreign investment rules, foreign trade agreements (FTA) and WTO agreements and investment risks for both foreign and domestic investors. In Chapter 9, Su Lin Han examines the role of key stakeholders in China’s efforts to improve access to credit for Chinese businesses. Her research with the World Bank and the People’s Bank of China includes an exploration of the legal and institutional changes that led to the adoption of fundamental principles of modern secured transactions systems by the new Property Law. Her chapter covers a topic pivotal to China’s economic and legal reform process, providing an overview of the impact of prior laws on today’s secured financing business in China – including registry practice and enforcement – and new areas of opportunity and remaining challenges brought by the passage of the Property Law. Read in conjunction with each other, these four chapters tend to affirm Jianfu Chen’s hopeful analysis, but may be more circumspect about how solid the legal foundations are in the context of a One-Party state political system. Rather than setting up a binary hopeful versus oppressive debate, however, they are mindful that China’s legal boiling-pot contains many

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possible futures. For instance, some have long-term aspirations such as the weiquan (rights) lawyers who hold that the ‘rights defence’ concept may help citizens bring about gradual political change by fighting for legal rights one case at a time – without having to directly challenge the authoritarian system. Others note that the Chinese commercial legal landscape is grossly influenced not only by the power of the CPC but also by the wealth that has been amassed over the past 30 years. With a major theme of the book being the nexus of wealth, power and law reform, Part III examines ‘wealth’, commencing with Richard Hu’s riveting analysis of China’s urbanization, property law reforms and examination of who are the big winners and losers in such monumental changes. Hu documents China’s urbanization in terms of demographic change and urban area growth, and elaborates on the property boom – a key driver and outcome of China’s economic growth during the urban revolution – and the new rich growing out of this socio-economic reshuffling. Chapter 10 focuses on the laws that have facilitated change in the three interconnected spheres of housing reform, land reform and the property law. In Chapter 11 Minglu Chen then investigates Chinese women entrepreneurs’ connections with the Party-state. In fieldwork conducted in 2009 in Shanxi, Hainan and Sichuan, she examines behind-the-scenes stories of private entrepreneurs and argues that these women are a group with profound political capital, realized in terms of their obtaining CPC membership, holding various leadership positions in the local Party-state and in the award of various titles and honours from the Party-state system which led to a process of incorporation and political socialization. Chen’s interviews reveal the extent of the connections these tiger-women entrepreneurs hold and, at the same time, the power that can come from parental and marital family connections. Vivienne Bath and Mary Ip in Chapter 12 explore two key legal features of China’s modern economy, namely ‘What happens when an enterprise goes bankrupt?’ and ‘How does the law now protect consumers?’ Bankruptcy and consumer laws present a number of difficult issues in terms of the development of the ‘socialist market economy’. The encouragement of foreign investment and private companies in China necessitated the drafting and implementation of a bankruptcy regime that was capable of dealing with the issues when these companies were not able to pay their creditors. At the same time, the growth in the domestic consumer market has made it necessary to provide additional legal protection for Chinese consumers. Bath and Ip examine whether changes made by the Enterprise Bankruptcy Law empower courts (and the newly created administrator) to handle bankruptcies in an even-handed fashion, and they analyse economic factors underlying the Consumer Protection Law and the recently enacted Food Safety Law. They question whether the reforms have succeeded, or are likely to succeed, in disrupting the vested interests of government, SOEs and private companies with close connections to local government, in order to create a regime which is genuinely protective of the interests of creditors and consumers.

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Feng Lin in Chapter 13 raises vital questions about the future of China’s law reforms and prospects for political reform. His analysis covers China’s Electoral Laws and recent experiments with direct elections at grassrootslevel people’s congresses, including township and county levels. The analysis indicates that internal CPC democracy has not yet led to any significant developments for expanded direct elections at township and county levels, with the CPC maintaining tight control over the two levels of direct elections. This chapter contemplates whether the combined effects of China’s wealth, power and law reforms will eventually move the country to democracy, arguing that the People’s Republic will eventually (and incrementally) move to a form of democracy with ‘Chinese characteristics’. In the concluding chapter, Randall Peerenboom directs our attention to two central issues, or sets of issues, regarding law, wealth and power in China. The first set includes the general question of whether there is a ‘China model’ of development which will produce a unique variety of capitalism and an indigenous variant of rule of law. In the longer term, can we expect more convergence or divergence, will market reforms and efforts aimed at more fully implementing rule of law continue, or will the reform process stall or even be reversed? The second set of issues focuses on the law–wealth– power nexus in China. It examines ‘winners and losers’ in the transition from centrally planned economy to a market economy and how development has impacted on the policy-making process and the operation of the legal and political systems more broadly. Vital questions are raised as to whether we may be witnessing the emergence of an authoritarian version of political capitalism similar to the type that has undermined political and legal reforms in the newly established Eastern European democracies. Whether chapters are read individually or collectively, the reforms covered carry a range of foreign and domestic investment implications. The state’s enterprises are clearly in transition; yet at the same time the bourgeoning private sector has no deeply ‘embedded’ moral doctrine beyond ‘business is business’ and, in an officially atheist country (notwithstanding the very rich traditions of earlier generations of Chinese ethical and religious practices), the law reforms can be theorized as a discourse of legitimization for the transformation to Chinese capitalism. The discourse includes calls for greater transparency, more predictability, anti-corruption and fairer regulation and governance. At the same time the discourse masks some ongoing and underlying practices which give rise to questions such as: Is a foundation for a rule of law being established? How do we really understand the nature of China’s legal reforms? To what extent are some law reforms ‘cosmetic’? What is signified beyond the ‘substantive laws’ in the specific areas of law reform and what are the political and institutional implications? How is the Party-state going about legitimizing these law reforms? Where are the reforms taking the PRC? Do the reforms have global ramifications and are they sustainable? Such questions are examined in the chapters that follow commencing with Jonathan Anderson’s overview of how we might view China’s current economic system.

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Notes 1 For more discussion, see Liu Ji (2003). 2 See the World Bank at: http://datafinder.worldbank.org/gdp-growth-annual (accessed December 2009); another link that demonstrates GDP growth succinctly is: http://www.telegraph.co.uk/news/worldnews/asia/china/6248768/Chinas-GDP.html. 3 See the World Health Organization at: http://www.wpro.who.int/countries/ 2009/chn/. 4 See CNN.com at: http://edition.cnn.com/SPECIALS/1999/china.50/red.giant/ communism/. 5 See http://www.msnbc.msn.com/id/33958780/ns/politics-white_house/. 6 Announcement by People’s Bank of China, 15 January 2010. Also see: International Monetary Fund at: https://www.imf.org/external/np/sta/ir/colist.htm. 7 See http://www.cbsnews.com/stories/2009/11/15/eveningnews/main5660868.shtml. 8 Source of global GDP from World Bank (2009), Global Economic Prospects 2010 Report; source of China GDP from China National Bureau of Statistics (2008). 9 See World Bank (2008), Global Economic Prospects 2009. Also see: Association of Automobile Manufacturers, January 2010, and: http://www.businessweek. com/ap/financialnews/D9CF1T4G0.htm. http://web.worldbank.org/WBSITE/ EXTERNAL/NEWS/0,contentMDK:22003191~pagePK:64257043~piPK: 437376. 10 Source: Newsweek, 19 January 2009, p. 26. 11 See www.stats.gov.cn. 12 See http://www.smh.com.au/world/children-of-the-revolution-20100212-nxjh.html. 13 See http://online.wsj.com/article/SB10001424052748704140104575057311774494 140.html. 14 ‘Report of the Work of the Government’, delivered at the third session of the 11th National People’s Congress on 5 March 2010. 15 See www.gucp.org.cn. 16 See Garnaut (2010). The debate here is in part about whether Bo Xilai is playing power games by presenting himself as a champion of the people against corruption, or whether he is improving his position in the CPC (or both). The specific corruption case is Li Zhuang and his 18-month sentence. 17 WTO document no. WT/L/432 (01–5996), 23 November 2001. 18 In one survey of Chinese judges, less than 5 per cent said they would rule according to law if it conflicted with the instructions of their Party bosses (see Pan Wei 2008: 280). 19 The Australian Legal Affairs, 24 October 2008, p. 31.

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Part I

Power and law reform in the People’s Republic of China

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Market reform Reflections on China’s economic system Jonathan Anderson

China: a state or a market system? This chapter reflects on the role of the state in China’s economy and its banking system. A proper understanding of how the mainland works in this regard is central. At the heart of the matter is this main issue: On the one hand, China has come a very long way from a traditional communist economy, where the state had full control of all assets and authority over almost every commercial transaction; after three decades of reforms, there is no doubt that the mainland has become much more market-oriented. On the other hand, the government still formally owns and runs a sizeable chunk of the system and, in particular, the ‘commanding heights’ of heavy industry, capital-intensive services and the financial system. As a result, describing China’s economy can resemble the tale of the blind men and the elephant; there’s plenty of evidence to support the most contradictory arguments. If you want to portray the state economy as a ‘basket case’ with chronically loss-making firms, excessive bureaucratic intervention and highly distorted incentives, you can always find data to argue your case. By the same token, if you wish to trumpet the state role as positive and promarket, with healthy companies and very limited interference, supporting figures are also readily to hand. How should we view the situation? As usual in such cases, ‘the truth’ is likely to be somewhere in the middle, but as I conclude below, it is much more useful and accurate to think about today’s China as a predominantly market economy with a few state-induced distortions, rather than a traditional socialist system with a mere market veneer. This, in turn, implies a more stable and sustainable growth outlook than the casual observer might assume. Here are the keys to supporting this perspective:

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The state share of the economy is still sizeable. The government still owns a significant share of the economy, a good deal larger than in other Asian countries. State commercial enterprises account for 26 per cent of Chinese GDP and more than half of productive assets although they employ only 5 per cent of the workforce.

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Even the state economy is now market-driven. Despite high levels of ownership, however, the government allows market forces to control its assets to a surprising extent. Although most state firms still have a bureaucratic internal management structure, they are not subsidized, operate in a highly competitive environment and face closure or restructuring if they cannot pay their bills. From the point of view of macroeconomic performance, this is more important than the issue of formal ownership. As a result, state firms are profitable. The state enterprise system in China is generally profitable – more profitable, in fact, than the private sector – without the quasi-fiscal ‘black holes’ that characterize many emerging markets. And corporate management is improving over time. In this sense, the market can be viewed as winning. The main distortions are in the financial system. Over the past decade the real problem has been government ownership of the financial system and poor lending discipline, which left China with a chronic tendency to over-invest. When the authorities didn’t maintain macro control, the economy went through sharp boom/bust cycles, which in the mid-1990s resulted in mass closures and tens of millions of layoffs. This is not a state enterprise problem per se, but rather a factor affecting the whole economy. The economy is moving in the ‘right’ direction. The government is now doing a better job in managing macroeconomic cycles and is picking up the pace on its divestment of state assets. Most important, for the first time in China’s post-war history, we now see an exit strategy for the state banking system (which I refer to in more detail later in the chapter). These changes have resulted in a visibly more stable growth pattern over the past eight years. Still a work in progress. Where do these changes leave us? Well over halfway along the path – but keep in mind that China still faces a significant task ahead in liberalizing the financial system and pursuing formal privatization. The current system may be much more Margaret Thatcher than Karl Marx, but at the end of the day the mainland’s market economy is still very much a work in progress.

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How we get there This chapter is not meant to be an encyclopaedic examination of the history of Chinese state enterprise management and restructuring. Instead, it adopts a topical summary approach, focusing on key issues and statistics that will give investors a comfortable grasp of where things stand and how the state is run and managed. In particular, the chapter looks at the classical pairing of ‘ownership’ and ‘operating environment’. On the ownership front, it asks an interrelated set of questions including: how big is the formal state? Where are the assets located?

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How many people actually work for the government or for SOEs? With regard to the market environment, how does the state intervene in the economy? What are the tools at its disposal? And how has the state’s role evolved over time? Is the state sector more or less profitable than the private sector? How do they coexist? What does this mean for macroeconomic control and microeconomic efficiency? And what is the current strategic thinking regarding the future of the state?

Who are ‘the players’? Defining key terms Before jumping to the main analysis, we need to define our terms. One of the main difficulties in China is actually agreeing on what the state is, and how to measure it, especially since the terms have changed significantly over time. The first point to note is that the ‘state’ in China includes both governmental operations as well as state-owned commercial entities. The former is the standard government apparatus that exists in any country, comprising the civil service, educational institutions, hospitals, cultural organizations, etc. In Chinese parlance, all of these are referred to as ‘administrative units’ (and, confusingly, are often included in state-owned enterprise (SOE) statistics). For the purposes of this analysis, this part of the state sector is not particularly interesting. Instead, my focus is on the state’s role in commercial activity, i.e. agriculture, industry and construction, as well as service sectors such as transportation, communications, trade and finance. This is where most of the arguments over ‘state economy’ vs. ‘market economy’ arise – and where China has always differed most significantly from other emerging and developed countries. As of the early 1980s, the situation was relatively straightforward, in that almost all economic activity was owned and controlled by the state in one form or another. The agricultural sector was made up of communes. Urban industry and services were dominated by SOEs. Everything else was pretty much divided into so-called ‘township and village enterprises’ (TVEs), which operated outside the cities, and urban collectives for small-scale urban activity. These last two were never formally integrated into central economic plans, but were still solidly state-owned in theory. For institutions of any size, managers were directly appointed by the government, and in the rest they were elected by the collective. Over the past 25 years, however, things have changed radically. To begin with, nearly all of agriculture was taken almost immediately out of public hands, as the communes were broken up and each family was allocated individual plots of land. Next, the various smaller-scale TVEs and collectives drifted gradually out of state control as the economy liberalized. Today they still exist in the hundreds of thousands, but they are effectively private companies, without access to state financing and without significant interference by local authorities. In fact, in the absence of a legal framework for private

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enterprises, most new start-ups went under the guise of TVEs and collectives right through the late 1990s. Since 2000, the patchwork has become more complicated still. The truly private sector has taken off, with tens of thousands of new and formally private enterprises established (this process is particularly well developed in coastal provinces and cities, while collectives still dominate in smaller, more inland destinations). In most sectors, foreign companies are no longer required to have a joint-venture partner, which has led to an explosion of wholly-owned foreign firms in China as well. The most important recent trend, however, has been the blurring of lines within the SOE sector itself. In Chinese usage, the term traditionally refers to a commercial entity fully owned and managed by the state, as opposed to other legal forms of ownership or incorporation. However, as we discuss further below, many smaller state firms have been de facto privatized, whether through buyouts or gradual management takeover. Many more were closed down after the bursting of the mid-1990s bubble sent entire sectors into insolvency. In the remainder, mixed ownership is increasingly the norm with, for example, a large portion of the roughly 100,000 foreign joint ventures in China created through tie-ups with state enterprises. The vast majority of listed companies on domestic and foreign markets come from the ranks of state-owned firms. And state firms are actively inviting outside investment from other domestic sources as well, creating new hybrid joint-stock and limited liability companies. In this environment, it no longer makes sense to talk about state vs. private companies as we see so often in the press. Instead, from an ownership point of view, the more relevant distinction is between ‘state’ and ‘non-state’ firms, where the former are both owned and to at least some degree actively managed by the government, while the latter are either held outright in private hands or (more commonly) have notional state ownership but no real government role in their affairs. A rough breakdown is given in Figure 1.1. From Figure 1.1, you can already sense how difficult it is to accurately gauge the true scope of the state sector. For instance, how should we treat the STATE

NON-STATE

Listed companies SOEs

Joint-stock companies Joint ventures

Figure 1.1 Who are the players? Source: UBS Investment Bank.

PRIVATE

TVEs Agriculture Private companies

Urban collectives

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mass of quietly privatized small and medium SOEs that still show up in the formal statistics as state-owned companies? By the same token, what do we do with SOEs that have sold part of their equity to outside interests through listings or joint ventures but where the state still has a direct 70 per cent share? Or a 40 per cent share? These issues are addressed in the next section.

Formal ownership: how big is the state? This section addresses the formal size of the state sector relative to the overall economy; given the myriad constraints in the data discussed above, here is how I shall proceed. To begin with, the existing statistics for SOEs and other state institutions are taken at face value, including firms where the state has a controlling interest (so-called ‘state-controlled’ firms, defined as any enterprise where the direct and/or indirect state share is over 50 per cent). In general, this approach overstates the actual level of state ownership by including privately held shares in state-controlled firms – for example, shares held by retail investors in listed public companies – as well as de facto privatized companies that still appear on the books as state-owned. On the other hand, it might also understate ownership by excluding firms with a large minority state share. As we will see further below, focusing on ‘ownership’ also strongly exaggerates the role of the state in the economy, but it’s still very important to understand what is sitting on the books of the government from the legal point view. Important point: please note that unless otherwise stated, from here on the term ‘SOE’ in the chapter (and figures) refers to the broader definition above, including both traditional 100 per cent state-owned as well as ‘statecontrolled’ commercial firms. The state and the economy Our first snapshot is the size of the state, using the ownership concepts defined above, as a share of Chinese GDP or total value-added in the economy. The breakdown is shown in Figure 1.2. The estimates in Figure 1.2 show that state administrative units (such as the civil service, healthcare, science and education) accounted for some 11 per cent of 2006 GDP. State-owned and state-controlled firms in all sectors made up another 26 per cent of Chinese value-added and ‘non-state’ ownership, as defined in the previous section, accounted for the remaining 63 per cent. In other words, on an ownership basis, the state now accounts for around 30 per cent of all (non-administrative) commercial activity in China. How were these estimates obtained? By beginning with official data for GDP by industry, and then using available statistics for state ownership in each productive sector. Figures are directly available for agriculture, manufacturing and construction; for the various services sectors partial data are used to generate the above calculations. As you can see from Figure 1.3, the state is virtually

Jonathan Anderson Share of 2006 GDP

SOE 26%

Govt/SOU 11%

Non-state 63%

Figure 1.2 State ownership by GDP. Source: NBS, CEIC, UBS estimates.

State ownership share 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

at e In du an st ry sp o r Fi t / Po na nc Tel st ec ia lI o m nt s/ er IT m ed ia ti H Ed on ea uc lth an atio d n O W th er el fa G re ov er nm en t Tr

st lE

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ot ho

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Figure 1.3 State ownership by sector, 2006. Source: NBS, CEIC, UBS estimates.

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absent from the agricultural sector, owns between 15–20 per cent of labourintensive services such as construction, trade and catering, controls nearly onethird of industrial capacity, and has a much larger share of other services, including telecommunications, finance and direct government functions. Needless to say, using GDP shares is not the only way to look at the size of the state. Figures 1.4 and 1.5 provide two alternative views: the state share of employment and total fixed assets, respectively.

Share of 2006 labour force

SOE 5%

Non-state 88%

Govt/SOU 7%

Figure 1.4 State share of employment. Source: CEIC, UBS estimates.

Share of total fixed assets, 2006

State 54%

Non-state 46%

Figure 1.5 State share of fixed assets. Source: CEIC, UBS estimates.

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Figures 1.4 and 1.5 highlight a very interesting point. The estimated state share of total employment is much smaller than the share in GDP, with only 5 per cent of the labour force in state-controlled firms and another 7 per cent in state administrative functions (including the estimated rural civil service). On the other hand, if we look at cumulative investment statistics, state asset holdings account for a much higher share than that in GDP – nearly 55 per cent of the total. Why the discrepancy? Very simple: as it turns out, the state is not very active in labour-intensive sectors of the economy, but accounts for a high share of capital-intensive production. (This fact was hinted at in Figure 1.3, and more details are shown below.) As a result, the state employs very few workers but holds a lot of physical assets. This, in turn, raises an obvious question: 5 per cent of employment, 26 per cent of value-added, over 50 per cent of fixed assets – which number is ‘correct’ in gauging the size of the state enterprise sector? In one sense, all of them are, as each captures a different aspect of state ownership. Economic theory holds that the value-added concept comes closest to capturing the ‘true’ share in total activity and thus the GDP share is probably the most useful single statistic. The distribution of state ownership across capital- and labour-intensive sectors is shown in Figure 1.6. (Note that the data in this figure are only for

State share of gross industrial output, selected industries 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Oil

To an d g bacc o as mi nin g Po w Oil er ref inin g Ve hic les Ste e Ch em l ica Me l Ma dic ch i n es /eq uip me nt Fo od Print ing pro ce ssi ng Ele ctr on ics Te Pla xtil es stic art icle s Fu rni tur e Ga rm en ts

0%

Figure 1.6 State ownership by industry, 2006. Source: CEIC, UBS estimates. Note: The shares in this figure refer to industrial enterprises with annual revenue of RMB5 million or more.

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firms with annual revenue above RMB5 million per year, which exaggerates the state share in the total population.) Figure 1.6 shows SOE shares for selected industrial sectors; as expected, state-controlled production is above 80 per cent for the most capital-intensive production areas: petroleum mining, refining and power generation. It is also interesting to note that the sector with the highest state share is tobacco. This has nothing to do with capital requirements, but reflects instead the government-imposed monopoly on cigarette production. Vehicle production and steel refining are roughly 50 per cent state-owned; further down are the chemical, medicine and equipment sectors. Finally, in line with the above findings, labour-intensive sectors such as textiles, electronics assembly, garments, plastic articles and furniture all have less than 15 per cent state ownership, and in some cases less than 5 per cent. Another key point is that state ownership varies sharply by region (see Figure 1.7; note that once again the data in the figure are only for firms with annual revenue above RMB5 million per year). As a rule, the more developed, high-growth industrial and export centres such as Guangdong, Fujian and the

State share of gross industrial output, selected provinces 80% 70% 60% 50% 40% 30% 20% 10%

F S h ujia an n do ng H en Sh an an g Si h a i ch ua n Be ijin H g ub e Sh i an xi H Ji ei li lo ng n jia ng G an Q su in gh ai

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gs G

ua

an Ji

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ia

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Zh

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Market reform and China’s economic system

Figure 1.7 State industrial ownership by region, 2006. Source: CEIC, UBS estimates. Note: The shares in this figure refer to industrial enterprises with annual revenue of RMB5 million or more

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greater Shanghai area have a very low share of state ownership; this reflects both the fact that these regions have been very successful in attracting private investment, as well as the fact that they have been most active in privatizing state enterprises. Meanwhile, the ‘rust belt’ industrial north and lesser developed inland areas have seen much less private market development, and have not been nearly as active in divesting state firms. The state and the economy – comparative context Is a 26 per cent share of GDP for SOEs – and a nearly 40 per cent share for the government broadly defined – unusually high by Asian or emerging market standards? As one might have expected given China’s socialist background, the answer is yes. Figure 1.8 shows the share in comparison to other regional Asian economies (using rough estimates for government and SOE shares in the region based on a survey UBS carried out in 2003). Most of Asia has a combined share of 20 per cent or less, with SOEs usually contributing fewer than 5 per cent; the only country that comes close to China in terms of state ownership is Singapore, with roughly 30 per cent of GDP.1

State share of GDP 40% SOE Government and social services

35% 30% 25% 20% 15% 10% 5%

Figure 1.8 State ownership in comparative context, 2003. Source: CEIC, UBS estimates.

nd la ai Th

Ta

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The state and the economy – over time So far, we’ve looked only at a fixed snapshot of the state economy. But this approach misses the most important aspect of ownership: whatever way we measure the size of the state, it is shrinking year by year. Consider the following numbers. In 1995, a census of state-owned assets recorded more than 300,000 SOEs, employing a total of 80 million workers, or 12 per cent of the labour force. In 2003, when the newly-formed State Asset Supervision and Administration Committee took stock, they counted only around 150,000 state-owned and controlled enterprises, with total employment of 47 million people the previous year. By 2006, estimated SOE employment (including state-controlled commercial firms) had dropped below 40 million and the total number of state enterprises is likely closer to 100,000. In other words, more than half of state enterprises and state workers ‘left’ the system over the past decade. Look at Figure 1.9, which shows the number of industrial state enterprises (the only sector of the economy where we have reliable time series data); the number dropped from 80,000 at the beginning of the 1990s to under 25,000 today. And we see exactly the same trends when looking at gross industrial output or overall employment (Figure 1.10). Number of state-owned/controlled industrial enterprises (thous) 140

120

100

80

60

40

20

0 1988

1993

Figure 1.9 State industrial enterprises. Source: CEIC, UBS estimates

1998

2003

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Jonathan Anderson State share of gross industrial output (LHS) State share of total enterprise employment (RHS)

80%

16%

70%

14%

60%

12%

50%

10%

40%

8%

30%

6%

20%

4%

10%

2% 1985

1990

1995

2000

2005

Figure 1.10 State output and employment. Source: CEIC, UBS estimates.

What happened to all the missing firms and missing workers? Many SOEs – and in particular smaller, locally-based enterprises in the vibrant coastal provinces – were sold off over the years through outside tenders or management buyouts, and this can account for a part of the decline. However, this is probably a small part of the overall story, since a large number of ‘privatized’ firms are still masquerading as state enterprises in the official statistics. The ‘real story’ lies elsewhere: state enterprises were forced to downsize or close altogether, and state workers simply lost their jobs. Remember that most industrial and services sectors suffered a debilitating blow after the bursting of the bubble in the mid-1990s; reported capacity utilization in some industries dropped as much as 30 per cent, and profit margins in many sectors went to zero or below. Light industrial, consumer services and real estate sectors were particularly hard hit, and large numbers of SOEs in these areas suffered heavy operating losses (not to mention the impossibility of servicing the substantial debt burden acquired during the boom years).

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Faced with this situation, the government took the painful decision to close down state factories and shops and lay off state employees. And the numbers are truly breathtaking: tens of thousands of SOEs were partially or fully closed, and 25–30 million workers were sent home. In the absence of formal bankruptcy procedures, enterprises were not disbanded and employees did not enter the formal ranks of the unemployed; instead, workers continued to receive nominal payments from the workplace or from local budgets, often as low as RMB150–200 per month, and then only if funds were available. Meanwhile, enterprise plant and equipment were either discarded or consolidated into a more viable firm. For our purposes, however, the salient point is that once plants were closed and workers left their jobs, they stopped being recorded in the SOE statistics.

The bigger question – how pervasive is the state? Now, let’s turn to a provocative question: who cares whether companies are state-owned or privately owned? The earlier discussion on the physical size of the state is interesting, but it’s not the only way to look at the issue and, in fact, may not be the most relevant gauge of the role of the state. One of the best-known academic experts on socialist economies, Harvard Professor Janos Kornai, achieved fame for his observation that what really matters at the macro level is not the formal ownership of firms, but rather the commercial environment in which they operate. That is, how pervasive is state influence in the economy, whether state-owned or private? Is the government actively interfering in commercial decisions? Are market signals strong? Are there barriers and controls on firms’ operations? And, crucially, how hard are ‘budget constraints’ on investment and production? Theoretically speaking, we could imagine an economy that is completely state-owned but also driven broadly by market forces. By the same token, we could also envisage a hypothetical economy where ownership is in private hands but where the government places draconian controls on pricing and productive activity. Thus, in this section we go through the various ways the government can interfere in the economy, including price controls, subsidies, internal corporate governance, investment, competition and financial resource allocation. The conclusions are striking. On the one hand, at the micro level, corporate structure and management are evolving slowly. From an internal bureaucratic point of view many SOEs still operate in a similar environment to that of a decade or two ago, which leads to distorted incentives far removed from the ‘profit-maximizing’ behaviour of pure market theory. However, on the macro level things look very different indeed. Despite internal distortions, nearly all state firms are subject to highly competitive external market pressures. To a surprising extent, the government no longer subsidizes SOE losses, has freed prices, does not protect outright state monopolies and is quick to force insolvent enterprises into restructuring or closure. These statements are not completely true for every sector of the

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economy, but apply extremely well to the average state firm. In other words, although state ownership is widespread, the Chinese authorities are surprisingly (and increasingly) laissez-faire when it comes to actually managing the economy. In almost every category, market forces are winning out. As late as two to three years ago, two key exceptions to this finding would have been highlighted – exceptions that have had an enormous impact on China’s economy. The first is the banking and financial system, where state controls and influence are still relatively strong, and where misallocation of resources has ramifications far beyond that sector’s relative size in GDP, traditionally leading to over-investment, increased macroeconomic volatility and lower economic efficiency. The second is the lack of a formal SOE dividend policy, which prevents resource intermediation and again promotes over-saving and over-investment in the economy. However, in the past couple of years we have seen sharp changes in official policy in these areas, with a rapid increase in commercial bank privatization transactions and the beginning of new dividend procedures as well. These reforms promise to further improve macroeconomic performance in the decade to come. The various categories are considered in detail in the following sections. The role of the plan In the traditional communist system, state enterprise balance sheets were placed directly on national, provincial or local government budgets, and nearly all commercial decisions were carried out as part of the ‘plan’ (which, again, existed in national, provincial and regional forms). Production volumes, prices, employment and investment levels were all dictated in principle through central planning agencies and sectoral line ministries, and outlays and income were little more than quasi-fiscal line items. TVEs and collectives were not formally part of the budgetary system, but faced severe constraints on the size and scope of their operations, including what they could produce and the prices they could charge. In the agricultural sector, state communes were effectively told what to produce, and sold produce at a fixed price. Now fast forward 25 years. After more than two decades of continuous reform, the situation today is very different indeed. To begin with, as SOEs are no longer ‘budgetary’ entities, and the government is no longer involved in day-to-day commercial operations. State firms decide their own production mix, source their own inputs, hire and (increasingly) fire according to market needs, and in most cases set prices without government interference. Firms keep profits on their own books and are responsible for their own losses in principle. As noted above, TVEs and collectives have long since disappeared from government radar screens, and are to all intents and purposes equivalent to private firms. The government still influences farm gate prices for grain and

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other bulk commodities, but farmers have much more freedom to produce what they choose. What, then, do planners do in China? The answer is: not as much as they used to. It is difficult to refer to today’s economic agencies as ‘planners’; instead, they look like ‘regulators’ – and increasingly similar to the regulatory agencies we see elsewhere in the world. The state still sets prices for a restricted number of goods and services, but the list is no longer unusual by emerging market standards. The government still plays a heavier hand in monopolized areas such as telecommunications, energy and airlines, but the role here is also becoming very familiar to investors in other developing nations. Reflecting these changes, the former State Planning Commission has been renamed the State Development and Reform Commission, and former industrial line ministries have been reformed into industrial regulatory agencies, or else simply disbanded and folded into the new Ministry of Commerce. China still does adopt a Five-Year Plan every half-decade, but that document is no longer a detailed line-item plan; in fact, the plan adopted in 2006 was more a statement of broad development goals. Investment approvals There is one key area where the government maintained its original planning role for a much longer period, and that is new fixed asset investment approvals. For most of the past decade, regardless of economic sector or ownership, all investment projects over a minimum size still had to be formally approved by the provincial planning officials, or, for larger projects, by officials at the national level. Without state approval, firms could not get long-term bank loans or buy land-use rights for their projects. Since 2005, however, the investment process has been substantially liberalized, with the elimination of mandatory approvals for projects in most sectors; the central government has kept controls for large centrally-owned SOEs and for certain priority industries. Implementation is mixed at the local level, but we believe it’s safe to say that the lion’s share of firms in the economy has fundamental autonomy to invest as they see fit. The approvals practice is also not as distortionary as it might sound. For most sectors in the economy, approvals served as more of a ‘watchdog’, granted in normal years as a matter of course when objective criteria are met (such as capitalization requirements, profitability, environmental viability, etc.), and used during periods of overheating to dampen macroeconomic volatility (as we saw, for example, with the property and auto sectors in recent years). As we will see further on, if banks are not allocating capital in full accordance with market principles, investment controls can serve as a much-needed brake on overall activity.

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Price controls Direct controls on prices and the price-setting mechanism are one of the most classic tools of socialist economic control – and one of the earliest areas where the state left the stage. In 1978, at the beginning of the reform process, the authorities determined nearly every price in the economy, at the retail, wholesale and farm gate level (Figure 1.11). Some 25 years later, the number of controlled prices had fallen to well under 10 per cent of the total, and these are predominantly energy, utilities, food staples and various service categories (such as transportation, telecommunications and health care), i.e. the same prices which are administratively set in most emerging economies. As any market participant in China can confirm, virtually all industrial manufacturing prices, and most commercial services, are not only uncontrolled but extremely competitive as well. Subsidies In the traditional budgetary system described above, the government was directly responsible for meeting SOE liabilities and expenditure needs, and Share of prices set by the market 100% 90%

Retail Goods Agricultural Goods Producer Goods

80% 70% 60% 50% 40% 30% 20% 10% 0% 1978

1983

1988

Figure 1.11 Market price formation in China. Source: World Bank, NBS.

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(at least in theory) enterprise profits were remitted directly to the budget. As a result, any losses were automatically subsumed into the budget as well, and recorded as enterprise subsidies. As SOEs were taken off the books of the budget, the authorities also took reforms that substantially changed the nature of commercial subsidies. First, SOEs were given profitability targets, and also more autonomy to adjust prices and thus avoid losses. Second, the government gradually began to strip away state enterprises’ ‘social welfare burdens’, i.e. hospitals, schools, housing and other administrative liabilities that had long been managed directly by SOEs and funded out of their own revenues. Finally, in the mid-1990s, the government bowed to the fact that many state enterprises were fundamentally and chronically unprofitable and needed to be shut down; we already showed figures for the ensuing closures and employee layoffs in the preceding section. As a result, formal enterprise subsidies fell dramatically, from more than 6 per cent of GDP in the early 1980s to only 0.1 per cent of GDP (Figure 1.12). We saw the same trend in other categories such as price subsidies on agricultural goods, which have all but disappeared from use; Chinese farmers are Government subsidies as a share of GDP 6.0%

Loss-making enterprises

5.0%

Agricultural Other 4.0%

3.0%

2.0%

1.0%

0.0% 1985

1990

1995

Figure 1.12 Formal subsidies, 1985–2006. Source: CEIC, UBS estimates.

2000

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not operating in a fully liberalized environment, but it turns out that the prices for their goods are much closer to true market equilibrium than would be the case in the USA or the EU. Of course the sceptic could claim that SOE subsidies haven’t fallen at all – they’ve simply been moved from the budget to banks, who continue to throw funds indiscriminately at loss-making companies. This is true in one sense; the numbers in Figure 1.12 do not include subsidies to the banking system, which have been quite significant in past years (about which more below). But very little of these amounts represent flow financing to loss-making firms; the ongoing removal of social welfare liabilities and the closure of uncompetitive players have visibly increased state enterprise profitability. Company structure and governance The classical management configuration of a state-owned enterprise was very nuanced and complex and basic questions like ‘Who owns the company?’ and ‘Who manages the company?’ were often impossible to answer. Firms were owned by ‘the state’ – but ‘the state’ is a very vague concept, and there was never one unified entity that oversaw and managed SOEs; instead, enterprises took directives from a confusing range of functional and line ministries, as well as local and provincial governments. The management structure consisted of state-appointed bureaucrats, who worked in close cooperation with groups such as the enterprise Communist Party committee, the employees’ trade union and the Party youth league. Faced with this situation, the Chinese government gradually evolved a vision of governance reform over the course of the 1990s. According to the strategy, state enterprises should look and operate very much like Western commercial firms: (1) all enterprises would be legally incorporated as jointstock companies, with ownership claims clearly assigned among shareholders; (2) for SOEs remaining wholly or partially in state hands, the government shares would be formally assigned to a single agency with oversight and management functions (the remaining firms would be privatized, about which more in the next section below); and (3) the old management structures would be thrown out in favour of a Western system, i.e. a professional chief executive officer rather than a civil servant, and a board of directors and a Europeanstyle supervisory board rather than Party committees. How much has actually been achieved? The answer is a fair bit, but many state firms are still in the early stages of corporate restructuring. Some have gone through incorporation and management restructuring, including many larger SOEs belonging to the central government and any firm applying for an equity market listing, but for the average state enterprise progress has been much slower than the rapid changes in the external operating environment. As a result, many state employees still work under a management structure that would easily have been recognizable 15 or 20 years ago.

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The biggest step to date, in fact, came only in 2003 with the creation of the State Asset Supervision and Administration Committee (or SASAC), which is now entrusted with formal ownership and management of all non-financial state enterprise assets. Their job is to oversee the corporate restructuring process, set management targets and audit commercial performance, for example, in much the same way as the Khazanah holding entity in Malaysia. SASAC also has an implicit mandate to speed up the formal privatization process. All of these reforms promise to improve governance and add more transparency to the system, but it’s too early to gauge results. Competition If you ask any firm operating in China today about their biggest concerns and the factors that most significantly impact on their business, ‘competition’ would almost surely be at or near the top of the list. In spite of its socialist background, the mainland has earned a reputation as one of the most relentlessly competitive economies in the world (overly so, in fact, in the view of many observers). This acts as an extremely important disciplinary force on the SOE sector. Chinese industry studies routinely show abnormally low market concentration levels, even by developed country standards: in highly competitive sectors, the five largest firms might only command 10–15 per cent of the national market. And even in the most heavily regulated or capital-intensive areas – such as telecommunications, airlines, energy, media, steel or autos; sectors which in many economies would boast a single monopolized ‘national champion’ – you would find at least a handful of major companies operating in China . . . and often dozens. Moreover, despite periodic efforts by the central authorities to rationalize and consolidate markets, the number of players has actually grown over the past few years in every single sector listed in the previous paragraph. Why is the mainland so competitive? If anything, planned economies are supposed to develop monopolized, coddled industries, as we saw in the former Soviet Union. One reason is regional autarky. China did in fact have monopolized, coddled SOEs – but at local and provincial levels. During the decentralization of the late 1980s and early 1990s, and especially during the ‘go-go’ bubble years from 1991 to 1995, nearly every region decided to set up their ‘own’ television factories, automobile plants, breweries, and so on. These local champions were usually protected by significant interstate trade barriers such as punitive tariffs, taxes or outright import bans. Over the decade, as barriers were forcibly dismantled by the central government, the country woke up to find sizeable excess capacity in many, if not most industries. A second reason is the abundance of capital. As we discuss below, the high domestic saving rate and the traditional configuration of the financial system have naturally led to excessive credit creation and low ‘effective’ cost of capital. This was true in the early 1990s bubble years and true during the

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economic overheating in the first part of this decade as well, which led to excessive capacity creation in a number of heavy industries as well as property construction. Finally, the Chinese government has substantially increased the transparency and effectiveness of commercial policy-making, including laws and decrees, the status of the legal system and the administrative environment. Historically, the system has favoured well-connected players who could rely on informal relationships. While this is still the case, the playing field is increasingly being levelled. In this environment, the sole traditional respite has been firm barriers to foreign entry, and even here, China is rapidly liberalizing. In 1992, the average import tariff rate was nearly 45 per cent; today it is under 10 per cent and falling year by year (Figure 1.13). The unwieldy historical web of quotas and restrictions on foreign trading rights has been dismantled to a significant extent, and limits on external ownership are already much more liberal than only a few years ago. Figures 1.14 and 1.15 show pre and post-WTO foreign ownership and activity restrictions in key services sectors. From virtually no access in the Average import tariff rate 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 92 93 94 95 96 97

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Figure 1.13 Chinese import tariffs. Source: CEIC, UBS estimates.

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Market reform and China’s economic system

Figure 1.14 Foreign access before WTO. Source: CEIC, UBS estimates.

1990s, foreign interests are now able to establish wholly-owned subsidiaries and operate without significant restriction in most categories. Bankruptcy laws From a formal standpoint, China does not have a fully functional bankruptcy system. But there has always been a Bankruptcy Law in place – and a new and vastly improved version was implemented in June 2007. This area of law reform is examined in detail by Vivienne Bath and Mary Ip in Chapter 12. With the new system, however, the administrative and financial requirements of bankruptcy procedures for state enterprises are so onerous that very few firms have actually gone through the system. This did not stop the government from closing down tens of thousands of unprofitable and insolvent SOEs over the last decade. Most SOEs simply stopped producing and sent workers home under so-called ‘administrative closure’ without bothering with bankruptcy proceedings. Enterprises either downsized, quietly shut their doors altogether or had their assets consolidated into other state firms.

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Figure 1.15 . . . and after.

This is the other side of the competitiveness coin: not only do SOEs have to fight for market share against numerous other players, they also face a credible threat of extinction if they do not keep up. This is not wholly true for every sector, of course; the state does provide more protection and support for the largest national firms. But the number of enterprises considered ‘too big to fail’ is likely much smaller than the outside observer might suspect. The main losers from the lack of a functional bankruptcy system have been China’s banks. When SOEs were closed down, many left large amounts of unpaid loans behind them; in a working bankruptcy environment, banks would have a claim on enterprise assets, but in practice they often came away with nothing; this is one reason why mainland non-performing loan (NPL) ratios were so high through most of the past ten years. This brings us to some reflections on the banks.

The banks The banking system Years after discussions about state enterprise privatization had begun in the 1990s and the fate of even the largest SOEs was open to question, the banking

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system remained solidly off limits. It was not until 2003, after the new government took power that things began to take a significant turn. In very short order, the authorities decided to list a significant share of the ‘big four’ large state banks, which account for the majority of bank loans and assets in the mainland (these are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China). As a prerequisite, this meant bank restructuring and especially a large-scale write-down of historical non-performing loans, and the ensuing flow of capital into these commercial banks has been truly massive in scale: according to UBS estimates, more than US$500 billion in capital injections, loans and subsidized write downs over the years 2004–08 alone. As of 2008, three of the big four had already listed on foreign and domestic stock exchanges, with market ownership between 20 per cent and 30 per cent, and each of the three also had a foreign strategic shareholder with a stake of 5 per cent and 10 per cent. The Agricultural Bank is expected to show similar numbers when it completes restructuring and listing in the near future. In other words, from wholly-owned state institutions less than half a decade ago, these banks are now one-third owned by private retail and institutional investors, with a large foreign shareholding base as well. This historically unprecedented restructuring goes well beyond the introduction of outside ownership. To begin with, it opens the way for liberalization of interest rates; in the past the authorities had no incentive to remove controls on rates, since state banks could not withstand competition from other commercial institutions given the poor condition of their balance sheets. With banks now more profitable, the PBC has already taken partial steps to lift rate controls, and further moves are expected over the next few years. Equally important, moving bad loans off commercial bank balance sheets opens up the prospect of resolving SOE debt problems (which, in turn, could help push further privatization of the state sector). Not only does writing down debts make state firms more attractive; in theory, one of the most promising tools for improving state enterprises’ financial position is the ‘debtequity swap’, which has the advantage of lowering debt and effectively privatizing the firm in one fell swoop. In practice, the government has tried such swaps in the past without much success, mostly because equity claims stayed with state-run asset management companies and could not be sold into the marketplace. But as the authorities diversify asset disposal into private hands, and as direct and indirect equity markets continue to develop, the next decade could bring more radical changes in enterprise ownership and liquidity. Resolution to the problems still troubling China today such as poor financial resource allocation, chronic tendencies toward overinvestment and lack of progress in formal privatization could be around the corner as the authorities change the way SOEs are managed and reform the banking system. Such changes don’t happen overnight, of course, but if the government continues on its current path, the next few years could mark a final watershed in the development of China’s market economy. This implies a

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more stable macroeconomic development path in the years ahead notwithstanding the global financial crisis (GFC) of 2009. Financial resource allocation As argued, until very recently the financial system had been the glaring exception in nearly every reform category outlined earlier. To begin with, despite their heavily labour-intensive profile China’s financial institutions had been almost completely state-owned; until 2005, the major banks, including the ‘big four’ state commercial banks as well as the large policy banks, were 100 per cent directly held by the government, with civil service appointees serving in senior management roles. The second tier institutions – so-called joint-stock commercial banks – have more management independence, and a number are listed on public exchanges, but they still have state-owned entities as their largest shareholders. Next, in contrast to other industries, financial sector prices are strongly controlled. The central bank directly set the interest rates banks can charge for loans and offer for deposits (this is no longer completely true, as the authorities have lifted interest rate ceilings and deposit floors, but the ceiling on deposit rates is still fully binding). And the latter, at least, are set at a very low level; by keeping the cost of deposit funds below 3 per cent, the government ensures moderate borrowing costs as well. Banks have also been a heavy recipient of both implicit and explicit government subsidies (in sharp contrast to much of the rest of the economy). The main reason for the system of controlled floors and ceilings on commercial bank interest rates has been to ensure a very high gross margin on lending operations in order to keep state banks solvent. Indeed, since 1998, the government has spent nearly US$600 billion – or more than 4 per cent of GDP per year on average – in order to write down non-performing loans and recapitalize banks. Fourth, while the Chinese financial system is competitive, banks are not even remotely subject to the same exit pressures as industrial state firms. Smaller local and rural banks have been closed or consolidated, but larger banks have never been touched, despite the fact that most large institutions have been formally insolvent for most of the past decade. Quite the opposite, the flow of state subsidy funds clearly sends the message that large banks are ‘too big to fail’. Finally, in contrast to heavy intervention on pricing and regulation, banks now see surprisingly little interference from the centre in detailed lending operations. Considering that banks started as little more than financing arms of the government budget, where a ‘loan’ was simply a line-item in the investment plan, the current situation looks very different indeed. Banks still come under pressure for policy-related lending, particularly in infrastructure and development projects, but the central government is encouraging banks to be as market-oriented as possible in their normal commercial and consumer

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lending. This has been a key problem in China. Ironically, the issue is not just that the state owns banks per se; rather, the trouble is that the state owns banks and sets prices while at the same time leaving maximum leeway in bank operations. SOE dividends SOE dividends must also be mentioned as this is another very special topic which goes against the general trend of market-based liberalization. Consider the situation in an average state-owned company in China: the firm may or may not have gone through a formal incorporation process to identify ownership stakes, but in either case the state is either the sole or the largest majority shareholder, with management appointed by central or local governments. The fact that the firm is state-owned increasingly doesn’t matter for most of its commercial operations: it produces in a competitive environment with a credible threat of exit in case of losses, and almost no protection in terms of subsidies, controlled prices or segmented markets. There is one area, however, where the company is very different from its private counterparts, and that is the distribution of profits. Simply put, stateowned firms have nowhere to put their money except to re-invest. The government is the residual claimant on the bulk of retained earnings – but for the past 20 years China has had no dividend policy for its SOEs, which meant that earnings automatically stayed with the companies themselves. Managers and other small shareholders may have taken out a portion of the funds, but to a very large extent the companies had little else to do with the money but re-invest in productive capacity. Had the government taken its share of profits, it might have used the money to fund social welfare payments or other transfers to households, but instead rising SOE profitability has tended to contribute to very high levels of investment in China. Things began to change somewhat since the announcement in late 2007 of mandatory dividend payments (of 5 per cent to 10 per cent of net earnings) for large centrally-owned SOEs. But this is still a relatively small step which applies to a limited number of companies.

How to think about the economy as a whole Previous sections have analysed the individual pieces of the Chinese economic ‘puzzle’; state ownership still plays a significant role, but also the government is surprisingly pro-market in its interaction and influence with the economy and liberalization momentum is accelerating over time. Now let’s take these elements and put them together into a unified framework, i.e. how to think about the economy as a whole. As a reminder, there are very polarized views on the role of the state in China. At one extreme, some observers see the state as an oppressive drag on the economy: most SOEs are fundamentally unprofitable, inefficient and

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can’t compete with the private sector; state management has very distorted incentives with no profit motive; the government interferes far too much in commercial decisions, and the situation is only getting worse over time. At the other, supporters see a strong, profitable state economy that forms the ‘backbone’ of the Chinese system, a backbone that is too important to be left to market signals and private commercial ownership; instead, the state should be strengthening the position of SOEs in order to compete over the next decades.

Three broad conclusions First, ordinary state enterprises need not be viewed as a big problem for China at present. The vast majority of remaining SOEs are profitable on a flow basis, generally even more so than their private-sector counterparts; unlike many emerging markets, China does not have state-owned ‘black holes’ that suck in ever-increasing amounts of fiscal resources. High debts and social welfare burdens are certainly an issue, but mostly a historical legacy. And the economy is becoming more competitive over time. Second, this does not mean that the Chinese economy is trouble-free – as the fate of tens of millions of unemployed workers over the last decade and the current economic downturn clearly shows. The main problem lies in the combination of state ownership of the financial system, the lack of lending discipline and the issue of residual claims on profits, all of which have naturally led to over-investment and thus chronic macroeconomic ‘boom/bust’ behaviour. Third, based on the apparent policy settings of the current authorities, the economy is likely to become more stable and more efficient over time notwithstanding the effects of the international financial market instability of late 2008–early 2009. The government is improving market regulation capacity and continues to open industries to domestic and foreign competition. While formal privatization efforts have been moderate to date, we are already seeing acceleration in momentum and expect more rapid changes to come. And most important, the government now has an exit strategy for the banking system, which should have significant positive implications for resource allocation going forward.

The boom–bust economy For the longer term, it looks like good news for the state economy with firms generally profitable. However, let’s pause for a minute and recall how we got here. Only a decade ago it looked to many observers as if China was indeed heading for disaster; state losses were mounting, the economy was in nearrecession and most sectors had significant excess capacity. Yet corporate profits rebounded very quickly. Why? One of the main reasons for the sharp recovery was the round of mass closures and layoffs

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over the ensuing half-decade, taking a large amount of productive capacity out of the system. This meant rising ROE and ROIC numbers for the surviving firms, but it implies much lower returns on overall social investment. It also implies a highly volatile Chinese economy. As it turns out, China is among the most volatile countries in the Asia region, the most volatile if we exclude the Asian crisis year 1998 – much more similar to small, open economies like Singapore and Hong Kong than to larger counterparts such as India or Japan. Unlike its smaller neighbours, China’s fluctuations are due to domestic factors rather than the vagaries of external demand. Over the past two decades, China has seen a repeated pattern of internally generated ‘boom–bust’ cycles. We could blame this fact on state ownership in general and the prevalence of SOEs in the economy, but that argument is not quite right. The 1991–94 bubble is an instructive example; most of the overinvestment and excess capacity generation did not come from existing state firms at all. Instead, China saw a virtual explosion of new ‘white elephant’ projects; many of the new companies were state-owned as well, but many others were non-state or private. So this is an economy-wide issue rather than an SOE one. Or, to put it another way, despite the high share of state ownership, the economy operates relatively well in ‘normal’ years; the main troubles have come during periods of lax macroeconomic oversight and bubble-like growth. On this analysis, the root of the problem has come from the state – but in one particular sector, i.e. the banking system. Remember the discussion above: until very recently the government directly or indirectly owned the vast majority of the financial system, strictly controlled the price of capital, and even today still provides an implicit guarantee that bank losses will be funded by the state. In this environment, civil service commercial bank managers have had little internal incentive to control credit growth or to pay particular attention to the quality of loans. Furthermore, borrowers in such an environment may be encouraged to take excessive risks on the view that capital is relatively inexpensive and banks may not be very aggressive in demanding repayment. This puts the onus on the government to directly monitor and control state banks’ balance sheets. Indeed, when central policies have been watchful, banks are generally well behaved. But during periods of relative neglect, when the government has taken an expansionary, pro-growth stance, the economy has always shown a sharp tendency toward overinvestment. This is precisely what happened in the early 1990s bubble years, as well as the 2002–04 ‘overheating round’: banks saw a green light to accelerate lending, and well-connected enterprises, local and provincial governments aggressively jumped on the opportunity to make ‘easy money’. Before the central authorities had time to react, the economy erupted in a wave of excess capacity creation, along with the subsequent inventory build-up and margin pressures. Another implication is that Chinese banks do not lend very much to smaller private enterprises. When financial discipline is weak and there is

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excess demand for credit, banks naturally ration funds to those with the best bureaucratic connections or the highest profile, which means in turn that the private sector does not have anything close to equal access to the banking system. According to the available estimates, SOEs account for around half of all bank loans in China and a full two-thirds of non-agricultural commercial lending despite the fact that they account for only one-quarter of mainland economic activity.

The road ahead So, here we are emerging from the GFC. China’s state economy has been through wrenching changes, including painful downsizing and exposure to competitive forces both within and without. The average industrial or commercial SOE is probably as profitable over the past five years as it has ever been since macro reforms began; distortions from state interference in economic and financial decisions are fading over time . . . in short, the mainland has become a much more fundamentally market-oriented economy, which helps explain the strong macro performance of the past few years and our relatively stable outlook going forward. However, this does not mean that China’s market transformation is complete; the mainland will continue to face significant changes ahead. To begin with, the government still has some 100,000 state-owned companies formally on its books, and their legal fate will eventually have to be resolved. The authorities also need to decide how to manage the remaining SOEs and other state assets in a rapidly globalizing economy. And the structure of the financial system remains very much a work in progress. Going forward, there is very good reason to believe that China will fundamentally resolve these problems within the next decade. The improved commercial legal framework is explored in the chapters that follow, and the explosive growth of mergers, acquisitions and equity listings are already reducing the number of state firms at a fast clip. The government has also adopted a much more progressive approach in its treatment of large state-run companies, and the past few years have seen important changes in commercial banks and financial markets.

Note 1 For more details, see Jonathan Anderson (2008).

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In search of wealth and power The character of the Chinese state and limits to change Yingjie Guo

Introduction It is common in the academic literature to characterize China’s ‘reform and opening’ (gaige kaifang) since 1978 in terms of transition of various kinds. Politically, change is often described as a transition from totalitarianism or dictatorship to authoritarianism, soft authoritarianism, and so on. Economically, it is widely perceived to be a transition from a planned to market economy, or from socialism to capitalism. Numerous consequences and manifestations of the process have been mentioned. Above all, there is something approaching consensus that economic and political transition is accompanied by a shift from rule by decree (or the rule of man) to the rule of law or rule by law; state power has dwindled and a civil society with middle classes has emerged to alter the power imbalance between the state and society in the latter’s favour. These developments bode well for China’s democratization and fledgling market. The magnitude and depth of change in China in the past three decades or so are hardly disputable. The question is whether or not the change constitutes a transition that is conceived as a substantive transformation from one economic-political system to another, a linear movement from point A to point B, or, as in official CPC communications, a retreat from more to less advanced stages of socialism. It may well be that what analysts call ‘transitional phenomena’, particularly the abnormal or hybrid features of the Chinese state including the market and legal systems, are actually longlasting or even permanent. If so, claims of transition and forward projections based on such assumptions may be misguided and misleading. It is thus necessary to question these assumptions and relocate the analysis of China’s current transformation out of transitional frameworks. A more rewarding approach would encompass historical continuity as well as change and take hybridity seriously instead of treating it as something transient. When analysing current changes in the Chinese state and market, it stands to reason that one ought to keep in mind the nature, aims and functions of the state and market at various times and identify patterns or elements that have remained essentially intact regardless of fashionable discourses about change. It is equally advisable to delve into the ideas and values underpinning those

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unchanging elements and then review the limits to change. This is not an endorsement of historical determinism but rather a recognition that some things, especially those that are valued above everything else by political actors with the capacity to influence the course of events, do not change quickly. This is certainly the case with the preoccupation with wealth and power, which has been an overriding objective of the Chinese state for centuries. With rare exceptions, political regimes have placed greater emphasis on the wealth and power of the state than that of the people. Since the Opium War and particularly in the People’s Republic of China (PRC), national salvation (jiuwang tucun) and national revival (minzu fuxing) have become dominant concerns. Although the interests of the state and the nation have overlapped in numerous areas from time to time, such has been the primacy of the state in national life that the state is essentially a ‘nationless state’ in so far as popular sovereignty is not implemented (Fitzgerald 1996: 57). That is not to argue that the Chinese state always considers the wealth and power of the nation as negligible or treats these as merely a means of increasing its own wealth and power. Nevertheless, it is reasonable to hypothesize that the current Party-state will not allow and encourage the development of the market and the accumulation of private wealth if it does not stand to benefit from these, certainly if its own wealth and power are threatened by the wealthy or as a result of devastating market fluctuations it cannot control. It follows that it is in its interest to prevent private wealth from translating into economic, social or political power that challenges its rule and to maintain sufficient control of, and leverage over, the market so that the latter does not result in dramatic reduction of state revenue, decapitate the mechanisms of state power and cause massive shocks to social stability. These hypotheses deserve much more attention than they are given in the existing literature. They go to the nature of the Chinese state and market, the role of law, and to the relationship between the state, market and the wealthy. These questions will be the focus of this chapter which comprises five sections. The next section highlights the centrality of power and wealth of the state and the primacy of the state in the political thought of various (and competing) schools. This is followed by an analysis of the fundamental characteristics of the PRC in relation to its quest for wealth and power and a general explanation of the hybrid nature of the current PRC state using Barzel’s (2002) model of the state. The chapter concludes with a brief discussion of the limits to change.

The primacy of the state Historically, the political and intellectual discourse in China on wealth, power and statecraft has centred on the morality of wealth production and consumption, the preferable locus of wealth, the means by which wealth and power ought to be acquired, the role of law in wealth production and

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governance, and the aims of the state. While this discourse includes many schools of thought, most prominent are four distinctive but often overlapping sets of ideas: Confucian, legalist/statist, liberal and Maoist. Despite vast differences among these schools, it can be argued that there is a broad consensus about the primacy of the state. From a Confucian standpoint, government ought to be based on spiritualmoral force, and to govern is to rectify or lead with moral correctness. Economic gain and material production are therefore secondary to moral principles such as benevolence and righteousness, while the pursuit of economic profit must be guided by these principles. Thus, Confucius observes: Riches and honours are what men desire. If it cannot be obtained in the proper way, they should not be held (Analects, Book iv; Legge 1883: 24) . . . The mind of the superior man is conversant with righteousness; the mind of the small man is conversant with gain. (Analects, Book iv; Legge 1883: 26) Moreover, Confucianism, like many other religions, advocates thriftiness and frowns upon extravagance. For these reasons, it is believed to be antieconomic (Schwartz 1964) and not amenable to the spirit of capitalism, or the ideas that favour the rational pursuit of economic gain for its own sake (Weber 2002). These perceptions about Confucianism are well justified in so far as it goes against the rational maximization of economic interest by selfseeking individuals. This Confucian tendency, as will be discussed later, was seen as a major obstacle by radical Chinese reformers of the late nineteenth and early twentieth centuries, including liberal thinkers demanding liberty and democracy, and its impact is still detectable today in the CPC’s moral teachings and prevalent ‘hatred of the rich’ among the Chinese populace. That tendency is, however, by no means equivalent to indifference to wealth or wealth production. When asked by a disciple about what governments should do for the people, Confucius replies that governments should enrich and teach the people – these are critical functions of government in the Confucian view (Analects, Book 13; Legge 1883: 70). Governments can enrich the people, he reiterates, by refraining from imposing burdens on them, being economical in expenditures, ensuring that the people have plenty before the prince has plenty, and helping create the foundations of agriculture. He also stresses that the family left at peace to cultivate its own fields can produce its own livelihood. Confucius’ policy recommendations to governments are obviously oriented towards non-interference and laissez-faire. This notwithstanding, there is a clear recognition in the Confucian canon that the assurance of an economic livelihood is an indispensable precondition for a stable political and moral order. Furthermore, the state is central to the assurance of people’s livelihood. Thus, as Schwartz has pointed out, Confucianism has propelled the development in China of a ‘sociological’ approach to the lives of the

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masses, whose behaviour is fundamentally shaped by their socio-economic environment while the shaping of their environment is the responsibility of the state and the vanguard elite (1985: 105). This approach evidently differs from Adam Smith’s notion of laissez-faire and economic individualism. Legalism, although antithetical to Confucianism in many ways, agrees with the latter on the need for the state to shape society and the course of human affairs. The two schools of thought are, however, profoundly divided over the nature and aims of the state and by an opposing line of politicaleconomic philosophy. To the Confucians, the state is an agency of spiritual transformation which, instead of demanding compliance through coercion, aims, above all, to create a proper moral and political order by encouraging human virtue. By contrast, the image of a legalistic state is an engine of power; the sinews of power are the revenues of the state; and an effective legal code ensures that neither the powerful nor the weak can escape state control, thereby securing the wealth and power of the state. Restated differently, the ultimate raison d’être of the legalistic state is the enhancement of its own wealth and power through legal instruments and legalistic mechanisms of behavioural control.1 These contrasting conceptions of the state are premised on contrasting ‘models of man’ or assumptions about human nature. With the notable exception of Xunzi, Confucians assert the innate goodness of the individual, assuming that the lack of a positive cultivating influence in society causes bad moral character and therefore must be addressed. In contrast, legalists maintain that the bent of the true human nature is based on individuals’ likes and dislikes, and their tendency to pursue personal interests is perfectly natural (Shang Jungshu 1957: 38; Han Feizi Jijie 1957: 330). This endorsement of the pursuit of personal interest resonates with the assumptions of classic economics in Europe. Unlike classical economic liberals, however, legalists believe that people do not understand their own ultimate needs or interests, nor can the self-seeking actions of a multitude of individuals acting on their own will be amalgamated into the common good. It is up to the ruler to prove to them that their long-term interests are best served by state programmes and to structure the conditions of economic production. For centuries, legalism has inspired state regimes in search of wealth and power and intellectuals looking for ways of enhancing the wealth and power of the nation-state. As Schwartz (1964: 341) has put it, since China’s defeat by Western powers and Japan in the nineteenth century, the country has pursued wealth and power under a strong state, or at least the Chinese have been looking for the leadership of a strong state; moreover, the three core components of legalism – a strong state, wealth, and power – became the principal goals of twentieth-century China, even though other tenets of legalism were rejected by anti-traditionalist reformers. In many ways, Yan Fu exemplified the quest for wealth and power by liberal intellectuals in modern China, and the general thrust of his rationale for enhancing the wealth and power of the state came to inform most of the

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socio-political movements in the twentieth-century. In a series of essays and translations of Huxley, Smith, Montesquieu and Mill, Yan explored the laws of society which made some states wealthy and strong and others weak and poor. The source of the wealth and power of the Western nation-states, he invariably concluded, resulted from their sages’ clear understanding of evolution and their wisdom to guide society in taking advantage of the forces of evolution in social development, while China’s weakness was related to its sages’ static views of society and static and cyclic views of nature (Yan Fu 1953a: 71). His argument was inspired, in particular, by Charles Darwin, Herbert Spencer and Adam Smith (Schwartz 1964). As Yan Fu saw it, Darwin’s theories not only described reality but also prescribed a course of action. In his own words, ‘The weak invariably become the prey of the strong, the stupid invariably become subservient to the clever’ (Yan Fu 1953b: 41). It is the ‘values of struggle’ more than anything else in Darwin’s theories that inspired Yan Fu. He went on to link these values with Spencer’s ‘science of social groups’ (Yan Fu 1981a) and derived from it a multi-layered understanding of the ‘social laws’ that accounted for the wealth and power of nation-states in the West. First, he came to realize that the ‘egoistic’ energies which produced the wealth and power were energies latent in the individual. Second, it was the pursuit of self-interest which motivated individuals to exert their physical, intellectual and moral energies and to apply these energies constructively. Third, liberty, equality and democracy facilitated the pursuit of self-interest by the individual. This understanding led Yan to conclude that while the West had in modern times created institutions and fostered ideas designed to release individuals’ creative energies, the sages in ancient China did the opposite. Yan Fu directly ascribed to Smith the credit for the wealth and power of modern Europe, asserting that the wealth and power resulted from the science of economics and that ‘economics began with Adam Smith, who developed the principle . . . that in serving the greater interests (dali) the interests of both sides must be served’ (Yan Fu 1981c: 34). Once again, Yan reached the same conclusion, as he did from Spencer’s ‘science of social groups’, that is, the interests of the individual and those of the nation were intimately interrelated, that the wealth and power of the state could be achieved only if the energies and capacities of the individual were released. It is noteworthy that, when drawing his inspiration from Darwin, Spencer and Smith, Yan Fu had to break away from much traditional Chinese thought, especially the Confucian political-economic philosophy. Interestingly, he also ignored the recommendations of the legalists, even though his primary concerns were similar to theirs. It is hard to find reasons from his writings for his indifference to legalism, but it is certainly consistent with his anti-traditionalist line of argument and the growing iconoclastic ethos of his time. Like other radical reformers of modern China, Yan had no doubt that China’s cultural tradition must be rejected in toto because it was responsible for the country’s poverty and weakness. In addition, unlike moderate

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reformers such as Zhang Zhidong, he stressed the need to abandon ‘our faith’, namely the entire Chinese value system, in order to preserve ‘our state’. In doing so, he placed the wealth and power of the state squarely at the centre of his intellectual concerns, like statist elites of the past. At the same time, Yan had to reconcile Spencer’s liberalism and his own passion for liberty with his state-centric approach to national salvation. There is no reason to assume that Yan was merely paying lip service to Spencer; in fact, his reputation as a liberal thinker is rarely questioned among Chinese writers. All the same, it is possible to argue that while he saw individual freedom and the welfare of the state as mutually reinforcing, he did not treat the former as an end in itself. On the one hand, he endorsed the view that the search for happiness motivated the individuals’ exertion of their energies. He also agreed that the social aggregate depended on the quality of the individuals who composed it. Additionally, he appeared to assume the long-term benefit for individuals flowing from the wealth and power of the state. On the other hand, as Schwartz notes (1964: 75), the individual’s ontological status in Yan Fu’s vision, as in Spencer’s theorem, is so feeble that it appears to be little more than an instrument for achieving state goals. As well, Yan Fu had to reconcile his own mercantilist inclinations as manifested in his advocacy of the wealth and power of the state with the economic individualism of Adam Smith, who is known as the deadly enemy of mercantilism.2 This he did by transmuting the language Smith used to refer to the ‘general interest’, ‘the nation’, ‘society’ or ‘country’ into language which referred to the state interest (Schwartz 1964: 117). He also did this by highlighting Smith’s emphasis on the objectives of political economy, namely, enriching both the people and sovereign, and on the sovereign’s duty to protect society from violence and invasion. Consequently, in Yan’s conception, the complement of the self-interest of the individual is the general interest of the national community, while the individual’s economic freedom was justified because it helped achieve the broad goals of the state. Hence, despite his rejection of the wisdom of the Chinese sages, he actually endorsed their statist consensus. The reasons for this is complex, but it was inconceivable, in the face of the national crisis at hand, for Yan Fu or any other reformer to suggest that the crisis could be resolved without a strong state or that liberty and democracy should prevail over the wealth and power of the state. This exemplifies the dilemma of Chinese proponents of Enlightenment values who felt compelled to reconcile liberty and national salvation. As it happened, state goals ‘overrode’ the Enlightenment agenda. Given that even liberal thinkers like Yan Fu were preoccupied with the wealth and power of the state, it should not come as a surprise that the Communists pursued these goals with much more vigour, as they took it to be their historical mission to establish a new, prosperous and strong China. This mission is written into the constitutions of both the CPC and of the PRC. In pre-reform China, the mission was inspired by Marxism and

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Darwinism, so that the Chinese revolution was not simply portrayed as a movement towards Communism, but also as a struggle for national survival under the slogan that ‘backward nations are bound to be bullied’. The state’s pursuit of wealth and power was also justified in the mass media and school textbooks with narratives of China’s ‘century of national humiliation’ at the hands of Western and Japanese imperialists. In addition, following the anti-traditionalism of early reformers and ‘May Fourth intellectuals’, the CPC conducted numerous campaigns against traditional culture before the late 1970s. Yet, even at the peak of antitraditionalism during the Cultural Revolution, it continued to promote the legalists and the pro-legalist Qin Shihuang – especially their ideas about state power. Even more ironically, the Party has carried on much of the Confucian tradition in its emphasis on moral indoctrination and the state’s role in guiding and shaping society. While the CPC has always encouraged its members to cultivate virtue, it was particularly stressed under Jiang Zemin who emphasized that the rule of law should be combined with rule by virtue. In the Hu-Wen era, the Party has subsequently stepped up efforts to promote thriftiness and other Chinese (and socialist) virtues as a bulwark against excessive commercialism and moral degradation. The renewed interest in traditional values and Confucianism is both a retreat from its long-standing tradition of iconoclasm and a sign of uneasiness about China’s emergent capitalist market economy and accompanying moral turpitude (see Garrick’s Introduction in this volume). However, as the PRC differs fundamentally in nature from all previous state formations, so do the aims of wealth and power and the mechanisms of power and wealth production and regulation in the PRC. To the legalists, for example, state power primarily served the purpose of maintaining domestic political order and conquering competing states by force. In Yan Fu’s vision, state power was conceived predominantly in international terms, i.e. as the state’s capacity to defend China’s sovereignty and to compete for survival in a Darwinian world of nation-states. In both cases, the wealth of the nation and of the state is the fuel of state power. While the CPC endorses this notion of wealth, it adopts different modalities of wealth production and rationalities for distribution.

The nature of the Party-state There is no denying that the current Party-state differs fundamentally from all previous state formations and its predecessor in the Maoist era. An enormous body of literature in China studies has illuminated numerous aspects of economic, cultural, political and social change in the PRC in the past three decades. However, there is a risk that anybody approaching this body of diverse literature may see the trees but not the forest. A clear understanding of the nature of the state is more likely to emerge if one puts things into perspective by focusing on the changes and continuity in its persistent goals and

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functions. Particularly useful for this purpose are Blondel’s summary of the goals of government and Almond and others’ insights about the political system’s functions and capacities.3 Blondel (1969), having pointed out that governments can be differentiated by the goals they pursue, distinguishes three very broad goals of government. The first is related to who can participate in government. The second focuses on the preservation of a particular procedure or method of carrying out government business. And the third is concerned with the achievement of particular policies. Thus, Stalin’s Soviet Union differed from democratic regimes in that it placed great emphasis on the achievement of particular policies, so that when the procedure stood in the way, it was brushed aside. Another factor that set the Soviet Union apart from democratic regimes was Stalin’s restriction of political control to himself or a small group which was subordinate to him. Almond and others stress a total of five functions of the political system as being decisive: 1 2 3

4 5

Extracting physical and human resources from society and mobilizing them for particular purposes. Regulating and controlling the behaviour of individuals and groups. Allocating goods, services, status and other kinds of opportunity in society, and at the same time securing the necessary support from sufficiently large portions of the population. Commanding symbolic means of creating support for the political entity of the nation-state and its government. Reacting adequately to inputs through repression of certain demands or through transformation of others into outputs in the form of decisions and actions.

These goals of government and functions of the political system obviously overlap and can be synthesized and reformulated into four core questions about the aims and functions of the Chinese Party-state in the Maoist era and during the three decades of ‘reform and opening’. These include: 1 2 3 4

who wields the power of the state and how the business of the state is conducted; what kind of value system guides the state and is promoted by the state to guide and shape society; how the state extracts resources to support its operation and policies and approaches wealth production, distribution and consumption.; how it secures support for its policies and programmes and legitimizes its power.

The answers to these questions will not only cast light on the changes and continuity in the nature of the Chinese Party-state but also address the question of

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transition to some extent, i.e. whether or not the dramatic change in China can be conceived in terms of transition from one economic-political system to another. The most obvious and significant changes have taken place in the Partystate’s value system, its approach to wealth production and distribution, its extractive function and capacity, and the modes of its legitimization. In contrast, there has been no change to the CPC’s monopoly on state power and little significant change in the ways in which state power is exercised. To begin with, the state’s official ideology in Mao’s China, as stipulated in the constitutions of the CPC and PRC, was Marxism, Leninism and Mao Zedong Thought. The PC state, as defined in the state constitutions of 1975 and 1978, was a ‘proletarian dictatorship’ based on the alliance of the industrial proletariat and the peasantry led by the CPC – the vanguard of the proletariat. The Party-state’s dominant political agenda and top priority, particularly between the mid-1960s and 1976, were to carry on incessant class struggle and a continuous revolution aimed at eliminating classes and leading to a Communist society. Accordingly, economic development was meant to serve political purposes and considered secondary to political imperatives while meeting the basic needs of the people. As one slogan during the Cultural Revolution went, ‘We’d rather have socialist weeds in the fields than capitalist crops; we’d rather have socialist delays on the railway than capitalist punctuality.’ Thus, the planned economy and collective production were not designed to stimulate the individual’s profit motives as the driving force of production or to increase private wealth; in fact, private property and capitalist modes of wealth production were considered a source of evil. Rather, these were part and parcel of the socialist transformation leading to a Communist society. In this process, it was up to the state to decide who produced what, where it was produced, how much it cost, and where the products went. Additionally, economic rewards were distributed according to the value that the state ascribed to the service performed, while consumer demand was restrained in favour of greater capital investment for economic development in a desired pattern and in desired areas. As dictated by the Party-state’s ideology, the PRC state in the Maoist era was a Leninist state, or an instrument for class oppression. In other words, the aim of state power was not simply to maintain domestic stability and safeguard state sovereignty but also to maintain class dominance and implement the socialist transformation. As the transformation involved every aspect of social and individual life, it entailed a totalitarian state that effectively controlled the individual, economy and society and directed most – if not all – economic activities towards the goals of the state. This state also had the prerogative of keeping the entire output the revolutionary classes produced and confiscating the private wealth of the members of the counterrevolutionary classes while denying them civil and political rights. In the reform era, the CPC’s value system has been revised as the aim of the Party-state is redefined. Its new ideology, according to the current

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constitutions of the CPC and PRC, comprises Deng Xiaoping Theory and Jiang Zemin’s Theory of ‘Three Represents’ in addition to Marxism, Leninism, and Mao Zedong Thought. The diverse political doctrines are obviously incompatible or even contradictory. Dengism, for example, contradicts the key tenets of Marxism, Leninism and Maoism. Above all, it revises the historical mission of the CPC and the aim of the PRC state: it is not their goal to carry on class struggle or a continuous revolution, but to enhance the comprehensive strength of the nation-state and raise the living standards of the people. Under Jiang Zemin and Hu Jintao, the central aim of the Party-state has been reformulated into the construction of a reasonably well-off (xiakang) and harmonious society as well as the enhancement of national strength. Furthermore, ‘Dengism’ rejects socialism as an end in itself and redefines it as a means to other ends such as the ‘development of productive forces’, ‘enhancement of the comprehensive strength of the socialist nation’, and ‘improvement of people’s standards of living’ (Deng 1993: 372). Consequently, socialism is largely divorced from socialist relations of production and public (or collective) ownership of the means of production. Moreover, it is not seen as the only way of achieving the Party-state’s new goal; in fact, whatever serves that purpose is acceptable. As Deng put it, ‘It doesn’t matter whether the cat is black or white. The cat that catches mice is a good cat.’ Jiang’s theory redefines the aims and nature of the CPC and the PRC in a similar vein. As well as the vanguard of the Chinese proletariat, the CPC also represents the best interests of the entire Chinese nation. Instead of upholding socialist relations of production, or the foundational principles of Chinese socialism, the CPC now represents and promotes ‘advanced productive forces’. It is thus able to free itself and the production of wealth in society, from the shackles of Chinese socialism and sever its ideological bond with the working class (Guo 2004, 2008). Non-socialist forms of ownership and modes of wealth production and distribution consequently become acceptable and legitimate. The new clarion call is ‘to get rich is glorious’. Thus, it stands to reason the Party would open its doors to private entrepreneurs, company managers, capitalists and other social groups who are constitutionalized members and political subjects of the PRC. These are by no means insignificant changes. Most pertinent to this chapter is the Party-state’s shift from continuous revolution to economic development. The shift has entailed making the production and accumulation of wealth one of the Party-state’s principal goals and a dominant motive for society. This is followed by a change in the meaning of socio-political life in the PRC as well as the transformation of its polity and the status order of its political subjects. As the Party-state’s new historical mission requires advanced productive forces and consumers with ample purchasing power rather than revolutionary forces ready to wage class struggle, its primary concern is therefore no longer the working class – the most progressive class with the capacity to transform society, but the principal creators of wealth.

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Moreover, ‘wealth is in the process of becoming an increasingly important component of political power’ and affects the process of social, political and cultural change in the PRC (Goodman 2008: 2–3). As part of the shift, the Party-state has had to gradually dismantle the planned economy, together with the attendant collective production and service units, such as communes and state-owned and state-operated enterprises. Meanwhile, it has adopted market mechanisms in resource production and exchange and allowed the private sector to grow. Consequently, it has been forced to streamline and restructure the state’s Leninist social control mechanisms and to relinquish direct control of large parts of the economy. The Party-state’s loss of direct control as a result of these changes is coupled with declining capacities for ideological indoctrination and political control over society, thus necessitating legal reforms and the acceleration of rulemaking, rule-application and rule-adjudication. It is not clear, however, the extent to which these changes may have weakened the Party-state and its hold on state power. It has been claimed that increased reliance on markets in post-Communist states induces a shift of power, most notably distributive power, to the market (Szele˙nyi 1978). In China’s case, it is similarly argued that redistributive power is gradually transferred from the redistributors to direct producers with property rights and is engaged in exchange in the marketplace that is based on contracts instead of government fiat (Nee 2005a, 2005b). One of the consequences of this is the increase of market power over resources at the expense of the Partystate’s redistributive power. In addition, entrepreneurship has become a key avenue for status attainment and upward mobility (Nee 2005b). This ‘power transfer’ theory has given way in recent years to ‘power persistence’ theories, which contend that there have been continued economic returns to individual-level political capitals in both urban and rural China, contrary to early predictions of the decline of economic returns on political influence. Power persistence is manifest in the continuation of the state’s redistributive power, its bargaining power in the political market, its property rights, and in rent-seeking, state control of economic activities and state intervention in the economy (Walder 1995, 2002; Parish and Michelson 1996; Bian and Logan 1996; Zhou 2000, 2004; Bian et al. 2001; Lu 2002; Davis et al. 2005; Goodman 2008; Liu Xi 2009). Even more importantly, despite all the change, China’s one-party rule remains guaranteed in the PRC Constitution and largely intact in reality, and there are as yet no constitutional constraints on the power of the Party-state. To be sure, the CPC’s ideological revision and the ideology’s loss of coherence and enforceability may be a sign and source of weakness, but the ideological reorientation essentially means a change in policy directions or even rhetoric which has not shaken the rule of the Party-state. On the one hand, there have often been disputes among CPC leaders about the goals of the Party-state. On the other hand, its commitment to Communism has always been doubtful. In any case, it is conceivable for the CPC to change its policy

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directions dramatically or forsake Communism in order to save its rule in the same way that Yan Fu and other radical reformers abandoned ‘our faith’ to ‘preserve our state’. Once the CPC’s traditional ideology is taken out of the equation, there is no need to structure the polity of the PRC or the status order of its political subjects along class lines. Nor is it necessary to privilege the working class over other classes. From the Party’s perspective, it does not matter at all whether the proletariat loses its status as the most progressive force of history; it is all the better if those who are joining the country’s vast new poor no longer constitute the mainstream of China’s new consumer society. It would appear that the CPC must make-believe that it has not betrayed its class constituency but this has not proved to be such a difficult task. Its two-pronged strategy to this end is to appease the working class by maintaining ‘proproletariat’ rhetoric and by lowering the taxes of low-income earners and increasing welfare payments to disadvantaged groups. In any case, the decline of the working class has not undermined the fundamental interest of the CPC or its monopoly on state power. It is a similar although more complex story in the economic realm. When economic development is no longer dictated by the CPC’s ideological orthodoxy or geared towards continuous revolution, it is no longer necessary or desirable for the Party-state to control all economic activities or all corporate and individual players in the market. Nor is it necessary or desirable to keep all the means of production under public or collective ownership or retain all the organizational units designed for collective production. In fact, whether to control the economy and how much of it to control are subject to a different calculus: a calculus that centres on the advancement of productive forces in particular, and the cost/benefit to the wealth and power of the nation-state in general. So long as the Party-state’s goals are achieved, it is sensible to allow goods and services providers to decide what to produce, where to produce it and what to do with the products, and to make the profit motive a legitimate driving force of resource production and exchange. What matters most for the state here is not tight control of the whole economy, but effective regulatory (and extractive) functions and capacities. The former are indispensable to maintaining a functional market order, while the latter are essential to enhancing the wealth and power of the Party-state. The more wealth is produced in the market, the more riches the state is able to derive through taxation and by other means. The state therefore stands to gain from the individual’s profitmaximizing behaviour. This, of course, is not something that the Party-state prefers to draw attention to. Rather, it highlights the positive effects of its good policies in creating a ‘win-win situation’, where the wealth and strength of the nation and state are mutually beneficial (The Theoretical Department of the People’s Daily 2009). It is not clear what the strength of the nation in the official rhetoric means other than purchasing power, but there can be no doubt that the average

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Chinese and the Party-state are wealthier today than in the Maoist era. According to official statistics (ibid.), the Chinese economy has increased by an average of 9.8 per cent per annum in the last three decades, and the number of people officially classified as poor has decreased from 250 million to 40.7 million. In 2008, China’s GDP exceeded 30 trillion yuan in contrast to 0.3645 trillion yuan in 1978, making China the third (arguably the second) largest economy in the world. At the same time, the PRC’s foreign currency reserve – amounting to the order of 2 trillion US dollars in 2008 – is ranked number one in the world, and the average per capita disposable income in urban and rural areas has soared by 6.5 and 6.3 times respectively. The wealth that the Party-state has amassed through ‘reform and opening up’ has enabled it to assert its power and influence in the world as never before and to undertake self-aggrandizing projects like the Beijing Olympics Games, the World Expo and the space programmes. Coupled with this is China’s exceptional performance during the current global financial crisis and speedy recovery from the economic downturn. As a consequence, the confidence in the Party-state’s strength and economic policies has surged notably among Chinese leaders in the last couple of years. The confidence, in turn, has prompted the CPC to reaffirm its goals and the definitive characteristics of the Party-state and its ‘socialist market economy’, as though the CPC’s reform measures and policy direction are now vindicated by the global crisis and China’s performance. The ‘six whys’ In a series of keynote articles in the People’s Daily and two volumes of speeches, articles and round-table discussions, the CPC’s Department of Propaganda has, since June 2009, provided elaborate answers to the ‘six whys’.4 Not surprisingly, these publications reiterate, once again, that China must resolutely continue with ‘reform and opening up’; adhere to Marxism, socialism, the leadership of the CPC and the people’s democratic system; and reject capitalism and Western-style democracy. To many commentators, most notably in the Chinese Diaspora, these publications are nothing but trite propaganda. However, the publications have taken on a new meaning in the context of the domestic debate about political reform and the global financial crisis. On the one hand, they may be intended to dampen the demand for, and expectations of, political reform which have surged in the lead-up to the CPC’s next national congress. On the other hand, they are clearly related to the CPC’s diagnosis of the global financial crisis. Particularly worth noting are the unequivocal dismissal in these publications of American-style division of power and further privatization, and its emphasis on the importance of maintaining the primacy of public ownership, effective state intervention in the market, and the leading role of SOEs in China’s global economic expansion. Although it is not stated straightforwardly what lesson the CPC has learnt from the crisis, one cannot fail to

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notice a deep suspicion of capitalism, fears of market failure leading to massive loss of state and private wealth, and wariness about governments’ lack of capacity to prevent economic crises. It is also clear that China’s performance in the crisis is attributed to a strong state with a competent and resolute leadership, a sizeable state-owned sector in the economy, a statecontrolled currency, and a large foreign currency reserve.

Between a dictatorship and rule-of-law state: a hybrid model The lesson the CPC has learnt from the current global crisis and what it values most and perceives to be the major strengths of the PRC’s economicpolitical system are likely to be retained and perfected unless future developments in the domestic and global economy conclusively prove otherwise. In particular, the current Party-state continues to stress the state’s paramount role in shaping society and its socio-economic environment. The impact of the Confucian moral state also remains visible in the PRC while the individual pursuit of wealth is well recognized in society, although the recognition is tempered with widespread uneasiness about its negative effects, perceived and real. Of even more benefit to the CPC is the statist and mercantilist wisdom of legalism, which is reinforced by the insights of Spencer and Darwin. Additionally, the Party-state, while adhering to its own value system, recognizes the profit motive of self-seeking individuals and the efficiency of market mechanisms. All in all, the CPC has incorporated various elements of Confucianism, Marxism-Leninism, Darwinism, its own ideology, and economic liberalism, and so on. Given the multiplicity and complexity of these elements, a systematic analysis would be a book-length study. But it is possible to describe and explain the fundamental nature of the PRC state, with particular reference to state power vis-à-vis wealth production and the role of law, with a modified version of Barzel’s (2002) political economy model of the state. What is most notably in need of modification is his simplifying treatment of the state as a single entity. By contrast, the Chinese Party-state, as most China watchers agree, is characterized by complex internal structures populated by officials with diverse and diverging interests. To Barzel’s assumption that the ruler is self-seeking, one can add that Party-state officials, too, are significantly motivated by their own self-interest even when acting in a purely official capacity. Some may even be purely self-interested, like Anthony Downs’ ‘climbers’ and ‘conservers’, who value power, wealth, prestige or security above all else (1967: 88–9). In Barzel’s model, power backed by violence, or the ‘ability to impose cost’ (2002: 18), is the essential ingredient of the state; wealth can be converted to power and vice versa; and the creation and functioning of the state are tied to the protection needs of individuals or the enforcement of agreements. States range from rule-of-law regimes and dictatorships. The former are regimes where the protected control the protector, paying him/her a salary in the form

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of taxes; the latter are not controlled or controllable by the protected or constrained by the law. Ideally, the model reveals, individuals should install a ruler to protect them after, not before, the establishment of a collective-action mechanism which is intended to prevent the ruler from confiscating their property. This mechanism plays a major role in the formation of institutions, which bring about a rule of law. Indeed, law enforcement is a basic feature of a rule-of-law state that enforces agreements as a third party. The absence of such a collective-action mechanism makes it possible for the protector to easily become a dictator. In that case, the dictator is more inclined to dismantle existing mechanisms that constrain his power and to prevent new collective-action mechanisms from emerging. He/she is also more inclined to confiscate the wealth of the protected, impose costs on them or extract payment by the threat of imposing costs, or shirk protective responsibilities. He/she may confiscate the subjects’ wealth by fixing their income at the subsistence level, where nothing is left for uses other than sheer survival. He may also maintain some control over the subjects’ wealth and constrain them to the minimal consumption level required to produce the output to be extracted from them. Consequently, the dictator is able to keep the entire output the subjects produce and to ensure his/her stay in power, as the subjects are prevented from acquiring the necessary resources or the ability to overthrow him/her. When applied to the PRC state, this model draws particular attention to the latter’s creation, the way in which it exercises power, the political implications of wealth, and the role of law in economic governance. First of all, Barzel’s model (2002: 14) starts from an initial state of affairs which resembles Hobbes’ ‘state of nature’ ([1651] 1991). Here independent individuals seek to maximize their utility, which is primarily a function of physical and human wealth and of personal safety. They use their own power and skills to acquire assets and defend themselves by whatever means they see fit. Eventually, they are willing to install a ruler or protector (or a king in Hobbes’ case) in the use of violence in order to protect themselves from one another. The main difference between Barzel’s ruler or protector and the Hobbesian king is that the latter is considered benevolent, whereas the former is deemed self-seeking or predatory like all other individuals. In contrast, the Chinese ruler or state is rarely, if ever, installed by individuals who employ him for a collective service. In the days of the ancient sages, sages made themselves the ruler. The initial state of affairs, as eminent Confucian Han Yü (cited by Yan Fu 1953c: 78) described it, was one where noxious insects, serpents and wild beasts ran rampant while the people suffered acutely. It was the sages who drove away the insects, serpents and beasts and settled the people in the Middle Land. They became the people’s rulers and teachers. They then taught the people how to sustain themselves. They clothed them when they were cold, fed them they were hungry, and built dwellings for them so that they did not have to live in trees. They went on to train artisans to supply the people with tools, merchants to exchange their

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goods, and doctors to prevent their early death. They established the rites of mourning, burial and sacrifice to nurture their feelings of love, and ceremonies to teach them the proper precedence of social relations. Thus, the Chinese civilization emerged. This civilization did not result from the profit-seeking behaviour of individuals, to which Adam Smith ascribed the credit for giving rise to civilized society. Nor was there a role in the process for capitalism, which, according to Smith, propelled the transition from the ‘savage state of man’ to civilized society. In fact, mankind in Han Yu’s account are simply incapable of moving out of the horrible state of nature due to their inertness and lack of initiative in any human activity; it was sages who delivered mankind from this state of nature. The CPC, in the constitutions of the Party and the PRC, portrays itself as a saviour who has lifted China and the Chinese out of chaos, weakness, backwards, poverty, and oppression by imperialism, feudalism and capitalism. This image differs little from that of the sage who made himself the ruler, except that CPC took state power by force and is sparing no pains to ensure its stay in, and monopoly of, power. This is merely pointing out the obvious. But oddly enough, the obvious appears to have been neglected or ignored by analysts who suggest that the PRC is in transition from a dictatorship to a rule-of-law state presiding over a rule-based market economy. Any suggestion to that effect must address at least five questions. One, is the Party-state ready to voluntarily relinquish much of its power? Two, is it willing to be controlled by market players or subject its power to the constraint of law and collective-action mechanisms without being forced to do so? Three, is it prepared to become an employee of market players and allow its power and wealth to be significantly reduced? Four, will it commit to not confiscating the assets of, or extracting payment from, an employer over whom it has no direct control and where it is not able to establish a constraining collective-action mechanism over that employer? Finally, supposing that the central Party-state is ready to do so, can it ensure that local governments, government departments and officials will do so too? A negative answer to these questions is more plausible than an affirmative. Most importantly, as the CPC took state power by force and installed itself as the sole protector, no collective-action mechanisms exist to constrain it. Although it has stepped up efforts in the reform era to establish a functional legal system, to this day the formal structure of the PRC state has no legal foundation in the absence of a constitutional law or a constitution as Sartori (1962) defines it: a frame of political society, organized through and by the law, for the purpose of restraining arbitrary power. The emphasis that political theorists such as Sartori lay on the law and constitution limiting the government’s activity is clearly not shared by CPC leaders. They see it as critically important that the CPC should not be shackled by a constitution, but rather empowered to lead and guide the people. This applies to law-making, law-application and law-adjudication, and social policy more generally.

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Given the CPC’s monopoly on power backed by violence, producers and market players in the PRC have no opportunity to set up a collective-action mechanism to limit its power or prevent it from confiscating their wealth, extracting payment from them, imposing their costs arbitrarily, or shirking its protective responsibilities. The relationship between the Party-state and the protected is simply not the employer–employee relationship to be found in rule-of-law states. Rather, it is largely a dictator–subject relationship. Due to the power imbalance, it is not up to the protected to decide whether protection is needed, what is to be protected and how or how much reward the protector deserves. The protector is able to make all these decisions independently. On the other hand, for the CPC to be subject to the people or the collective-action mechanism erected to control it almost inevitably means a democratic election of some kind, which may end up deposing the Party. There is no reason for the CPC to risk this outcome unless other available alternatives are more risky or harder to actualize. Unconstrained by law or other mechanisms, the Party-state and its officials will not be content to be an income earner or a tax collector only; they are actually enabled to empower and enrich themselves at the expense of those they are supposed to protect. This in part explains the rampant rent-seeking behaviour and corruption amongst party-state officials. The Party-state will not be content to be a third-party enforcer of agreements only either; instead, it will be keen to enrich itself by participating directly or indirectly in market activities, converting its power into wealth in the marketplace. Thus, the Party-state is both a third-party enforcer and player in the market. In this it differs from rule-of-law states. The state not only participates directly in the domestic and global market through intervention and influence but also through a contingent of SOEs which may contribute increasingly less to China’s GDP but are encouraged by the state to spear-head China’s economic expansion globally. The remaining SOEs are allowed to maintain their monopoly in key domestic industrial sectors, such as banking and financial services, oil production, civil aviation, rail transportation, power generation, and telecommunications. Direct participation in the market is crucial to the Party-state because it is a means of achieving wealth and maintaining effective leverage over the market. In this process, state power becomes a means of amassing wealth and maintaining the stability and security of the mechanisms of wealth production, while the amassed wealth fuels the state’s power and influence in the domestic and international arenas. Admittedly, the current Party-state is by no means an absolute dictator that ignores the rule of law entirely or confiscates everything in sight. It has obviously become more benign in the three decades than in the Maoist era and shed many of its dictatorial features. This development is attributable to the Party-state’s growing confidence in the stability in the country, since dictatorships tend to curb their confiscatory tendency as they become stable. What is more, the amount of wealth that the state is able to amass largely depends on per-capita income, and rises in per-capita income are related to

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the profit motive. It thus stands to reason for the state to encourage the profit motive and facilitate the production of wealth, which requires the protection of property rights and reliable enforcement of agreements. The legal reforms in the past three decades are largely intended to serve these purposes. The dilemma for the Party-state in this regard is that its income is positively correlated to the per-capita income of the protected, whereas its safety well might be negatively correlated to the latter’s wealth, as the latter could translate into the capacity to resist state power or pose a threat to it. The state, therefore, has good reason to be concerned about the accumulation of private wealth. This concern is compounded by the age-old Confucian practice of giving precedence to moral principles over profit maximization as well as traditional and socialist legacies of equalitarianism. Generally speaking, it is likely for dictatorships facing a dilemma of this kind not to adopt policies that would yield higher income to the subjects, as Barzel notes (2002: 256). In contrast, the Chinese state has chosen to adopt quite different policies. It seeks to control the development of the richest stratum in society, expand the middle reaches, and reduce the poorest stratum. It also encourages the rich to ‘fulfil their social responsibilities’ by donating money or resources to disadvantaged groups of individuals and comes down hard on rich individuals who dare to challenge the Party line. The legal system has a limited role to play in creating and maintaining a rule of law not simply because the system is hampered by numerous defects and poor enforceability, as many legal analysts, including some from this volume, have pointed out, but also because it does not set all the rules of the game and must compete with (and indeed can be overridden by) political or moral imperatives. Consequently, it is of limited reach and applicability and does not have the capacity to protect the protected against the protector and its numerous agents, who are not effectively constrained from using their power arbitrarily or abusing their power.

Conclusion In summary, while dramatic socio-political changes have taken place in many areas during the reform era, the CPC’s preoccupation with wealth and power continues to dominate its economic, legal, political and social policies and shape the nature of the Party-state and China’s ‘socialist market economy with Chinese characteristics’. There can be no doubt about the entrenched and prevailing conviction among China’s political elites, including the CPC leadership, that wealth fuels power, and wealth production is not just a private or market economic activity but a political imperative of the state. State power is a means of creating, acquiring and enhancing social and private wealth; and that state power at this stage is not to be shared, significantly constrained, or banished from economic and private spheres. These continuities and prevailing convictions are diametrically opposed to key aspects of liberal ideas of limited government, classical economics and

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free market liberalism (with its emphasis on the rule of law). It is inconceivable that these convictions will disappear, at least in the short to medium term, so long as the CPC stays in power and refuses to share power with other political parties or subject its power to popular mandate and effective constitutional constraint. It is equally unlikely that the Party-state will, of its own accord, transform itself from a strong, ‘interventionist’ state to a ‘limited state’ or to suspend state intervention in favour of a rule-based free market economy. In that scenario, the Chinese state and market will not divest themselves of all their current qualities and characteristics and coalesce towards such economic-political models as market capitalism, rule-of-law state and limited government. It thus follows that the transition theories that have been applied to China’s ‘reform and opening up’ cannot be taken for granted.

Notes 1 In the words of Shang Yang, the goal of the state is ‘the enhancement of the state and the strengthening of military capacity’ (Shang 1957: 18). 2 Eli Heckscher defines mercantilism as that system which ‘would have had all economic activity subservient to the state’s interest in power’. He also states that ‘mercantilism as a system power was thus primarily a system for forcing economic policy into service of power as an end in itself’. See Heckscher ([1935] 1994: 15–17). 3 Blondel’s summary of the government’s goals is applicable to the Chinese state for the simple reason that the government and the state are intimately intertwined and hardly distinguishable except in specific functions, although even the specific functions and policies of the government must be aligned with the goals of the Party-state. 4 The ‘six whys’ include namely why China must adhere to Marxism rather than allow ideological pluralism, why it is that only socialism can save China and ensure its development, why China must not adopt social democracy or capitalism, why China must not introduce American-style division of power, why China must uphold the leadership of the CPC, why China must maintain an economic system where public ownership is the mainstay while multiple forms of ownership are allowed to develop, and why China must remain resolute in carrying on reform. See The Theoretical Department of the People’s Daily (2009).

3

Politics, society and the legal system in contemporary China William J. Hurst

Introduction There have been a number of ongoing debates about the overarching trajectory of China’s legal reforms. Some have argued that the country is approaching some thick or thin form of ‘rule of law’; while others have claimed it is stagnating or even regressing on important measures (Lubman 1999; Potter 1999; Keyuan 2006).1 Some have pointed to new benefits and protections for particular social groups or economic practices, while others have focused on rights and provisions that are still absent or that perhaps even have been eroded (Gallagher 1999; Seymour and Anderson 1999; Biddulph 2007). Some scholars have even looked to the legal system to provide new means for Chinese citizens to challenge abuses of state authority, especially at the local level (O’Brien and Li 2004) while others have emphasized the role of legal reform in bolstering the power of the state and Party centre (Bin Liang 2008). Few previous studies have looked at several areas of Chinese law in a disaggregated and comparative manner, however. Most have been either holistic analyses of the entire legal system or detailed case studies of particular sub-sections. In order to assess the interaction between legal institutions and the rest of the Chinese state, or more broadly between law and politics, to say nothing of the more complex dynamics of state–society relations, it is necessary to disaggregate the Chinese legal system more finely than has been the habit of Western scholars in the recent past. Specifically, I argue for disaggregation among several important areas of the law – family law, other areas of civil law, criminal law, and administrative law – to examine the relationships between law, politics, and society in China today. In such a framework, it is possible to distinguish between different dynamics of state–society relations driving the functioning of legal institutions as well as differing degrees to which legal processes and outcomes are influenced or constrained by extra-judicial political actors and institutions. After laying out a schematic framework for characterizing these relationships and processes, I move on to a more detailed case study of criminal law covering counter-revolutionary crimes as implemented by basic-level courts in Southwestern China during the Maoist period. Criminal law, especially as

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it pertains to counter-revolutionary crimes, is usually seen as a clear-cut case of the politicization of justice in Maoist China. My case study helps illustrate, however, that Maoist political campaigns and other extra-judicial forces exerted different influences on the functioning of urban and rural courts, underscoring the importance of sub-national comparative analysis of court work across space as well as over time, even within the same fairly narrow area of law.

Disaggregating the law by substantive area It is neither controversial nor especially novel to argue for the benefits of disaggregating legal systems into areas such as family, civil, criminal, and administrative law. But much prior research on China has paid insufficient attention to the differences between these areas, especially as they relate to political and social dynamics, even though broader comparative research has highlighted the various political and social functions of courts (Shapiro 2000; Moustafa and Ginsburg 2008: 1–22). To begin, I maintain that there are three distinct state– society relationships that animate various parts of the Chinese legal system. First, social control lies at the heart of many parts of every legal order (Shapiro 2000: 17–20, 24–5; Moustafa and Ginsburg 2008: 4–5). All governments seek to exercise authority over certain aspects of their citizens’ lives and portions of the legal system provide their primary legitimate venues and means to that end. Criminal law is the most obvious area in which states wield legitimate coercive power over their citizenry. But family law is also often driven by a similar desire to prescribe certain behaviours (such as marriage), while strictly proscribing others (like polygamy). In the Chinese case, we may see clearly that criminal law has been used since 1949 (and before) as a principal instrument of legitimate domination and repression. The strike hard (严打) campaigns are among the more colourful examples of this, but every time a citizen is detained, prosecuted and punished, the state and Party signal the limits of tolerance and establish a minimum standard for correct behaviour. Family law is perhaps a less obvious or blunt instrument, but it has also been used as an important tool for changing social norms and common practices – such as after 1950 when polygamy and forced arranged marriage were outlawed and clearer and more equitable divorce procedures formalized (Diamant 2000, 2001). Second, a desire to promote economic development and efficiency often drives the development of important areas of law such as contracts, corporations, commercial regulation, product liability, and many types of torts (Moustafa and Ginsburg 2008: 8–9). By laying down and enforcing consistent rules for economic transactions and activities, governments can help foster predictable and transparent environments in which business and commerce may thrive. Despite problems in implementation, drives to reform areas of civil law that relate to the economy in low income or authoritarian countries are often undertaken with the aim of promoting development.

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China is no exception to this rule. It is not a coincidence that legal fields such as contracts, bankruptcy, corporate governance, product liability, and labour and industrial relations have received so much attention over the past 15 years. As transactions become more routine, contracts more enforceable, and producers and vendors more accountable, the Chinese economy reaps immense benefits. While problems like local protectionism, uneven enforcement of court judgments, continuing violation of intellectual property and copyright protections, and high-profile scandals involving products from toys and pharmaceuticals to pet food and powdered milk persist, it is clear that the CPC and central state are at least increasingly focused on improvement. Many observers conclude, moreover, that improvements have indeed been vast. Third, principal–agent relationships between different branches of the government or levels of the state apparatus underlie administrative law as enacted and enforced in most countries (Shapiro 2000: 28; Ginsburg 2008: 67–70; Moustafa and Ginsburg 2008: 7–8). Whether in the US immigration or taxation systems or in China’s rural governance and land requisition processes, higher-level governments in many contexts use administrative law to help discipline their subordinates. The Chinese state is notoriously fractious and difficult to control at its lower levels. In its continuing efforts to discipline its far-flung agents, the centre has paid increasing attention to administrative law and litigation since the mid-1990s. As scholars like O’Brien and Li have documented, citizens have been empowered by the state in recent years to use administrative litigation against local officials who egregiously violate central principles and policies (O’Brien and Li 2004). While the overall incidence of such suits remains low, and there are ongoing doubts about their effectiveness, their very existence and even modest successes indicate the rise of a new dynamic in Chinese legal institutions and state–society interactions (Table 3.1). In addition to state–society dynamics, implementation and adjudication processes can vary substantially across different areas of the law. Court Table 3.1 Procedures and objectives of different types of Chinese law Procedures and outcomes subject to political interference? State–society dynamic Social control Economic efficiency and development

Principal–agent and policy implementation

No Family law Most civil cases outside of family law (e.g. contracts, commercial disputes, product liability, many other torts, etc.) Empty

Yes Criminal law Subset of civil cases plagued by local protectionism and similar Issues Administrative law

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activities and decisions can be more or less subject to interference from extrajudicial authorities, procedures can be more or less transparent or predictable for citizens who find themselves in court, and judgments and sentences can be enforced or carried out with greater or lesser consistency and alacrity. Whether and how other political actors interfere in their work are key questions in assessing and categorizing the functioning of legal institutions. In Table 3.1, I have tried to characterize the degree of political influence over courts’ work in different legal areas. Criminal and family law both exist largely as tools for the state to shape and control social behaviour, but criminal cases are subject to much greater political interference than most family disputes. Even when criminal outcomes are not influenced by political and legal affairs committees of the CPC (政法委), by public security organs, or by the procuratorate, criminal investigation and prosecution procedures and rules protecting the rights of the accused are routinely circumvented by extra-judicial actors – especially the police prior to handing cases over to the procuratorate. Aside from cases involving the enforcement of population control policies, it is not obvious that family law cases should be subject to any similar degree of political interference. Similarly, civil disputes related to economic activities can be divided into those that are relatively free of interference and those, especially those plagued by local protectionism, which political actors frequently seek to influence. Most often, officials insert themselves in economic disputes for personal gain, to preserve special rents or benefits for important allies, or to promote the economic development of their localities. Though such cases garner much attention in China and abroad, they clearly represent a relatively small portion of courts’ total civil caseload. Finally, administrative cases are politicized by their very nature. It is almost inconceivable that extra-judicial actors would not try to influence the procedures or outcomes of such suits. Lower-level agents have clear incentives to try to prevent plaintiffs from succeeding, while higher-level authorities intervene on citizens’ behalf with surprising frequency to preserve social order and protect the Party’s reputation. In China’s current environment, it seems unlikely that any type of law driven by principal–agent relationships could keep procedures and outcomes free from political interference. Each cell in Table 3.1 can be characterized as manifesting a distinct relationship of law and politics. Areas of the law motivated by social control and subject to intense political interference, like Chinese criminal law, represent fairly arbitrary exercise of authoritarian control and are furthest from what most Western scholars would consider a ‘rule of law’. Other areas, like Chinese family law, are examples of coercive state power applied relatively consistently and transparently in a pattern reminiscent of a ‘rule by law’ or Jiang Zemin’s favoured formulation of yi fa zhi guo (以法制国, ruling the country according to law), in which the state decrees clear regulations governing specific spheres of activity and enforces these relatively consistently

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and impartially. Law governing economic activity consistently has market development and efficiency as its central motivations, and the central question becomes one of implementation and the degree to which processes and decisions are subject to interference. Finally, politicized administrative cases help highlight divisions between levels of the Chinese state apparatus as well as the degree to which such cases depend on a system that is quite far from any apolitical ideal. That there can be many legal orders in one country is not a strikingly new observation. But China’s legal system is not just a moving target as it reforms over time. It is also a differentiated collection of subsystems that can be as different from each other as from other countries. By thinking about the Chinese legal system in such a disaggregated manner, scholars can better assess specific reforms to particular areas of the law. Eschewing monolithic characterizations, while keeping the broader lie of the land in perspective, also facilitates more incisive analysis of relations between state and society, and between law and politics at specific moments in time and points on the conceptual map. But what about within each cell in Table 3.1? How important are differences between basic-level and higher-level courts, or across regions, to say nothing of over time? Clearly, the effects of political interference or changes in the state–society dynamic at particular points in time can be different in different sorts of contexts. To illustrate this more concretely, I now turn to a case study of how urban and rural criminal courts in Southwestern China dealt with counter-revolutionary crimes during the Maoist era.

Disaggregating the effects of campaign politics on urban and rural courts: counter-revolutionary crimes in Maoist China Criminal law and the criminal process in Maoist era China have traditionally been understood as a relatively blunt instrument of repression, subject as well to the overriding influence of CPC political campaigns and ideological struggles within the ruling elite. In no area was this more pronounced than in the handling of counter-revolutionary crimes – by definition, political cases. While this general conception is certainly not without merit, it paints with very broad strokes and, I argue, masks important urban-rural variation even within this one cell of Table 3.1 to give us Table 3.2. By examining how the criminal sections of several basic-level courts, all in Southwestern China, dealt with prosecutions for counter-revolutionary crimes, I endeavour to show that there was considerable variation not just over time but also between urban and rural settings. The influence of politics on courts did not always have the same effects, even in the same region and during the same period. By looking at this example in more detail, we can see the benefits of even greater disaggregation than I have already argued for above. But it is first useful to get a clearer sense of how Maoist criminal courts and the prosecution of counter-revolutionaries have been portrayed in previous scholarship.

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Table 3.2 Functioning of basic level criminal courts during the Maoist period as seen through their handling of counter-revolutionary crimes Political campaign(s) in full force?

Urban setting

Rural setting

Yes

Politicization of the courts, reduction of normal functioning, personnel instability as purges common Relatively stable functioning of competent courts

Resources relatively more available for court operations, some politicization of cases, but much better general operation of the courts than otherwise Severe shortage of resources for basic court operations, courts unable to perform more than the most rudimentary functions

No

The classic work on Chinese criminal courts in the Maoist period, and arguably before or since, is Jerome Cohen’s (1968) The Criminal Process in the People’s Republic of China. Working from a textbook for legal cadres, a Chinese law review available in Hong Kong, and some émigré interviews, Cohen painted a remarkably detailed and accurate portrait of the Chinese criminal court system’s formal rules and institutions as established during the 1950s. Though the institutions and statutes are painstakingly reviewed over 600 pages, packed with copious footnotes and documentation, lack of direct access to Chinese courts and the unavailability of court histories or document collections limit the empirical scope of Cohen’s otherwise authoritative work. Also, the time at which his research was conducted limits the applicability of his conclusions about the Maoist era to the period before the beginning of the Great Proletarian Cultural Revolution in 1966. Stanley Lubman has also focused on criminal courts and the criminal process in China since the late 1960s. In both a 1969 article and his 1999 book, he lays out a periodization of institutional and political change (Lubman 1969: 535–75, 1999: 71–87). In the early years of the People’s Republic, Chinese criminal courts attempted to establish regular institutions and predictable procedures. Such efforts had to overcome the use of campaigns and invidious class distinctions and conflict prior to the start of the First Five Year Plan in 1953. During the 1953–57 period, courts achieved many of the aims of regularization they had been forced to keep on hold during the first four years after 1949. All this was abandoned in 1957, however, with the start of the Anti-Rightist Campaign, a forsaking of bureaucratic legal procedure for mass political movements that was only exacerbated during the Cultural Revolution years. Only after 1978 could China’s courts return to the institution-building project they had set aside in the late 1950s. Susan Trevaskes also directly addresses criminal courts in her recent book (Trevaskes 2007: 12). However, her main focus is on the post-1979 period.

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Even within this smaller period, she differentiates between the 1980s, when she claims campaigns and sentencing rallies kept criminal court work more politicized, and the more recent past, when she observes significant progress being made despite the continuing role of ‘strike hard’ waves and other political initiatives. The Maoist era, when mentioned, is usually held up only as an example of how badly courts allegedly functioned prior to reform. It is noted that judges and court leaders were uneducated and incompetent, as well as that courts lost most of their credibility as institutions of adjudication or even policy implementation (e.g. ibid.: 137–40). While Trevaskes draws heavily on the gazetteer of the Baotou Intermediate Court, her study’s narrow focus on that one locality and on the period since about 1980 detracts from its otherwise solid strength. Trevaskes’s book is also narrow in another sense in that she focuses on strike hard campaigns as pursued in a single intermediate-level court. By not paying much attention to the work of basic-level courts, especially those in rural areas, Trevaskes risks misconstruing the overall contours of the Chinese legal system. In his foundational study of the Chinese legal system, Randall Peerenboom (2002) mostly leaves aside the criminal courts. Focusing instead on the civil and administrative litigation apparatus, he argues that China has made inexorable, if slow, progress toward some ideal of a ‘rule of law’ over the past several decades. While he does not often speak directly to issues of criminal law, Peerenboom’s relatively optimistic analysis is important in that it provides a counterpoint to the arguments of other scholars who have harped on continuing problems in the administration of criminal justice in China. The principal sources I’ve relied upon to assess the handling of counterrevolutionary cases by Maoist era courts are 64 court gazetteers (法院志), published by basic, intermediate, and higher-level courts throughout China from about 1990–2006. These were compiled by court research offices at the direction of the Supreme People’s Court in Beijing. They are thus official histories in the true sense, assembled and disseminated by people inside the very institutions they chronicle. Such histories are, of course, highly problematic and cannot fully stand in for comprehensive access to original documents like case records. Such records, however, are not easily available in China and it is debatable whether selected access to records of a few individual cases could actually provide a more complete picture than the official histories do. Also, self-histories may be biased but, like autobiographies, they are not always factually incorrect. Moreover, on certain questions, such as the disposition of court work during the Great Leap Forward or the Cultural Revolution, official historians would appear to have incentives to overstate rather than understate claims that politics and mass mobilization overtook the proper functioning of legal institutions, as such a view conforms to conventional wisdom. Such overstated claims also offer a ready explanation and excuse for exceptional patterns, events and even flagrant judicial incompetence or misdeeds.

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Finally, these histories are the most complete sources yet available for scholars of this period. We do not yet have access to comprehensive court records. Interviews conducted now must ask subjects to recollect events more than 40 years after they occurred, and participants likely have even more incentives to distort past practices than court historians do. In sum, court histories represent a vast, if imperfect, untapped reservoir of data about how courts actually functioned during a key phase of Chinese political development when many have assumed they hardly functioned. By examining this record, however partially, we can begin to piece together aspects of the puzzles first identified by scholars like Cohen, but so far largely neglected in more recent analyses. Establishment of Chinese criminal courts after 1949 Compared with other basic institutions and political entities, Chinese criminal courts were established relatively late after 1949. Though scholars like Lubman have characterized the growth of criminal courts in the early 1950s as a revival or restoration, in fact, there were many areas, particularly in the countryside, that had never been served by courts before. Indeed, in the first several years of the CPC takeover, military commanders in many of these regions set up adjudication divisions within local public security bureaus rather than independent criminal courts. Until at least 1953, it was not even clear that courts would be created at the county level throughout all of China. The operation of the criminal process within the public security apparatus during these crucial early years clearly contributed to the precedent of administrative detention and reform through labour as a mainstay of Chinese criminal justice. Even after courts were granted formal authority under the 1954 PRC Constitution, it took several more years before many trials were actually processed through these new institutions. Indeed, only with the start of the Great Leap Forward in 1958 does the number of criminal prosecutions rise significantly. Though others have seen this turning point as a retreat from ‘regularization’ in the Chinese legal system, it also marks the first assertion of judicial authority in the criminal process after 1949 or in areas previously completely cut off from the formal court system. Criminal courts’ power and social position waxed and waned over the 20 years after 1958. Clearly the years of the Great Leap Forward (1958–62) and the Cultural Revolution decade (1966–76) were periods of marked politicization of the judicial process. Courts were also especially active during the Great Leap Forward and especially inactive during the Cultural Revolution, confirming at least part of the conventional wisdom on the functioning of justice and the cycles of extension and retrenchment of formal government institutions more generally during the Maoist period. The intervening years (1953–57, 1962–65, and 1976–78) were hardly free from political influence in the legal apparatus, however.

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Functioning of courts and the role of campaigns A common view of criminal courts in the Maoist period is that they served as legitimizing instruments of political implementation. This perspective emphasizes the role of mass campaigns in the criminal process and the degree to which principles like ‘strike hard’ and the mass sentencing rally continue to inform ideas of criminal justice in the People’s Republic. Such a view is too simplistic, however, especially since courts were hardly passive objects of mass campaigns. Five mass political campaigns and movements principally affected the political landscape criminal courts faced during the years from 1949–78: the campaign to suppress counter-revolutionaries (1953–54), the 3-Anti and 5-Anti Campaigns (1954–55), the Anti-Rightist Campaign (1957), the Great Leap Forward (1958–62), and the Great Proletarian Cultural Revolution (1966–76). Each of these influenced the composition and work of criminal courts in particular ways, and courts utilized aspects of the environment created by each campaign to advance specific purposes. The Campaign to Suppress Counter-Revolutionaries coincided with Chinese criminal courts’ institutional birth and structured their behaviour at a key historical moment. In cities, at least, scholars have seen this as a turning point when courts started to shun careful judicial practice in favour of enforcing class struggle. Groups were selected and pursued, convicted en masse of counter-revolutionary crimes, and given harsh sentences. In fact, many rural courts only began operating during this period, and as such they never experienced the enlightened heyday many of their urban counterparts may have. The 3-Anti and 5-Anti Campaigns further politicized justice, especially in major cities. People newly labelled as members of the bourgeoisie were persecuted and tried in increasingly fraught court proceedings. Even more importantly, some of the leading targets of these campaigns were ex-Guomindang (GMD, 国民党) officials, including most of the experienced and best-trained judges. The campaigns thus amounted to a judicial purge in urban courts, weeding out the very people who could most effectively resist the politicization of justice or the undue influence of the CPC in the criminal process. Once again, the rural experience was different. Few rural courts had ex-GMD judges and any ‘bourgeoisie’ was quite thin on the ground in most Chinese villages in the 1950s. The twin campaigns thus had very little impact on rural courts’ work. Much more important were continuing rounds of the Campaign to Suppress Counter-Revolutionaries, which courts used to expand their purview and institutional reach. The Anti-Rightist Campaign and Great Leap Forward affected both urban and rural areas. In both settings, courts dramatically stepped up their rates of prosecution and conviction. If anything though, the change seems to have been one of degree in rural areas (more cases being brought to trial); whereas a qualitative shift (from a more regularized to a more political judicial process) seems to have occurred in cities. The Anti-Rightist Campaign in

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particular also appears to have led to a similar purge of experienced urban jurists as the earlier 3-Anti and 5-Anti Campaigns. Finally, the Cultural Revolution impacted both urban and rural China, but the effects on courts were more severe in cities. During the ‘decade of chaos’ (1966–76), courts did not simply close down as some Chinese judges and scholars claim. Neither did courts stop working to the degree Western observers sometimes assume. Rural courts appear to have kept up their work without tremendous disruption. Urban courts were severely hampered in their basic tasks. Both endured a degree of political interference and social mobilization that rivalled, but did not likely surpass, the Great Leap Forward period. An important difference, however, was that during the Great Leap Forward, courts took on greater roles; whereas during the Cultural Revolution, courts’ work was frequently superseded by ‘revolutionary justice’ carried out in the street by Red Guards and other militants (see Chan in Chapter 4 in this volume). Now that the basic lie of the land has been established, it is useful to examine the handling of counter-revolutionary crimes in Southwestern Chinese basic-level courts in more detail. This analysis underscores the basic points just discussed and puts further empirical meat on the conceptual bones.

Looking at the situation on the ground: the handling of counter-revolutionary crimes Counter-revolutionary crimes are unique to formative phases in the social and political development of Communist states. During these periods, of which the Maoist era in China was certainly one, such crimes are viewed as the most socially threatening and symbolically important of offences. The proper handling of counter-revolutionary crimes is thus seen as essential in establishing the legitimate authority of the new Communist courts. In China, however, the manner in which accused counter-revolutionaries were dealt with seems to have varied significantly between urban and rural areas. The rural experience and lessons from a Yunnan County In rural courts, counter-revolutionary crimes became a catch-all label ascribed to any number of offences in a context of scarce resources and little existing institutional coherence or strength for courts. In such an environment, the politically charged atmosphere of mass campaigns and periods of upheaval provided important openings for courts to take on more assertive roles. When judges stepped over into more extreme political excesses, these were often addressed upon later internal review. Zhenxiong County is located in a mountainous part of Zhatong City, one of the poorest prefectures in China, in the Northeast corner of Yunnan Province near the border of Guizhou Province. There, Maoist campaigns appear

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to have had a very different influence from what Lubman and others describe based on evidence from big cities. Instead of degrading an otherwise developing justice system, mass movements actually helped establish the institutional capabilities of rural courts. The PLA arrived in Zhenxiong on 12 April 1950 and established the Zhenxiong County People’s Government five days later on 17 April (镇雄县 法院志: 102). The new county government did not include a formal court, but did provide for the adjudication of criminal cases through a ‘justice section’ (司法科) of the local Public Security Bureau (PSB). Not until 8 June 1951, at the height of the Campaign to Suppress Counter-Revolutionaries, was the Zhenxiong Criminal Court founded as a stand-alone institution. In the beginning, the court tried some cases, while others were handled directly by the county PSB. In fact, because it lacked the necessary personnel and its institutions were still weak, the court adjudicated very few cases before the end of 1952 (the PSB took care of nearly all of them) (ibid.: 103). It was only the Campaign against Waste and the Campaign to Suppress CounterRevolutionaries that finally brought adequate resources and prestige to the court to allow it to begin operating in earnest by early 1953. During the period from 1953 to 1957, a very high percentage of criminal cases tried were on charges of counter-revolutionary crimes (1,073 of 4,036, or 27 per cent) (ibid.: 104–5, Table 1). This would seem to undercut, at least partially, Lubman’s depiction of regularization and relative depoliticization of Chinese criminal courts during the period of the First Five Year Plan. In fact, rural courts were largely non-existent prior to 1953, and still so dependent on the PSB even after, that they apparently grasped for whatever rationale they could find to garner more resources and assert jurisdiction over larger numbers of cases. Counter-revolutionary cases shot up to unprecedented levels during the Great Leap Forward era (1958–61), and then came down sharply, before levelling off at just a few from about 1967 through 1976. These latter-day counter-revolutionary cases, however, appear to have been more political and less opportunistic than those tried in the period of the First Five-Year Plan. Once the power of the court had been successfully extended by the early 1960s, politics began increasingly to permeate its activities during later campaign periods. The Zhenxiong Court did reverse many of the most egregiously politicized decisions later on through adjudication supervision (审判监督) mechanisms (ibid.: 204–23). Specifically, investigations aimed at correcting political abuses were launched in cases from the Campaign to Suppress CounterRevolutionaries, the Great Leap Forward and the Cultural Revolution. In each case, significant numbers of convictions for counter-revolutionary crimes were overturned, but most remained on the books. The fact that most convictions stood, even when strong political incentives were directed at overturning them, suggests that some cases were less politically motivated than the literature implies.

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At the end of 1956, the Zhaotong Prefecture Intermediate Court sent a three-person investigation team to Zhenxiong to look into possible abuses during the phase of the Campaign to Suppress Counter-Revolutionaries carried out between January 1955 and August 1956. Altogether, the team reviewed 895 criminal cases – all of which involved counter-revolutionary crimes. Of these, 206 (23 per cent) were found to have problems (ibid.: 205). One entailed the application of capital punishment when it should not have been used; eight were incorrect judgements; 56 were plagued by problems in policy enforcement; 30 involved sentences that were too lenient or too harsh; there were 50 cases in which evidence was insufficient or key facts were unclear; and 55 cases in which more technical mistakes were made. All of these were overturned or revised. In 1962, on orders from the Supreme People’s Court and the Yunnan Province Higher-Level People’s Court, the Zhaotong Prefecture Intermediate Court coordinated a systematic review of all cases tried in Zhengxiong County between 1958 and 1961 – the height of the Great Leap Forward. Overall, 2,438 cases, involving 2,690 defendants, were reviewed and the convictions of 98 people were revised or overturned. Of these, 19 convicts were fully and publicly exonerated, 37 had their sentences eliminated, eight were released early, seven got reduced sentences and 18 were given probation (ibid.). The excesses were further deemed to have stemmed from an unreasonable influence of extreme leftist thinking among judges and court personnel. In particular, the mentality of ‘favouring the left and avoiding the right’ (宁左勿 右) caused jurists to act against their better instincts in politicized cases, which were allegedly those corrected under later supervision. One example of such a case was the trial of a Mr Wang, accused of hanging an image of Chairman Mao from a tree, dousing it with flammable liquid, and incinerating it. Upon subsequent investigation, it was discovered that: there were no witnesses, Wang had vehemently denied the charges, and the court could never even establish whether or not he had ever owned an image of Mao Zedong. His original five-year prison sentence was then revoked (ibid.: 206). Other problem cases involved the rehashing of old issues specific to key moments in China’s recent political history. For example, one Huang Yuangui seized land from local peasants by force five times during 1949 and 1950. Later in 1950, he registered as having admitted his crimes and reformed, disgorging many of his ill-gotten gains. In 1953, during the Land Reform Campaign, he was forced to give up most of the rest of what he had; never did he commit any further crimes. But in 1958, he was branded as a counterrevolutionary ‘land bandit’ (土匪) and sentenced to three years in prison – a sentence that was overturned in the 1962 reassessment (ibid.: 207). An even more extreme example was the case of a Mr Gan, whose thinking and words were merely ‘backwards’ and old-fashioned, but who was convicted in 1960 of wrecking the socialist system and sentenced to nine years in prison (a sentence that was thrown out two years later). His alleged crimes were utterances deemed threatening to the aims and processes of collectivization of

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agriculture. In particular, he was heard to remark in 1955 that ‘people’s communes should leave more land privately held’; in 1957 that ‘the government takes all the good grain, leaving bad grain for peasants to eat’; and in 1958 that, ‘dense planting does not yield a harvest’ (ibid.: 207–8). In the hysteria of the Great Leap, such slips of the tongue could apparently land a farmer in jail, but the worst of these cases were supposedly cleared up later (sometimes even posthumously). After the Third Plenum of the Eleventh Party Congress of the CPC, the central state and Party Centre issued a series of commands to local courts to investigate several types of politicized cases from the Cultural Revolution period. Especially of concern were those said to have been influenced by the ‘Gang of Four’ or by the frenzy to criticize Lin Biao, i.e. mostly cases from the 1970s rather than the height of the Cultural Revolution itself from 1966– 68. The Zhenxiong Court appointed two cadres to investigate, who were later joined by eight others to constitute a supervision team in March of 1979. Some 15 additional personnel were added that July and the team began work in late 1979, continuing their work on into 1980 (ibid.: 219–20). They reviewed all 354 criminal cases, involving 420 defendants, tried during the Cultural Revolution decade (1966–76). Of the 91 trials for counter-revolutionary crimes, that involved 100 defendants, 41 verdicts were allowed to stand (affecting 44 convicts). Meanwhile, 50 cases (in which 56 people had been convicted) were overturned. Included among these were 26 cases in which 27 defendants were acquitted of their crimes on review (ibid.: 220). Though fewer cases from the Cultural Revolution were revised under later supervision, compared with the Great Leap Forward, the rate at which original verdicts and sentences were overturned was much higher. Urban courts and some examples from Chengdu City Jinjiang district encompasses one of the most important industrial zones of Chengdu City, capital of Sichuan Province and a key hub of commerce, transport and culture for all of Southwest China. During most of the Mao era, today’s Jinjiang was part of the larger Dongcheng District – a sizeable chunk of the urban core of the largest city in the region. The history of the Jinjiang/ Dongcheng basic-level court diverges sharply from that of Zhenxiong County’s, even though they are both located within the same broad region of China. Proportionally, counter-revolutionary crimes constituted a smaller percentage of the total case load in Dongcheng District than in Zhenxiong County: between 1955 (when records begin) and 1976, 2,225 of 10,103 criminal cases (just over 22 per cent) involved charges of counter-revolutionary crimes (成都 市锦江区法院志 成都: 四川辞书出版社 1999: 143–4, Table 5–3). Particularly in the 1950s, a much lower proportion of prosecutions in Dongcheng were for counter-revolutionary crimes, as compared to Zhenxiong. Between July 1955 and June 1956, Dongcheng District court tried 184 counter-revolutionary cases, involving 205 defendants. All appear to have

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been convicted. Of this total, nine were sentenced to death or indefinite (life) imprisonment, 111 were sentenced to some defined period of incarceration, and 85 were ‘otherwise disposed of’ (作其他处理). Among the higher-profile cases in this period were those of a Mr Meng and a Mr Lü. Meng was accused of unspecified ‘reactionary activities’ in Dazhu County and placed on probation. He broke the terms of his probation, entering Chengdu city and persisting with his allegedly counter-revolutionary activities. He was arrested there, taken to jail, tried and sentenced to death (ibid.: 150). Lü was a regional leader of the Yiguandao Cult in Chongqing and Chengdu before 1949. After Chongqing was liberated by the PLA, he changed his name and fled, travelling to Luzhou, Neijiang, Jiang’an, Wuhan, Kunming and elsewhere to evade capture. Eventually, he grew weary of the chase and gave himself up to the Chengdu PSB in late 1954, not wanting to flee onward to Tibet. He was tried in 1955 and sentenced to three years in prison for his activities with Yiguandao (ibid.). Both these cases suggest that 1950s counter-revolutionary crimes were far more politicized in Dongcheng than in Zhenxiong. The period from 1957 through 1966 constituted a high tide for counterrevolutionary cases in Dongcheng District Court. Especially from December 1957 through to the end of 1962, the Anti-Rightist Campaign and Great Leap Forward had sufficient influence to cause the majority of criminal cases handled in the district’s 16 People’s Courthouses to revolve around counterrevolutionary crimes (ibid.: 150–1). Later, in March 1962, the Dongcheng District Court launched an investigation into how these cases were handled. In the case of the Dongjia St. Courthouse, 30 counter-revolutionary cases were examined, of which six were found to contain technical errors, four were concluded to be incorrect verdicts, and two were changed to acquittals (ibid.). In a departure from Zhenxiong’s rural experience, the ‘New 5-Anti’ and ‘Four Clean-ups’ Campaigns strongly affected court work in Dongcheng. The official court history even indicates that the court undertook massive numbers of counter-revolutionary trials so as to ‘strongly protect the smooth progress of the campaigns’ (有力地保障了运动的顺利进行) (ibid.: 151). Overall, between December 1957 and 1966, the district handled 1839 counterrevolutionary trials. During the Four Clean-ups, however, there was strong pressure to differentiate between antagonistic contradictions and contradictions among the people, so that 18 cases in 1964 that were originally classed as counter-revolutionary crimes were later changed to other charges (ibid.). One example of a counter-revolutionary case from the period was of the son of a great landlord in Fushun county, surnamed Mu. He and his father were suppressed by the new People’s government in 1950. Later, in 1962, the younger Mu came back to denounce local leaders, even crying out during his trial in 1963, ‘you killed my father, now I just want to avenge his death’ (ibid.). From 1967 until 1979, the Dongcheng Court was basically forced to apply the principles of a January 1967 circular disseminated jointly by the CPC

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Party Centre, the State Council, and the Cultural Revolution Small Group, on ‘Strengthening Public Security Work during the Great Proletarian Cultural Revolution’. This made all cases political, as did later campaigns to oppose Lin Biao, the activities of the ‘Gang of Four’, and manoeuvres against Deng Xiaoping. From 1968 to 1970, 259 people were convicted by the Dongcheng Court of counter-revolutionary crimes. Most of these verdicts were reversed upon later investigation following the Third Plenum of the Eleventh Party Congress of the CPC (ibid.). One such case that was overturned was of Liu Baoyuan, a 19-year-old peasant who fought with his father, ran away from home and had conflicts with authorities while undergoing reform through labour because he posted reactionary writings in public eating areas. He was convicted of counterrevolutionary crimes in 1976, but his deeds were later deemed to be an example of contradictions among the people and his conviction was thrown out (ibid.: 151–2). In a case originally handled less formally that was overturned, a 48-year-old worker named Li Yuanhu was given three years probation during the Anti-Rightist Campaign in 1958 because he was from a landlord family. After being ‘un-hatted’ in 1961, he continued to work at his job in the Number One Machine Tool Plant. There, he frequently expressed his dissatisfaction with the Cultural Revolution between 1967 and 1970. In March 1970, his work unit decided to make Li wear the counter-revolutionary hat once again, convicting him and supervising his subsequent behaviour through ‘mass justice’. In the following eight years, he did not commit any crimes or cause other trouble, so the Dongcheng Court ruled in August of 1978 that Li’s dissatisfaction with the Cultural Revolution was not, by itself, a crime and his conviction was overturned. Broader implications of this case study for the analysis of Chinese criminal courts Some scholars might question the importance of further disaggregation and micro-level comparison such as this. After all, Maoist era Chinese criminal courts, both urban and rural, were still highly politicized and focused almost singularly on social control. Though Chinese courts continue to be subject to CPC control and the criminal process in particular continues to be plagued by excessive political interference, the overall trajectory over the past three decades is clearly a movement toward greater regularization and predictability despite lingering problems. Additionally, the stage for reform was set long before 1979. That Chinese criminal courts often responded to campaigns and political interference with measures to enhance their own institutional capacity and bureaucratic position speaks to the fact that the judiciary was not simply the blunt instrument of state repression. Rather, almost from their inception, criminal courts laboured to carve out a space for themselves independent of the public security apparatus – a

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labour that has shown much progress, but is certainly still ongoing. That this process unfolded in dramatically different ways in rural and urban areas is important to note when examining the influence of extra-judicial organizations on courts’ work across history and in the present day. Many in China and abroad assert that criminal courts were rebuilt from scratch in 1979. This was clearly not the case, however. A strong basis was laid for reform of criminal law and the criminal process during the Maoist period through the supervision and revision of criminal cases most severely affected by political campaigns. Institutions were also well in place during Maoist era, and courts were not shut down or in shambles – even at the height of the Great Leap Forward and the Cultural Revolution – as some have claimed. What did change in 1979 were the definitions of many crimes and the new specification of economic crimes. Also, courts seemed to gain much more resources and an influx of better trained personnel in the 1980s. Finally, counter-revolutionary crimes were moved out of basic court jurisdiction and up to the intermediate court level. This, more than strike hard campaigns, might have contributed to higher rates of prosecution and conviction, and lower rates of subsequent review.

Conclusion Chinese law is no more monolithic than its Anglo-American or Continental European counterparts. By thinking systematically about the social and political functions distinct areas of Chinese law are meant to serve, we can begin to categorize them by their underlying state–society dynamics. By assessing the degree to which procedures and outcomes are subject to political interference, we can create subtypes for each dynamic that are relatively more or less politicized. This lets us see that different parts of the Chinese legal system may likely evolve along decidedly different trajectories, obviating many macro debates about the overall course of legal reform. Understanding that criminal and family law are never likely to be free of their social control dynamic, but that criminal law in the Chinese political system is subject to much greater extrajudicial interference, for example, takes us part of the way toward a systematic mapping of the contours and interactions of Chinese law, politics and society. While further study and more careful conceptual clarification of each subtype are naturally still needed, the basic way forward is clear. Even within each subtype, however, there is likely to be significant variation across local contexts in terms of the social and political effects that patterns of judicial behaviour and courts’ interaction with the state and Party apparatus are likely to have. Looking at the case of counter-revolutionary crimes during the Maoist period, we can see that even in the most extreme subtype of politicized social control, there were differentiated urban and rural effects of mass campaign politics on the court system and judicial

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outcomes. Similarly disaggregating each cell of Table 3.2 across place and over time is likely to yield similarly rich variation. Only by both appreciating such variety and simultaneously placing micro-level findings into broader conceptual contexts can we move toward a more productive discussion of China’s continuing legal development and change.

Note 1 For a useful corrective to the over-emphasis of Anglo-American teleology in this debate, see (Clarke 1998–99: 49–62).

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Power narratives and lessons from the Chinese Cultural Revolution Paradoxical backdrop to market liberalization and law reform Andrew Chan

Introduction: power narratives China celebrated the 60th birthday of the People’s Republic in October 2009. At the heart of the celebration were reminders from the CPC leadership: of the leaders whose greatness lay in being visionaries for the nation; of the people’s solidarity which transformed a country; of the achieved economic prosperity that has propelled China into a global force, and of the need to continue trusting China’s leaders for the advancement of their homeland. These reminders, encased in ‘power narratives’, relate history from the perspective of today’s CPC. This chapter examines the validity of these power narratives and their influence on China’s contemporary reform agenda, and specifically to review the lessons that may be taken from China’s history and the Cultural Revolution years. Examining the lessons of the Great Proletarian Cultural Revolution (GPCR) has not been an easy task. Many have asked me why I want to rake over the ashes of those tragic years. What is the point of stirring old ghosts that may be better left at peace? How will looking at those years help when China has become more prosperous and an apparent economic miracle has taken place since the policy of reform and opening up was introduced? Why should I re-open wounds that may not yet be fully healed? The point is, of course, that much in history repeats itself; and a never-ending challenge is to accept the lessons of history so as to avoid past mistakes. As Marx once noted: Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past. The tradition of all dead generations weighs like a nightmare on the brains of the living. (Marx 1852) In the 30 years since Deng Xiaoping began the process of reform and opening up, China has experienced radical reform. China is currently the third largest

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economy in the world, and accounts for approximately 20 per cent of the world’s population.1 Global leaders now vie for China’s critical support on issues ranging from trade currency to climate change. China’s internal evolution continues and has reforms afoot in almost all key areas of law, finance, community, environment, manufacturing, business regulation and anti-corruption. China’s history, indeed world history, teaches that people as a collective should not blindly follow leaders. The power is in the collective which can leverage a multiplier effect to compel revolutionary change. The ideal of socialism rejects capitalism as the latter is viewed as concentrating benefits for the few from the toil of many. Is the CPC’s ‘socialism with Chinese characteristics’ achieving equality for the masses? Does economic prosperity justify the consequences of reform evolution occurring in China? What is, or are the ultimate goals? China’s third revision of its Patent Law, which took effect in 1 October 2009, is evidence of continuing civil and commercial legal evolution further strengthening the framework for efficient enterprise. At the same time there are millions of ‘Ant Tribe’ workers and ‘Bare Branches’ (guang gun) striving to yet be included in China’s economic prosperity (Lian 2009). Reform evolution is progressive. In 2004, the Constitution was amended to validate entrepreneurs as ‘builders of the socialist cause’. The CPC has evolved from Mao Zedong’s regime that ruthlessly exterminated intellectuals, to Deng Xiaoping’s back breaking vision of China becoming the workshop of the world, to the current CPC’s policies which encourage building intellectual capital to guide sustainable economic growth. Can intellectual capital be effective in its pursuit without corresponding agendas of political, civil liberties and judicial reform? Can the current CPC succeed where its predecessors have failed, in containing development of the population’s rights-consciousness? The CPC’s October celebration created awe without the shock, unless the shock was in the scientific demonstration of propaganda. President Hu Jintao stated clearly in his speech that the people must adhere to the leadership of the Party. How effective is leadership without a following? The fruits of market liberalization were realized from the sacrifices of millions. For example, millions have lost their livelihood from rationalization of the stateowned enterprise (SOE) system. Yet it was the system that was faulty, not the people. There is a real danger of creating a social class of victims if, in the reformation process, ‘rhetoric’ prevails over ‘justice’.2 A wide range of views/predictions about China’s future exist. On the one hand, there are ‘prophecy writings’ such as ‘the coming collapse of China’ (Chang 2001), ‘fifty fault lines on the face of China’ (Marriott and Lacroix 2009) and, on the other, there are predictions of democratic reform as an inevitable consequence of the market liberalization. This chapter considers these prospects and argues it is more likely there will be ultra-stability in China over the next 50 years. This assessment is based on lessons learned in

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the Chinese Cultural Revolution and the CPC’s remarkable past record and skilled practices of historiography.

Lessons from the past Doing historiography Narrative, or retelling of experience of the past, is a speech act of political identity or identification with a widely held system of political beliefs and socio-cultural values that enables people to make sense of events and their connections to the other nodes of understanding around them. To paraphrase discourse analysts, ‘speech acts’ are both political and practical. They help people make sense of both the events and the people around them. Deng Xiaoping’s reform speeches, for instance, are post-Mao and neo-liberal (Wang 2004). His meta-narratives are in fact discourses that sustain the accepted view (or the legitimization) of ‘sayings’ of the Great Leaders (such as that ‘the wealth and power of a few is acceptable at the expense of many’). Meta-narrative, as the term is used in critical theory (and more recently postmodern social theory), refers to an abstract idea that is thought to be a comprehensive explanation of historical knowledge. Marxism is an example of a meta-narrative that encompasses and explains other ‘little stories’ within a totalizing scheme. It was precisely such a meta-narrative that legitimized, at the time, the deeds carried out in the name of the Chinese Cultural Revolution in the mid-1960s. Deng’s new narrative changed all that around. Deng’s famous aphorisms: ‘feeling for stones as one crosses the river’, and ‘socialism with Chinese characteristics’, are held up as guiding principles of socialist reform in China. At the same time it has been a strategy of ‘spin’ – addressing the (as yet) unaccomplished project of communism/socialism. As such, Chinese reform is sustained by a meta-narrative and discourse (legitimized by an unquestioned assumption) about the acceptance of necessary evils and the inconvenience on the pathway (or crossing the river) to economic prosperity (i.e. capitalism with Chinese characteristics). But it is worth noting the ‘macro-historical argument’ of Gao (2008) who pointed out that upon Deng Xiaoping coming to power, his elites were eager to ‘periodize’ the GPCR to have ended no earlier than 1976 and that the GPCR was a ‘tenyear calamity’ (shi nian hao jie) ending when Mao Zedong died. Deng’s reform policy is widely heralded as a stroke of genius and, along with China’s 2001 entry into WTO, chimes with the Western hope for an end to a 200 plusyear wait for China to open up and ‘join the club’ (of developed nations). Shaping the ways people think The ways in which intellectuals, ruling elites and the CPC propaganda machinery shape how people think, fashion and instill values among the population have been well documented (by among others, Spence 1999; MacFarquhar and

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Schoenhals 2006; Gao 2008: 182–3; Wang 2003). This fashioning is also a political ‘speech act’. The act works by talking, thinking, writing about, and deliberating on viewpoints and opinions that inform and shape the present. It has a real effect on people! Statesmen, officials, intellectuals, business men, corporations, CEO’s investors, managers, and commoners alike are constantly interpreting the present status quo and future possibilities. In the most calamitous days of the Cultural Revolution – between 1966–69 – people chanted homilies and platitudes of Mao Zedong’s Thoughts. At the end of one’s tether, ‘thinking’ stopped; irrationality slipped in. The scene in the GPCR between 1966–68 became a cauldron characterized by lack of reflection and thoughtlessness, die-hard patriotism, glaring campaigns (e.g. ‘kill the hen to frighten the monkey’) that frightened people into avid compliance. These characteristics were coupled with official stigmatization for groups labelled as ‘cadres’, ‘proletariats’, ‘rightists’ and ‘capitalists’, deference to recalcitrant patriarchy, and official mandates tolerating rebellious students like Kuai Dafu, careerists like Nie Yuanzi, or like cotton mill security guard cum radical-fighter turned CPC Vice-Chairman (personally groomed by Mao as a possible successor) Wang Hongwen. Mao later admitted, in December 1970, to American journalist Edgar Snow these times were like ‘all-round civil war’ (quanmian neizhan).3 There was little self-reflection about the state of the nation during the heights of GPCR between 1966–69. The lack of reflection and self-reflection is one of the significant lessons of this period. Yet ironies remain present in today’s reforms with a hint that not all these lessons were absorbed. In retelling and writing over history in ways that give advantage to, and privilege certain actors, there is the paradox of sustaining values and identities in society (the new rich) at the expense of the disenfranchised. That history can repeat itself is not a new concept. As Guo points out in Chapter 2, in traditional Confucian historiography, court historiographers summarized the immediate past dynasty power-holder in order to extend, redirect, or correct, justify and legitimize current rules and regulations – as deemed correct in the situation. A moral tale has to be told that legitimizes and glorifies the virtues of a ‘present history’ – in order to shrug off the mistakes of the previous dynasty (Burrell 1998). In recent times, the Chinese ruling elite at virtually every level has been competing to lure foreign capital – through giving privileged treatment to capital investment and development. As a self-proclaimed socialist party state, the glaring difference between ‘preaching’ and ‘doing’ is upfront dissonance. Perhaps this is what Deng foresaw when he mentioned the need for patience and tolerance as the new entrepreneurs of socialism ‘felt for stones as they crossed the river’. But a programme or script plot was needed to put the disquiet about the changes into perspective. It was important to retain sobriety and ‘common sense’. It no longer mattered ‘if the cat was black or white as long as it could catch mice!’ Some commentators have criticized this ‘split personality’ of the CPC, predicting internal discontent will one day

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reach the tolerance threshold leading to peasant uprising, urban unrest and massive hatred for the rich. It has happened before! The Chinese authorities have vast experience of sustaining stability against all odds. Again, this is precisely why we have to learn from the lessons of the Cultural Revolution. At that time, conditions were so poor that Mao himself admitted this. Conditions were being very slowly smoothed over. With such experience behind it, the CPC can handle virtually any major internal unrest (with limited casualties)!

Popular beliefs about reform and opening A certain justification (or story) to make sense of what one preaches and what one does is not a new phenomenon. For instance, at present the government is working hard to promote its new Labour Laws to protect workers and especially the vulnerable migrant workers (see Kay-Wah Chan in Chapter 8 in this volume). There has been, however, a tendency for the government to stand on the side of capital when it comes up against a labour dispute. There are many case studies that demonstrate the dismal working conditions of migrant workers, and enterprises not taking steps to improve working hours and conditions but exploiting the workers. At the same time there has also been a tremendous amount of wealth transfer from the state to the private sector. Together, these forces of labour exploitation and wealth transfer have fuelled negative perceptions about those beneficiaries who possess the connections (guanxi) with the establishment, or were simply those who held political power themselves (or their families). Yang (2007), for example, points out that the many state employees holding government managerial and professional positions became private enterprise owners when SOEs were transferred to the private economy (see also Gao 2008: 184). This phenomenon of the emergence of a ‘class of newly rich’ was also generated by historical circumstances ‘by which various levels of political and economic elites could be combined into one’ (Wang 2003: 83). This book refers to this as a wealth/power nexus. Wang Hui (2003), widely acknowledged as one of the sharpest observers of contemporary Chinese politics, comments that such ‘uneven conditions created anew social and class polarization – which contained within it the seeds of long-term social crisis’ (ibid.: 83). It has been a very widely held belief that China’s reforms dated from 1978, and that these changes were caused by the policies of Deng Xiaoping. This is also the preferred party-line of the Chinese government. There are good reasons for this. However, despite popular belief, Meisner (1999), Feigon (2002) and Gao (2008) have argued that the seeds of reform were actually sown in the late 1960s – during the most tumultuous years of the Cultural Revolution. Reform commenced earlier than 1978. Many observers in Western countries (and indeed some Chinese commentators) are perplexed as to why Mao’s cult continued in China despite his fatal (and catastrophic) errors. Why is his birthday still celebrated each year among commoners in mainland

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China? Of course, Chinese people cannot be so easily duped; there must have been some thing(s) that Mao got right! (See Feigon, 2002; Gao 2008.) Those who got rich first ‘Wealth hatred’ is an issue in China. But how does one recognize hatred? The following is a news story of a commonplace incident in present-day China that sharply highlights the sense of antagonism towards the new rich. It is a highly flammable situation that some media commentators assert has the potential to affect China’s future stability: The Washington Post (Choy 2005) and Reuters (2005) carried the following report: CHIZHOU, China – Liu Liang, a slightly built computer student with big glasses, was home in Chizhou for summer vacation. At about 2:30 on the hot afternoon of June 26, 2005 he was pedaling his bicycle by the downtown vegetable market on Cuibai Street. Driving down the same street in his new-looking black Toyota sedan was Wu Junxing, deputy manager of a hospital in nearby Anqing. Wu, accompanied by a friend and two bodyguards, had come to Chizhou that day to attend opening ceremonies of a new private hospital and, associates said, survey the market to judge whether he should invest in his own facility. Liu’s bicycle and Wu’s shiny four-door sedan collided, sending Liu crashing to the ground. Almost immediately, witnesses said, Liu, 22, and Wu, 34, began arguing over who was at fault. In the heat of the dispute, they said, Liu damaged one of Wu’s side-view mirrors, prompting Wu’s muscular bodyguards to burst from the car and beat the skinny young man senseless, leaving him bleeding from his mouth and ears. A rumor spread that Liu had been beaten to death, and tens of thousands of local residents surrounded the police station where Wu was detained. The protesters demanded that the police handover the detainee because they believe the police were protecting the rich. The beating, part of a minor traffic incident on a slow Sunday afternoon, ignited a spark of anger. Mr. Wu was alleged to have declared that it did not matter if Liu was beaten to death – all he had to do was to pay RMB 300,000. When the police refused the demand to turn over Wu, some of the protesters turned the Toyota over and burned it and another police car. They proceeded to burn the police station and robbed a supermarket because its boss was rumored to have given soft drinks to the police. By the end of the evening, 10,000 Chizhou residents had filled the streets, some of whom torched police cars, pelted overwhelmed anti-riot troops with stones and looted a nearby supermarket bare. The spark between perceived rich hatred became a riot, evolving over eight chaotic hours into an expression of rage against the Chinese Communist Party’s new fascination with businessmen, profits and economic growth.

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This type of populist press coverage raises some underlying questions. What, for instance, spurs this kind of gross and atrocious trespass and condescension of human dignity? While reports in Western media carry stories like these – with an undertone of condescension and perhaps even quiet mockery – such incidents are not uncommon. As Hu points out in Chapter 10 in this volume, such episodes of mistrust and hatred for the rich partly explain the dissatisfaction of common people towards the elite class, ruling elites and elite cadres who have close connections with the wealth production machine. Wealth hatred and hatred for the wealthy and powerful inner cliques of those who grew rich first were, according to Marriott and Lacroix (2009), sources of unrest. They assert that some wealthy officials hold an elitistintellectuals’ distrust of the commoner, of backward states and of peasants. This view is essentially that the upper classes hold condescending views of lower-class people. Of course, such views would be in contrast to the stated socialist policies and state goals for a harmonious society. But those who got rich first are perceived to have come from ‘privileged-cadres families’. This is well documented by Gao (2008) who argues that these elites appear as nontrusting custodians over the people of China. He asserts that unlike the time when Mao was in charge and presented as ‘caring about the underprivileged’, the post-Deng beneficiaries do not want a Maoist-kind of ‘radical democracy’, broadly construed as enabling people (especially the underprivileged proletariat, women and disenfranchised) to ‘have a say’. This approach is no longer in their interests. One is best sensitized to the knowledge that contemporary Chinese politics/history has its contradictions and paradoxes. The CPC has, for example, the creative ability to paint and repaint (or paint over) the canvass of popular opinion and public discourse (including CPC history). In a sense it can be likened to the repainting and painting over of the picture of Dorian Gray (by Oscar Wilde). History is indeed written by the victors. In the caves of Yan’an in the 1930s, Mao learnt from Stalin who ‘wrote over’ the Soviet Communist Party history. With his own version, so too did Mao. Ironically, like the predicaments of many outgoing emperors before him, Mao’s successors rewrote history for him! They attributed, to an extent, the 10-year (1966–76) calamity of the Cultural Revolution to him (and ‘scapegoated’ the notorious Gang of Four). The fatal error of Comrade Mao, who ironically appears to have deviated from his own ‘MZD thoughts’, was to waste China (and its people) for 10 years (1966–76). This is the official PRC Party-state authoritative CPC (1981) assessment of the period over which the Cultural Revolution took place.4 Some scholars now assert it may have only lasted for three years or even less. The post-Mao leadership has had to write over the Party history to foreground Deng Xiaoping’s contributions and legitimize the new Party line. The Chinese ‘reform thesis’ – as a result of openness – is a discourse which has gained legitimacy as a result of the CPC’s extraordinary economic successes over the past 30 years. It has also entailed some rewriting of history. Given

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my thesis is on ‘the lessons of the GPCR’, it must be asked: Will history need further revisions? Will the new laws be re-reformed? Will the skills of contemporary historiographers again come into play to foreground emerging leaders? These are the questions of the following section that examines in greater depth the valuable learning from the Chinese Cultural Revolution.

The power narratives of the Chinese Cultural Revolution Throughout China’s summer of 1967, rival groups of pro-Mao, anti-Liu, pro-Liu, and anti-Mao followers fought each other as well as the People’s Liberation Army (PLA). Initially the factions used cudgels and knives, but later moved to machine guns and artillery seized from PLA (see Spence 1990: 609–13; Perry and Li 1997: 119–44; MacFarquhar and Schoenhals 2006: 199– 220). Between 1966–69, incidents of beatings, torture, round-the-clock group interrogations, lootings, withholding of food and many types of ill treatment were initiated by Red Guards – quasi-militia of young people organized at the local communal level.5 These treatments were imposed on those identified as being on the wrong side of Communist ‘red categories’, for example, ‘capitalist roaders’, ‘counter-revolutionaries’, ‘ox-demons’ and ‘snake-spirits’. Mao Zedong, in the initial phase of the revolution (August 1966–January 1967), permitted young students in middle schools – whose fathers belonged to privileged classes of the militia and high cadres – to organize a revolutionary Red Guards movement, using their unquestioned worship of him to battle for his cause. The Cultural Revolution occurred at a time when Mao’s authority as Chairman of the Communist Party was seen by most Western sources including Spence (1990, 1999), MacFarquhar and Schoenhals (2006), Short (2000) as ‘insecure’ (except, for example, Teiwes (1997) who argues that Mao’s positional authority was not insecure). The Cultural Revolution was preceded by the disastrous Great Leap Forward initiated by Mao in 1958, and carried out under the auspice of Zhou Enlai, Liu Shaoqi and Deng Xiaoping. This reform weakened Mao’s credibility when the masses had done as Mao and his team had demanded – to achieve an overly optimistic national steel production volume that would surpass that of the UK in less than a decade using locally made backyard furnaces. Huge ‘People’s Communes’ were formed, each with an average of 5,000 households. Their backyard furnaces were fed scrap metal. By 1958, approximately 25,000 communes had been set up throughout China. Male peasants were enlisted, leaving many fields unattended and the outcomes failed miserably, leading to famine as crop yield was so badly affected. The results of the Great Leap Forward were loads of substandard metal; devastation of the natural environment (as trees were consumed in the furnaces) and subsequent soil degradation (as surface retention of water had been destroyed), and a diversion of the peasantry from its previous agrarian activities. By 1961, Mao’s vision was revised and he stepped into the background of the CPC, holding the title of Chairman, wherein the state’s

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helmsmen were Li Shaoqi (as President of People’s Republic of China and Vice Chairman of the Chinese Communist Party) and Deng Xiaoping (as Chinese Communist Party General Secretary). Labelling people: Red Five/Black Seven Between 1966–68, under the stigmatization sanctioned by the leadership of ‘Red Five’ categories (workers, poor and lower-middle peasants, revolutionary cadres, revolutionary soldiers, and revolutionary martyrs), the offspring of good class backgrounds were deemed ‘politically reliable’. Those of people of bad class backgrounds were not. The ‘Black Seven’ categories were landlords, rich farmers, reactionaries, bad elements, right-wingers, traitors and spies. Coupled with the ‘blood pedigree’ theory that Red Guards used as a guiding principle of binary categorizations, these labels helped to constitute ‘status groups’ conscious of shared interests. This was exemplified in a couplet which can be translated thus: ‘If the father’s a hero, the son’s a good chap; if the father’s a reactionary, the son’s a scoundrel.’ People with diverse backgrounds, whether they had politically correct backgrounds through family ties, people in grey classes with political problems, or the under-privileged, began to seek asylum in favourable labels and found excuses for eradicating those whom they labelled as outcasts and targets for class struggle, or ‘Others’ using poststructuralist terminology. At its height, the blood pedigree theory made familial ties the sole test of socio-political acceptability. Entering shops, boarding trains, going to clinics, and so on, all needed a declaration of one’s family background. Those who spoke truthfully of their background of relative privilege were instantly dismissed. For example, hospital medical staff were simply forced to leave sick and injured patients unattended. Those who could flatly say: ‘We are workers!’ passed through unquestioned (Yan and Gao 1996: 104). ‘MZD thought’: Four Olds/Four News At one stage of its development, the Cultural Revolution manifested a movement targeted at ‘Destroying the Four Olds and Establishing the Four News’, being: new ideology, new culture, new customs, and new habits. Fired by the cult of personality, Mao sought to appeal to the masses – especially the young – over the heads of the Party and local officials in order to use them to purge his opponents. ‘Mao Zedong thought’, as expressed in the Little Red Book, or Quotations from Chairman Mao (Mao 1964), was a chief instrument in his strategy. These quotations were a collection of speeches, platitudes, and rants composed by Mao and read and chanted, as a form of drill by the Red Guards (Chan and Clegg 2007). Part of the Red Guards’ aim was to reform all feudal, capitalist, bureaucratic, and revisionist institutions. Mao raised hell as a means to teach his people ‘radical democracy’ and at the same time to unsettle the (grossly corrupt)

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inbred class of privileged bureaucrats within his Party. Mao had observed Nikita Khrushchev’s denouncement and discrediting of Joseph Stalin once the dictator died. Alarmed a similar predicament might befall him, and increasingly disillusioned with the revisionism of the new Soviet leadership in 1963, Mao sought to stop his own Party from following the Soviet-style revisionist line. Mao’s revolutionary instinct told him he needed to launch a permanent state of revolution throughout the country in order to leverage public sentiment to struggle and overthrow his perceived opponents. Hence the formation of the ‘Red Guards’ and accompanying power narratives. ‘Zaofan’: to rebel is justified In order to realize his ideal of a permanent revolution, Mao followed his welltested tactic of campaign and mass struggle – arguing all truths of Marxism could be summed up in one sentence: ‘To rebel (zaofan) is justified.’ Mao’s tactical vision of ‘mass struggle’ (or the ‘means’ to the ‘end’, i.e. purging what he envisioned to be corrupted revisionist classes within the CPC) of the GPCR was that it should overthrow old ideology, old culture, old customs, and old habits, to completely smash the bourgeoisie for a cause that was much larger than life.6 The Red Guards became widely acknowledged within the nation and news of their existence spread worldwide in the summer of 1966. Mass rallies were held to affirm the correctness of Mao Zedong thought. The eight ‘meetings’ with Mao Zedong in Tiananmen Square were attended by an estimated eleven million people who flocked to Beijing from around China between mid-August and late-November 1966 (Figure 4.1). In turn, students travelled to the countryside in squads – free train travel was made available – to spread the word of the Cultural Revolution. Maoist thought was an institutional fashion with many ramifications. Youths, both male and female, wore Mao Zedong jackets and trousers. Shanghai barbers, under the command of Red Guards proposed stopping all ‘gangster’ and ‘Hong Kong’ haircuts and cancelling such ‘capitalist’ services as manicures, facials and massages. The dental sections of hospitals stopped cleaning teeth. Many Chinese cities, including Wuhan, Huangzhou, Guangzhou, Harbin, Tianjing, Changchun, Ji’nan, Shenyang, as well as Tibet, all experienced the ‘Destroy the Four Olds’ action of the Red Guards. Its ripples spread to Hong Kong where there were demonstrations and attacks on factory bosses. Ethnic-sounding personal names and place names in Inner Mongolia, Xinjiang and Tibet were changed to designations such as ‘worker-peasant-soldier’, and ‘resist America’. Street names, store names, trademarks, names of halls and residences, even names of dishes could trigger the edginess, impatience and intolerance of Red Guards, and were all revolutionized (Yan and Gao 1996: 66). As the colour red stood for revolution and ‘left’ signified progress, the Red Guards disputed prevailing traffic regulations and insisted on red as the ‘go’ sign and traffic changing from right to left. This last request was tactfully handled and turned down by Zhou Enlai.

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Figure 4.1 Cultural Revolution and the Red Guards. Mao became an icon against the People’s enemies; demonstrations were attended by 11 million people in Tiananmen Square between August and November 1966. Source: Chinaspot.org.

Anti-Mao suspects Foreigners were particularly suspected of being ‘anti-Mao’. On 24 August 1966, Red Guards, who were directly supported by the Central Small Group and Public Security Bureau (PSB), stormed into Beijing’s Saint Mary’s Franciscan nunnery and drove out the Catholic nuns, who were, according to the PSB, ‘in religious garb but active as spies’. The convent was closed two days later and the PSB publicly issued the banishment order with slogans such as: ‘Scram, you counter-revolutionary foreign nuns’ (Yan and Gao 1996: 69) (Figure 4.2). Eight foreign nuns were deported.

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Figure 4.2 Franciscan nuns denounced in front of their Beijing nunnery on 24 August 1966.

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In a ‘manifesto’ by the Beijing No. 26 Middle School Red Guards entitled One Hundred Items for Destroying the Old and Establishing the New, samples of these strategies for establishing the new are shown. 32. Laundries must cease washing pants, stockings, and handkerchiefs for those bourgeoisie wives, misses, and young gentlemen and completely crush their stuck-up airs. 51. The bastards of the bourgeoisie are not permitted to occupy a large number of houses, the minimum limit being three persons to one room. 56. Wrestling areas throughout the country will be disbanded, and the wrestlers will go to police stations to register for participation in labor. 65. The family head system shall be destroyed, and children may make suggestions to grown-ups. 85. Sofas, couches, etc., may not be produced in great quantities. 86. Expensive articles such as gold pens etc. shall not be produced in great quantities (except for export) because they do not serve the broad worker, peasant, soldier masses. 89. When prescribing medicine, doctors must destroy the Western framework of writing in English and clearly explain the type of medicine prescribed. Their signatures have to be legible. 95. Those who have names with feudal bourgeois overtones will voluntarily go to police stations to change their names. (Schoenhals 1996: 213–22) The unconstitutional, lawless acts of the Red Guards in 1966, and the factional strife between groups and other organizations between 1967 and 1968 created bleak conditions across all China. For those identified as being on the wrong side of the red categories, torture, beatings, sleep deprivation, roundthe-clock group interrogations, withholding of food, and many types of punishment without any proper court procedures or rules of procedural fairness were initiated, including confiscation of homes and property. An estimated one-third of Beijing’s homes were ransacked. At least a hundred of Beijing University’s staff (of more than 2,000 faculty) found their homes confiscated without trial. By the end of September 1966, those who were branded as a Black Five Category were simply driven out of Beijing. The Red Guards confiscated gold, silver and precious jewellery from those denounced and driven out. The labelling narrative justified extraordinary oppression. Here are extracts (translated) from Chinese big-character posters written by teachers and students who themselves either took part in or witnessed violence in the Jianguang Junior Middle School. These were published by the New Beijing University ‘Smile Mingling in Their Midst’ Combat Team, and edited and published in Shanghai in 1967 as How Was the Young Teacher Bei Guancheng from Jianguang Middle School Forced to Die? What happened occurred with the blessing of top authorities and escalated the purge with a decree that the army and police must not intervene against the so-called Red youngsters:

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Investigation into the Bei Guancheng Incident Eyewitness accounts Eyewitness 1 Fei Zhensheng (elderly staff worker) I saw some twenty students surrounding Bei Guancheng on the terrace of Building No. 5. Three or four students were beating him up. He did not utter a sound, but just let them go on beating him. A student by the name of XXX was most vicious and threw Bei to the concrete floor maybe five or six times. At one point he was laying face-up when students led by XXX stepped forward to slap him in the face for about two minutes. They took turns, one taking over when the other had to rest, their slapping producing a sound like exploding firecrackers. Eyewitness 2 Chen Dongsheng (teacher) and Liu Xueqing (Red Guard) The students were violently beating and kicking Bei Guancheng. Finally, they dragged him off to the ping-pong table and propped him up against it, his arms and legs already limp . . . from afar you could hear the noise and the ‘slam, bam, slam, bam’ sound of him being beaten. Then the students ordered Bei Guancheng to lift his arms and lower his head and admit to being a counter-revolutionary, an ox-monster and a snake-demon. Eyewitness 3 Chen Yong (Red Guard in the first grade, class 1) Bei Guancheng was dragged off by us to the roof of Building No. 5 to be given a beating. I said we should not beat him, but student XXX said that the leader of the Red Guards had said: ‘You just go ahead and beat him up. Even if you kill him, you won’t be held responsible.’ Words like that actually gave us the courage, ordering us to go and beat him, which is what we did next. In the course of the beating, student XXX tried to force Bei Guancheng to commit suicide by jumping off the roof, but I pleaded with him, ‘What if he commits suicide and drags you with him? You’d die too.’ Because I said that, students XXX and XXX no longer tried to force him to commit suicide by jumping off the roof. (ibid.: 166–9) Leaders at the pinnacle of the CPC closest to Mao sanctioned the military and the police to refrain from restricting Red Guards from carrying out beatings and killings of anyone deemed to be a ‘dubious element’. During the GPCR, school headmasters and teachers, intellectuals, factory managers and others were stigmatized as rightists, revisionists and hence enemies of the People. The grievances of people surfaced and, in increasingly chaotic conditions, factional

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struggles, armed combats occurred throughout China between mid-1967 to 1969. Factions were formed with their own objectives (pro-Mao, anti-Mao or pro-Liu, and so on), and there were adult workers and white-collar workers who opposed neither Mao and Liu, and a few who even opposed both Mao and Liu. Generally two big feuding factions in these countrywide factional struggles were called ‘rebels’ and ‘conservatives’; and both had their foundations in grass-root units. The small groupings in schools, industrial and commercial enterprises, and factories were ‘cells’ of these two big umbrella factions active in society. The terminology was not merely descriptive. It was used to sanction Red responses. It was necessary to criticize and to struggle against ‘capitalist roaders’ and ‘part-cadres’ who formed the ‘new-born bureaucratic class’ within the Party. According to Mao, revisionist trajectories deviated from Mao Zedong’s revolutionary line and must be crushed. Liu Shaoqi, as Number 1 capitalist roader, was struggled against and so were his followers including Party First Secretaries and committee members. Following such ‘logic’, the First Secretaries of many provincial party committees were all made targets of public criticism. Those under them were also subjected to criticisms of the masses who had been mobilized to rebel – on the basis of enforcing MZD thought. Some Party secretaries and cadres were forced to confess their ‘sins’ in public hearings that were held at factory front-gates, school yards, and hotel entrances. On the commoner level, factory workers throughout China were affected by the waves of political movement that swept around them. Realizing it would be insufficient to rely solely on students to ‘raise hell’, Mao’s thinktank decided to ignite workers as well. In mid-November 1966, Mao’s Central Cultural Revolution Group issued the ‘12-point Decision Regarding the Cultural Revolution in Factories and Mines (Draft)’ – permitting students to visit all factories to mobilize the workers. On December 12, the Red Flag published an editorial that said: ‘The broad ranks of revolutionary workers now rise and go in for the Great Proletarian Revolution. The joining of forces of the revolutionary students and broad masses of workers marks a new beginning.’ Large factories, with 2,000 or more people, had a bureaucratic set-up and ‘conservatives’ of the old order were often powerful and stable. Typically, a factory director and a Party secretary would have been veterans of the AntiJapanese War or the Civil War – with many followers. Liu’s (1987: 75–6) analysis suggests that ‘rebel’ workers in these factories therefore often found themselves in confrontation with over 1,000 co-workers. In smaller factories of 200 people or less, there were fewer cadres in factory Party committees, political departments, trade unions, youth and women’s associations, and factory directors and Party secretaries were more likely low-ranking cadres without many followers. It was thus easier for the 50 rebel workers to make rebellion and class struggle in a small factory setting because there ‘conservative’ forces were weaker.

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Of the five Red categories, some who were progressive politically or ‘careerist’, came together to form their own organizations. A range of civilian organizations with different aims and objectives formed. Some were considered at that time to comprise people of ‘lower political quality’ who had suffered at the hands of the factory leadership. Liu (ibid.: 44) points out that these may have included, for example, people who had previously shown ‘little enthusiasm’ or had kept the Party organization and affairs at arm’s length. They may, however, have had ‘clashes with authorities’, ‘personal conflicts’, grievances, factional strife, and then rose to engage in political struggle by joining a faction – calling themselves ‘proletarian revolutionaries’, ‘revolutionary rebels’ or ‘rebels’ (depending on their own agendas). Because workers in factories were mobilized to join the criticism of the bourgeois reactionary line, cadres in factories at different levels found themselves for the first time on the defensive. They were deprived of their prestige and had to submit to the clamour of the masses. In an unprecedented climate of ‘democracy’, previously silenced yearnings and demands gushed out as if a floodgate had been opened. The upheld wage freeze, subsidies and employment disputes, overdue overtime compensations, issues over the assignments of factory dormitories, dissatisfactions over contract terms, fringe benefits and labour insurance problems were all magnified as well as transmogrified. Once the masses in one factory rose in rebellion, news swiftly spread to other units and other worker groups followed suit with fierce fighting often ending up with people beaten to death or left permanently crippled. In one of the relatively ‘tamer’ battles between fellow-factory workers that took place in factories all over China on 4 August 1967, Perry and Li (1997: 140–1) report on strife between members of the Lian Si worker group and the forces of the Shanghai Workers’ General Headquarters as follows: [H]undreds of thousands of combatants converged to encircle the Shanghai Diesel Engine Factory. Shanghai’s second large-scale armed battle began at 10 am and lasted until 6 pm. In comparison to what was happening elsewhere in China, the battles of Shanghai were remarkably tame . . . casualties were modest by national standards . . . Combatants were limited to spears, iron bars, catapults, high-pressure hoses, and homemade bottle bombs. Even so, hundreds of workers were injured in the assault and many became permanently crippled . . . Production was halted for two months, with a loss of production, and a loss in profits, as well as a loss of 3.55 million yuan in materials and 148,000 yuan in repairs to factory equipment and buildings.

Conclusion and lessons Some 44 years later in 2010, the derelict strip of factories in Shanghai Jing An district, and many other deserted factory sites in Greater Shanghai and

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Greater Beijing (such as Dashanzi District 798 Art Zone), have been turned into clusters of art galleries, stylish fusion-cuisine restaurants, bohemian bars and retro-cafes. Entrepreneurs now coordinate with municipal government regeneration policy, promoting selling points of property such as: ‘the SOHO look’, ‘with loft space and tall ceilings’, ‘vast interiors’ – characterized as ‘space for consumption’. The fashionable shopping districts of new urban developments are now meta-products: places to see and to be seen. Such are the paradoxes of China’s liberal transition. Such manifestations of the new China are packaged and marketed tastefully – as sights and sites where surreptitious forgetfulness and forbidden memories of the Cultural Revolution curiously mingle with an ever morphing blend of Chinese turbo-capitalism. The point of examining such paradoxes and raking through the troubling historical power narratives is to ensure important lessons inform contemporary decisions. The advances in China over the past 30 years have been made possible by its political system and its resilient people. From Deng’s time as Supreme Leader to the present day, the legitimacy of the CPC has been embedded in the success of its reform and opening up policy. China is now enjoying unprecedented economic prosperity. It has capitalized on its ‘backward advantage’ in part created by the Cultural Revolution (see Garrick’s Introduction). The new CPC leadership clearly recognizes law reform as crucial to tend economic growth. This is now an accompanying power narrative assisting China to participate in (and enjoy the fruits of) WTO membership. At the same time, in a communist regime, there is only limited acceptance of the principles of rule of law that are based on the idea that laws should conform with minimum standards of fairness in both content and procedure. With the Cultural Revolution but one generation ago, we have witnessed what can happen without a highly evolved, fair and transparent judicial system and effective rule of law. In those dark years there was only law by rule (or perhaps by fear); no space for debate, no toleration of helpful or well-intended critique. We now know what can happen where there is despotic rule and where labels categorize people to justify spurious political objectives. Perhaps the key lesson is simply this: Despotic governance, where there is no tolerance for rational discussion and debate over different perspectives, can be disastrous. There is always a need for objective re-evaluation and accountability in the face of powerful meta-narratives that shape popular opinion. This is precisely why the principles of rule of law can help sustain a fair, harmonious society as distinct from one that is fraught with hidden dangers baited with the lure of prosperity for intermittent survivors. China has fervently invited foreigners to engage within her sovereign boundaries and as partners in a range of international trade. That invitation per se includes advice and other resources to build capacity for reform. Stakeholders – academics, professionals, industry, trade organizations, governments and media – can collaborate to form a powerful voice for effective change.

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Notes 1 Source: The World Factbook, China population, available at: https://www.cia.gov/ library/publications/the-world-factbook/rankorder/2119rank.html – divided by world population https://www.cia.gov/library/publications/the-world-factbook/ geos/xx.html – as estimated for July 2009. 2 See editorials at: http://www.eeo.com.cn/ens/Observer/editorial/2009/08/25/ 149301.shtml; and http://www.eeo.com.cn/eeo/jjgcb/2009/08/24/148880.shtml. 3 Mao’s admission to Snow on 18 December 1970 was based on his own evaluation of the serious incidents between various factions of members of worker unions – ‘conservative workers’ versus ‘rebel workers’ – following many GPCR episodes such as the ‘Wuhan incident’ (4–30 June 1967), and ‘Shanghai large-scale armed battle’ (4 August 1967). Snow (and his wife Agnes Smedley) had previously visited Mao in 1936–37 living in the caves of the CPC’s Yan’an headquarters during the Long March of the Chinese Red Army. 4 Source: Resolution on CPC History, 1949–81 (1981: 41–46) Beijing: Foreign Language Press. The official periodization (1966–76) remains a matter of dispute, and aspects of Chinese socio-economic change during that decade, especially in the rural areas, are just beginning to receive analytic attention (White and Law: 2003: 1–24). 5 My focus is primarily on the years 1966–69 rather than the broader 10-year period (1966–76) which is now the officially identified period of the Cultural Revolution, as some of the most powerful narratives of the GPCR came from these turbulent central years which are not disputed as GPCR dates. 6 There is of course considerable debate about the purposes of the GPCR, and Mao’s role in it. My aim in this chapter is not to provide an historical analysis of those debates and events, but rather to focus on the narratives of power and how these connect from the past to the development of a rule of law in today’s China.

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Part II

The commercial law reforms

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5

China’s civil and commercial law reforms Context and transformation Jianfu Chen

Introduction: transforming China In many respects, China is a transformed and still rapidly transforming society. The continuing changes in China have not, however, just been about economic development. There has been another quiet, peaceful and largely successful ‘revolution’ taking place in the area of law. Its deficiencies though are as numerous as its achievements and progress. Until quite recently, law was seen as no more than a tool for social stability and economic development, with the rule of law struggling to find its own virtue. In post-Mao China, this instrumentalist attitude towards law has largely defined the course for the development of law in general and civil and commercial law in particular. This is not to say that law in present-day China does not have its own life at all. Rather, without a clear understanding of the context in which Chinese law has developed over the past 30 years or so, one would most likely find it extremely frustrating and perhaps become pessimistic in the face of conflicting rules, vague and ambiguous principles, and severe problems in legal implementation and enforcement, just to mention a few of the flaws in Chinese law. This chapter thus intends to provide a brief introduction to the politicoeconomic context in which Chinese civil and commercial law has been developed in the post-Mao era. It is then followed by an examination of what I call foundational development in private law: impersonal treatment of legal actors (legal personality), freedom of contract, and the protection of private property. Developments in these three areas have established a foundation upon which law may gain its own life and rule of law may eventually take root in China.

Broad context and gradual transformation An overview In light of the various difficulties in the actual implementation and enforcement of law, one may argue as to whether changes in Chinese law since 1978

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are cosmetic. But in the face of massive enactments (including the repeal, revision and updating) of the law, the rapid development of legal institutions and major efforts in popularizing law among the general population (see Chen 2007; Zhu 2007), it is fair to say that there has been some rather fundamental changes in Chinese law. At least there is now established in China a foundation for fundamental change. What is not easily understood, or taken seriously, is the importance of the politico-economic context in which Chinese law has developed. In fact, a careful examination of Chinese law, its development and practice, reveals various features of the contemporary Chinese law, and among them two stand out prominently and least controversially. First, the development of Chinese law for most of the post-Mao period has been largely determined by China’s politico-economic system and its evolution. Second, Chinese law is unambiguously becoming Western law in its form, terminologies and, to a lesser extent, its structure. In both developments, the process has been evolutionary, gradual and incremental, and often responsive (to politico-economic changes) rather than directional. Certainly, the influence of the political and economic factors in legal development has not been the same in all areas of Chinese law. Indeed, the development of constitutional and administrative law is perhaps more constrained by political reforms than economic ones, and civil and commercial law more constrained by economic liberalization. But in many respects China is still a socialist country, which means there is hardly a strict separation of the political and the economic, each of which reinforces the other. Politico-economic context 1978 is seen by China scholars, in and outside of China, as the commencement of a new epoch in modern Chinese history and a turning point in its legal development. In that year the Third Plenary Session of the Eleventh Central Committee of the CPC declared that large-scale nationwide mass political movements should be stopped and ‘the emphasis of the Party’s work should be shifted to socialist modernisation as of 1979’ (Communiqué of the Third Plenary Session of the Eleventh Central Committee of the CPC, 1978). A legal system was declared a necessity for socialist modernization. The then Party leaders also repeatedly emphasized the importance of law to provide a social order conducive to economic development (Hua 1979; Ye 1979). This was summarized by Deng Xiaoping as a ‘Two-Hands’ policy: On the one hand, the economy must be developed; and on the other hand, the legal system must be strengthened (Qiao 1984; Wang et al. 1996). This new policy under the leadership of Deng Xiaoping thus apparently differed greatly from the practice under Mao’s leadership. The changing fate of law was based directly on the need, as perceived by the Party leadership, for national development. Indeed, when Deng took over leadership, the ‘uninterrupted revolution’ under Mao had pushed the Chinese economy to

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the verge of collapse and the legitimacy of the Party leadership had to be rebuilt on the basis of economic development. For Deng, therefore, law had to be used to establish stability and order for economic development (Deng 1984: 335–55; also see Communiqué of the Third Plenary Session of the Eleventh Central Committee of the CPC). As summarized by Peng Zhen (then Chairman of the Standing Committee of the NPC), law is ‘The fixation of the Party’s fundamental principles and policies, that is the codification of the Party’s fundamental principles and policies. These fundamental principles and policies are those that have in practice proven effective and correct’ (Peng 1984: 160–1; see also Chen 1988 and for analysis Yu 1989). As such, the nature and the extent of legal development essentially depended on the parameters set by the reform programme. As the Chinese economic reforms, at least initially, had no clear direction,1 it is not surprising that legal development occurred in an ad hoc, piecemeal fashion. More importantly, this particular way of treating law (and the need for it) has meant that politico-economic ideologies have been the underlying determinants of legal development in post-Mao China. The initial reform policies during 1978–84 were largely repetitions of policies from the 1950s and 1960s (Lee 1987: 177). However, a new politicoeconomic theory which justified the introduction of various reform measures was rapidly established and it did not take very long for the new ‘Socialist Planned Commodity Economy’ theory to dominate ideological thinking in China. The establishment of this ‘new thinking’ effectively led to the first transition from a totally mandatory planning system to a partly mandatory and partly guidance one; a transition that was not just economic. It was politico-economic. The liberal thinking that was tolerated in the economic sphere flowed to law, which had always been seen as part of the ‘political’. Hence we saw the initial discussions about, and introduction of, Western liberal legal ideas. However, the concept of a ‘socialist planned commodity economy’ was not a complete break from the traditional understanding of ‘socialism’. At the same time the memory of the Anti-rightist Movement and the Cultural Revolution in the 1950s and 1960s was still fresh. Thus, liberalization of legal thinking was understandably tentative, hesitant and limited (Chen 1995: Chapter 2). From a ‘planned economy’ to a ‘socialist market economy’ A major ideological breakthrough was made during Deng Xiaoping’s surprise visit to Shenzhen and Zhuhai in January 1992 (now commonly referred to as the ‘Southern Tour’). During his visit, Deng was reported as saying that ‘reforms and greater openness are China’s only way out’ and that ‘if capitalism has something good, then socialism should bring it over and use it’ (Deng 1993: 1). Subsequently, the People’s Daily was flooded with editorials and articles calling for the speeding up of reform. Using capitalism to build socialism began to be openly called for (S. Fang 1992: 1; 1994). Party Secretary-General

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Jiang Zemin at that time proclaimed that the market and planning were both means of regulating the economy, but not criteria for distinguishing between socialism and capitalism (People’s Daily, 14 March 1992: 1; Gao 1993: 40–1). The ruling Politburo also promised that the policies of reform and opening up to the world would remain for 100 years and called for, among other things, the fast development of the socialist commodity economy (People’s Daily, 12 March 1992: 1). Finally, the Fourteenth Party Congress in 1992 set the tone for reform by declaring that economic reform would be accelerated towards achieving the central task of establishing a ‘socialist market economy’ (Jiang 1992). So, not long after the Central Committee of the CPC formally submitted its ‘Suggestions on Amending Certain Contents of the Constitution’, the NPC dutifully adopted these suggestions and translated the new Party policy into law in March 1993.2 As a result of the revision, the term ‘socialist market economy’ replaced that of ‘planned economy’ in the Constitution. There was little new in the notion of a ‘socialist market economy’ as far as reform measures were concerned. The real significance lay in the justification for introducing the notion, rather than in the notion itself. The Political Report declared that theoretical and ideological innovations for reform should not be constrained by the abstract question of whether such innovations were capitalist or socialist – all modern business and enterprise operating mechanisms, foreign capital, resources, technologies and talented personnel, no matter whether socialist or capitalist, should be used for socialism (Jiang 1992: 2). The significance thus lay in the abandonment of the requirement for ‘ideological correctness’ in introducing reform measures. In other words, the notion of a ‘socialist market economy’ is first and foremost to be seen as a licence to practise capitalism in the economic sphere and to introduce capitalist mechanisms and measures (including legal measures) to facilitate economic development. It is in this sense that economic reform and the ‘open door’ policy brought about a new phase in China. Symbolic as this notion of a ‘socialist market economy’ might seem to be, it did point to a new direction for economic reform and thus set new parameters for legal development. It has allowed scholars and officials to abandon any pretence of upholding socialism as an ideology or a politico-economic system when new ideas or practices are being introduced. This explains, and is evidenced in, the lively discussions held in legal circles regarding the reform of legal ideologies and legal development since the remarks made by Deng Xiaoping during his ‘Southern Tour’ and the Fourteenth Party Congress. As a consequence of the new policy, Chinese scholars began to openly argue that a ‘market economy’ was a result of human wisdom; it was not a ‘privilege’ (tequan) for the West (Liu 1995: 70). A socialist market economy was now asserted to be an economy under the rule of law (fazhi jingji) (Chen 1994; Min 1994; Xiao 1994).3 The establishment and perfecting of a socialist market were thus said to be a process of establishing the rule of law (Wang et al. 1996: 3). To establish a market economy in China therefore demanded

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a revolution in legal theory and legal thought (Guo 1994; Xie 1994; Wen 1995; Zhang 1995). The rights/duties debate Though far short of such a revolution (Chen 2000: 163), this ‘second tide’ of academic thought in post Mao-China (Guo et al. 1998: 1) influenced all areas of Chinese law (Chen 2000; Peerenboom 2002), and certain changes in legal theory have indeed occurred in China since then. For instance, legal discourse in jurisprudence is now strongly ‘rights-based’, as evidenced in the general debate on the relationship between rights and duties, namely, whether law should emphasize rights rather than duties (‘Jurisprudential Debate on the Relationship Between Rights and Duties’, 1991). Although this debate has been continuing since 1978, the discussion that began in the 1990s was on the issue of whether law should take rights or duties or both, as its principal concern. Many scholars took the view that law must first deal with rights and that duties would naturally follow as a consequence of these being protected. The argument stresses that rights would liberate people from the constraints imposed on them by the traditional emphasis on duties, status and dictatorship. This rights/duties debate, according to some jurists, is essentially an argument for and against a shift in emphasis on duties to the state, to an emphasis on rights against the state (Id). Simplistic as it may appear, subtle shifts in emphases represent a fundamental movement in attitudes about the functions of law in society. Internationalization Since 1992 when the Party adopted the notion of a ‘socialist market economy’, the new and most frequently used catchwords have become ‘assimilation or harmonization with international practice’ or ‘doing things in accordance with international practice’, and they are the topics most frequently discussed in socio-legal studies in Chinese journals and newspapers (S. Li n.d.).4 Some Chinese scholars thus claim that studies in China on assimilating or harmonizing Chinese law with international practice only began in 1992 (He 1992: 53). However, internationalizing Chinese law, in the sense of transplanting foreign (Western) laws, did not start in the 1990s. Modern reform of Chinese law during the dying days of the Qing Dynasty was, essentially, a process of wholesale Westernization with a clearly utilitarian and instrumentalist approach (Chen 2008: 23–8). Equally, communist legal efforts relied heavily on foreign experience, though dominated by one model: the Soviet model (Jianfu Chen 2008: Chapter 2). The early influence of the Soviet model The influence of the Soviet model led to a continuation, though fragmentary, of a Civil law-style legal system, but also installed a formidable barrier to the

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importation of any other Western influence. Fundamentally, Marxist legal theories, as introduced to China from the former Soviet Union, strongly emphasize the class nature of law (Li and Xiao 1994; Tay and Kamenka 1980). This emphasis led to an almost automatic denial of any usefulness of ‘feudalist’ (a coded word for anything traditional) and ‘capitalist’ (a coded word for anything Western or foreign) law (Münzel 1980: 275). Nevertheless, the ideological emphasis on the class nature of law could only help to justify the destruction of ‘old’ law but was unable to offer anything to fill the legal vacuum left. It was to history and foreign laws that China turned for ideas and assistance for legal construction. Clearly, neither history nor foreign influence can easily be ignored (after all, Marxism is also an alien concept to China). It is therefore not surprising that during the first serious efforts to rebuild a legal system, the question of heritability of law arose. The more daring jurists, probably misinterpreting the intention of the Party’s invitation to participate in the ‘100 flowers’ debate in 1956–57, began to tackle the legal taboo and argued that there were laws of a technical nature which were ‘internationally common’ and thus could be ‘critically inherited’ (ibid.: 275–7). Similarly, with the reform and ‘open door’ policy in place in the late 1970s came the slogans ‘old things must be put to the use of the present’ and ‘foreign things must be put to Chinese use’. Such political slogans then led to a renewed discussion of and debate on the question of heritability of law when legislative programs and legal research resumed around 1977–78 (Lin 1979: 280–6). That discussion was hesitant, ambivalent, and sometimes confusing. The central issue was whether there were technical norms in the ‘old’ law (both in history and from foreign countries) that could be used as ‘reference’ or be ‘critically inherited’. Both arguments for and against the heritability of law subscribed to and upheld the Marxist ideology of the class nature of law (Lin 1979: 280–6; Li 1979). Effects of the ‘open door’ policy What is particularly remarkable in the present process of seeking foreign assistance is the abandonment of any ideological requirement in choosing and adopting foreign legal institutions and theories. What is now emphasized is the urgency of assimilating Chinese law to or harmonizing it with international practice. It is therefore not surprising that the words ‘transplant’, ‘assimilation’ and ‘harmonization’ appear frequently in Chinese legal literature. ‘Internationalizing’ Chinese law, it is argued, is a matter of necessity, and the direction for modernizing Chinese law and its rationale is determined by the nature of the market economy and the ‘open door’ policy (He 1992; Fang 1993; Geng 1994). The liberal attitude towards foreign law and the hunger for advanced (Western) experience have made it almost impossible to trace the specific foreign sources of Chinese legislation as, in the making of each of the specific laws, scholars and law-makers have consulted practically all of the available

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foreign (Civil or Common) laws on the subject matter under consideration.5 Thus, the best we can say is that Chinese law, in its forms, structure and methodologies, has undoubtedly become Western (Liang 2004b) and is largely fashioned in a Continental style in its legislative techniques (Mattei 1997). While the movement towards the Westernization of Chinese law is easy to recognize, there has also been a rather subtle and incremental shift in recent years to a model based more on international practice and international treaties. Three principal factors underpin this shift. First, while the ideological breakthrough in 1992 allowed a liberal approach towards legal transplant, concerns were raised that modernization was becoming a process of Westernizing Chinese law. To defuse this fear, many scholars stressed the importance of international conventions and practice in the process.6 Much of the recent Chinese literature therefore concentrates on the necessity of harmonizing Chinese law with international practice and conventions in the process of transplanting Western laws onto market-related mechanisms (He 1992; Geng 1994; Li and Xiao 1994; Li et al. 1994; Gong 1995). The movement towards international practice had in fact already emerged earlier in law-making. Thus, while the 1981 Contract Law (repealed in 1999) and the 1986 GPCL had the strong flavour of Soviet and former Eastern European countries, the 1985 Foreign Contract Law (repealed in 1999) and the 1999 Contract Law signified the beginning of a ‘pluralist’ approach to drawing experience from many foreign countries and international treaty and customary law sources. In these two cases, while there were continuing influences from the former Eastern European countries, evidence of Common law influence is apparent (e.g. the notion of ‘consideration’ in contract law). In the case of the 1999 Contract Law, while the German Civil Code, the Japanese Civil Code and the KMT Civil Code were all studied carefully and followed to varying degrees (Liang 2004a), the UNIDROIT Principles of International Commercial Contracts (1994) and the UN Convention on Contracts for the International Sale of Goods (1980) were the actual models, and in some places were copied article by article (ibid.; see also Li et al. 1994: 3; He 1992: 53). More importantly, China’s determination to join the WTO, and its efforts to comply with WTO requirements after being admitted, resulted in a huge effort to make new laws and revise existing laws in line with its WTO negotiations and agreements, and with WTO-related negotiations (such as IP protection).7 Indeed, the legislative tasks have been massive, and are ongoing, involving the revision of practically every piece of law concerning market entry and regulation in line with WTO agreements. As a result, Chinese law is further internationalized. What we have then seen in the past few years is a concentrated period when international law (both treaty-based and customary law), international practice, and the results of international negotiations have been rapidly absorbed into Chinese law, and no longer only in areas of market regulation and economic development. There have been significant developments in

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relation to the rule of law and the protection of human rights conforming with commonly accepted international standards, such as the proclamation in the Constitution of the establishment of a rule of law and the protection of human rights. Equally significantly, the 1996–97 revisions to the Criminal Procedural Law and Criminal Law were aimed at absorbing commonly accepted international standards on justice and the rule of law, rather than following any particular legal tradition. With these developments, the overall legal reform process is thus better described as the ‘internationalization’, rather than the ‘Westernization’, of Chinese law.

Foundational development An overview The changing politico-economic system in China has a particularly powerful ‘constraining/liberalizing’ effect on the development of civil and commercial law in post-Mao China. While the impact has been continuing and evolutionary, the adoption of the notion of ‘socialist market economy’ has had the most decisive effect of causing fundamental changes to the foundations of private law in China. First, the politico-economic notion of ‘socialist market economy’ led many scholars to sharply criticize legal theories and civil and commercial legislation for being too restricted by ‘traditional doctrines’ and for being too often compromised by the politico-economic system and ideology (Liang 1992: 13–24; Zhang 1993: 12–19; Liu et al. 1993: 3–9; ‘A Summary Report of the Symposium on New Topics for Civil and Economic Law in a Socialist Market Economy’, 1993; Project Group Law Institute 1993). Many Chinese jurists declared that these ‘traditional doctrines’, namely, theories largely based on those of A.Y. Vyshinsky and imported from the former Soviet Union in the 1950s, were the first legal ideologies that had to be abandoned (Project Group Law Institute 1993; Zhang 1994).8 Existing laws governing civil law matters were also seen as being too unsystematic and unsophisticated and in many cases dated. Urgent revisions and the making of comprehensive laws governing civil and commercial matters were therefore demanded (Legal Science in China 1992a: 120; Legal Science in China 1992b: 3–12; ‘Political Reform, Next Target’, 1992: 4). Second, some Chinese scholars strongly attacked the fusion of public and private law – a long-standing and controversial issue in China and other (former) socialist countries (Chen 1995: 52–6; Li 1995). To these scholars, the separation of public and private law was not merely an academic issue; it challenged the fundamental politico-economic system in China. It concerned the very foundation for the establishment of a rule of law (Chen 1995: 52–6; Li 1995). Thus Liang Huixin, a prominent civil law scholar in China, pointed out that the fusion reflected the ‘old’ administrative-economic system and the influence of Soviet civil law theories. It provided a theoretical basis for state interference through administrative measures in civil law activities. He argued

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that in order to establish a legal order for a market economy, the government must be separated from enterprises, that economic and political functions of government must be distinguished, and that enterprises must become truly independent civil law subjects capable of resisting undue intervention from state administrative authorities (Liang 1992). In short, the autonomy of private law must be upheld (ibid.: 5). Liang further argued that not only did public and private law have to be separated and distinguished from each other, but also that private law had to take precedence over public law. He asserted that public law taking precedence over private law was a product of dictatorship, of a natural (agrarian) economy (ziran jingji) and of a centralized administrative-economic system. In his view, public law had been in a dominant position in China until then, and that, in order to build a modern legal system in China, private law had to take precedence (‘A Market Economy and the Modernisation of a Legal System – Speeches Given at the Symposium on a Market Economy and the Modernisation of the Legal System’, 1992: 2–3). Other scholars also saw the denial of the existence of private law as an ‘extremist leftist’ practice and strongly emphasized the importance of the distinction between public and private law (Li 1992: 37; Project Group Law Institute 1993: 6–7; Liu 1993: 5; Legal Science in China 1993: 119–20; Zhou 1993: 16). Some scholars claimed that the fusion of public and private law was responsible for the interference of government in enterprises and for many forms of corruption, such as officials conducting profit-seeking business (S. Fang 1992: 56–8; Wang and Liu 1993: 28–36; G. Xie 1994: 62–6). It is not surprising therefore that some scholars argued that central to the establishment of a rule of law was the establishment of private law in China (Zhang 1994; Yang 1995). Finally, it was strongly urged that all economic participants must be treated equally and that law must be made universally applicable to all kinds of economic actors (Dong and Li 1992; Wang 1992: 3–4; Zhao 1992: 21–3; Xie 1993: 12–14; Lu 1994: 27). Further, if public property was upheld as sacred and not to be violated, then private property also had to be elevated to the same level for protection, and not merely be allowed to have ‘lawful existence’ (see Studies in Law 1992: 3; Zhang 1993: 18–19).9 For Chinese scholars since the 1990s, catchwords of law reform arguments have become ‘equality’, ‘universality’, ‘private rights’, ‘freedom of contract’, ‘supremacy of law’, and ‘humanity’ (China Law Society 1992: 13–24; Zhang 1993: 12–19; Liu 1993: 3–9; Legal Science in China 1993; Project Group Law Institute 1993). These key words are then reflected in the development of what those scholars refer to as the ‘three pillars of modern civil/private law’: legal personality, obligations, and property (Peng 1994: 14). Legal personality One of the most important features of private law is, at least traditionally, its abstraction. This includes its rules and principles, its provisions and

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requirements being oriented towards commonly accepted values rather than ad hoc situations, and towards abstract right-and-duty-bearing units. In its abstraction, private law becomes a specific structure relatively independent of social, economic and political changes, yet its principles are able to deal with a wide range of social relations over a long period of time. Such abstraction is also the basis on which private law becomes universally applicable: whereby parties to private law relations are also treated on an equal footing (Tay and Kamenka 1983: 67–92). In reality, of course, private law has never been entirely insulated from social, economic and political development in any country. Nevertheless, treating parties as abstract ‘legal persons’ on equal footing has, in most countries, been maintained as a general principle in civil and commercial law. The mechanism for doing this is the civil law institution of ‘legal personality’, an abstract legal institution which treats all natural persons and legal entities as ‘legal persons’ with certain capacities (and incapacities) in conducting civil acts, regardless of their social position, political background and geographical location. Following the European Continental tradition, Chinese civil and commercial legislation has also taken a formalist and abstract approach, despite ideological differences underlying the law and law-making.10 Article 2 of the GPCL provides that ‘civil law regulates property relations and personal relations on an equal footing among citizens and legal persons, and between citizens and legal persons’. It is the first time that a basic law in China formally introduced the notion of ‘legal personality’, albeit only partially. However, the GPCL institution of legal personality was established under the ‘commodity relations theory’ advocated by the late Professor Tong Rou of the Chinese People’s University (among many other scholars) and, as such, has some quite different conceptual approaches inherent in this highly abstracted institution. For instance, it uses the word ‘citizens’ instead of ‘natural persons’, reflecting the influence of jurisprudence from the former Soviet Union and some particular Chinese considerations, causing some confusion in practice (see Chen 2008: 341–55). Nevertheless, the importance of introducing the term ‘legal persons’ is an underlying objective to address the inadequate protection of business autonomous interests brought about by economic reforms and, in particular, in the reform of SOEs and ‘to treat all economic entities, foreign and domestic, equally’ (ibid.: 341–55). Although detailed provisions governing legal persons have been enacted separately at different times under various policy guidelines and, hence having effectively fragmented and undermined the abstract civil law institution of ‘legal personality’, the term ‘legal persons’ has been the unifying and foundational force behind the movement toward equal treatment for, and autonomy of, economic and commercial entities (ibid.: Chapter 13). When a modern enterprise system consisting of the three pillars of law (Company Law, Partnership Law and Sole Investment Enterprise Law) was formally established by 1999, a level playing field for economic freedom and competition among economic entities was laid down in China, even though .

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the actual situation and practice did not always match the letter or spirit of the law (see Chapter 7). Equally important, the development of contract law and the protection of private property, to be discussed below, further reinforce the notions of (economic) equality and autonomy. Freedom of contract The institution of ‘civil obligations’ is seen by Chinese scholars as one of the three pillars of modern civil law. However, unlike in major civil codes in this tradition, this institution is not explicitly established in the GPCL. It is rather fused and disguised in two separate chapters dealing with civil rights and civil responsibilities respectively. An obligation is defined as ‘a particular relationship involving rights and duties created between parties in accordance with the stipulations of a contract or provisions of the law’ (Article 84 of the GPCL). This seemingly concise definition is deceptively simple. It covers the institution of contracts and several statutory sub-institutions including torts, unjust enrichment, negotiorum gestio (wuyin guanli, management of affairs without authority), and other types of action as may be provided by law (Tong 1990: 307–8; Peng 1994: 448–51). The most important development in the area of obligations has been that of contract law, especially in provisions relating to and concerned with freedom of contract. As Potter has pointed out, contract law has been particularly reflective of the tensions in Chinese economic reform and the intense ideological struggles involved in moving towards a market oriented economy (Potter 2000: 190). Not surprisingly, as a legal institution, contracts have been emphasized as a focal point for legal measures to accompany economic reform. They are used for assuming and dividing legal liabilities as well as for asserting economic autonomy and freedom. For the larger part of the postMao period, however, these measures had been underdeveloped and fragmented until the enactment in 1999 of a uniform Contract Law. Within this area of law, it is precisely the general principles of rights and duties being created between parties – in accordance with a contract – that encapsulate the tensions and transformations of socialist ideologies since reform and opening up started in 1978. The slow and initially fragmented development of contract law could largely be accounted for by the context of the evolving politico-economic system and the struggle for power within the bureaucratic structure (Potter 1992, 2000: 189–203). Put crudely, contracts were for a long time simply seen as a means for economic transactions, hence their usefulness and the extent of their adoption were largely determined by the prevailing politico-economic systems (Wang 1986: 5–11; Pi and Shi 1987: 33–44). Their development often encountered vigorous resistance from bureaucratic authorities vested with the power of examination and approval for economic activities. The first set of regulations on contracts in the PRC, the Provisional Measures concerning the Making of Contracts among Governmental Institutions,

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State-owned Enterprises and Cooperatives, was issued in September 1950. Thereafter, several more provisional regulations were issued, governing various specific kinds of contractual transactions (Wang 1986: 141–3). One of the main reasons for the initial contract regulations was recognition of the co-existence of public and private economies. Socialist transformation, however, soon led to the domination of public ownership, and so contracts were mainly used as a means of implementing state economic plans, rather than for regulating transactions among individuals and economic entities (ibid.: 141–7). The first major contract law in post-Mao China was the Economic Contract Law (ECL, now replaced by the 1999 Contract Law). As it was issued at the initial stage of economic reform, it had the strong flavour of a planned economy. Thus Article 1 of the Law defined the purpose of the Law as being to protect the social economic order, to promote economic efficiency and to guarantee the implementation of state plans. Its application was confined to domestic economic contracts between legal persons (Article 2 of ECL). The implementation of the ‘open door’ policy then necessitated the promulgation of a second major set of contract regulations, the Foreign Economic Contract Law (FECL, now replaced by the 1999 Contract Law). As indicated by its title, it was only applicable to foreign-related economic transactions. In 1986, the General Principles of Civil Law (GPCL) were issued, which provided certain governing principles for all kinds of contracts. In 1987, the Law on Technology Contracts (LTC, now repealed by the 1999 Contract Law) was issued, regulating contracts for technology development, transfer, consultancy and services. Together, the three separate contract laws were often referred to as the ‘three pillars’ of contract law in China (Wang 1999: 352). As these contract laws were issued in different times, the three principal laws on contracts represented different ideological orientations. The 1981 ECL and the 1987 LTC clearly reflected the planned economy ideology first imported from the former Soviet Union. On the other hand, the 1985 FECL had begun to allow much more freedom and autonomy for parties to form, conclude and perform contracts, more in line with Western capitalist practice than with socialism. In fact, it was the 1985 FECL (together with the various joint venture laws) that started a ‘pluralist’ approach to drawing experience from foreign and international sources. As such, the 1985 FECL, though evidencing some continuing influences from the former Eastern European countries, clearly reflected influences of international treaties and practices.11 The ‘three pillars’ system was indeed a complicated one, fraught with many practical problems. Practically, as pointed out by Wang Liming, it suffered ‘from duplicative, inconsistent, and even contradictory provisions’ and lacked ‘some of the most fundamental rules and institutions of standard contract relations’ (Wang 1999: 352). But much more fundamentally, significant progress in reforming the politico-economic system had been made in the early 1990s and thus a contract law, based entirely or partially on a planned

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market ideology, was seen as out of date and out of step with the requirements of the reform efforts. The initial legislative response to the changed politico-economic ideology was the making of major revisions to the 1981 ECL in 1993. Even though the revision was reasonably comprehensive, the result was ‘a half-cooked meal’ (Potter 2000: 193–6). The revision removed references to ‘state planning’ and ‘state policy’, however, the revised law was still largely ‘a policy driven document’ (ibid.: 193–6). Technically there remained many inconsistencies between the ‘three pillars’ of contract law and uncertainties in determining which law would apply in a particular transaction. Further, there were also Western pressures (especially from the USA) on China to unify its contract law and practice, to fall more in line with international practices (see ibid.: 191). Most importantly, a certain consensus among Chinese scholars had also emerged demanding contract law treat all parties on an equal footing, and that the fundamental principle of contract ought to be ‘freedom of contract’ (Wang 1999). New efforts to enact a uniform code on contracts started almost immediately after the revision of the 1981 ECL (Chen 2008: 444–50). While there are many features of the new uniform Contract Law (1999) that could be seen as having transformed contract law in China, two features stand out as particularly relevant to this analysis. First, there came the long process of eliminating the Soviet influence on private law. This initially started with the FECL and has now finally reached its climax as no longer were the civil code drafts of the 1950s and 1960s used as the foundation for drafting the 1999 Contract Law. Instead, the German Civil Code, the Japanese Civil Code and the KMT Civil Code were all studied carefully and followed to varying degrees (Liang 1997). Furthermore, the UNIDROIT Principles of International Commercial Contracts (1994) and the UN Convention on Contracts for the International Sale of Goods (1980) were followed closely, and as mentioned earlier, in some places copied article by article (Liang 1997). Additionally, common law principles were also considered a source of inspiration.12 Second, this process sought to establish freedom of contract and autonomy of parties. To a certain extent these have been established by the enactment of the uniform Contract Law. Under the uniform Contract Law, a contract is no longer defined as an agreement between legal persons or units, but as: ‘an agreement between citizens, legal persons and other organisations of equal status, which creates, modifies and terminates creditor’s rights and obligation relationships’ (Article 1 of the 1999 Contract Law). It is particularly noteworthy that this definition extends Chinese contract law to agreements between individuals. Further, there is no longer a general distinction between domestic and foreign-related contracts, although several provisions in the governing law and choice of law in relation to foreignrelated contracts do exist (in Articles 126, 128 and 129 of the 1999 Contract Law).13 However, such distinctions exist to deal with practical issues rather than reflecting differentiated treatment.

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Equality of parties Equality of parties in civil relations has been, for many years, a battleground for politico-economists and jurists in China. This battle strikes at the heart of the politico-economic system and hence at the legal system generally and civil legislation specifically. The whole battle has reflected the process of the transformation from a planned to a market economy, which itself redefines the role of the state (represented by its various bureaucratic authorities) in economic management and activities (Chen 1995: Chapters 2 and 5). Professor Wang Jiafu (one of the most prominent civil law authorities in China) points out that the ECL reflected the then politico-economic structure, containing two kinds of legal provision: those of civil law and those in the nature of administrative law. The former referred to provisions regulating the contractual relations of equal parties on the basis of voluntariness. The latter to those provisions guaranteed the possibility of state intervention in economic activities such as Chapters 5 and 6 of the ECL (see Wang 1986: 151). These provisions not only impaired the implementation of freedom of contract, but were at odds with the GPCL, which emphasizes equality of parties in civil relationships (see Article 2 of the GPCL). Under the new uniform Contract Law 1999, the principle that parties enjoy is equality of position in contractual relations (Articles 2 and 3 of the 1999 Contract Law). The Law also prohibits one party from imposing its will on the other (Article 3 of the 1999 Contract Law). This provision could and should be interpreted to mean that state authorities as contractual parties have no right to force anyone, natural person or legal person, to enter into a contract. These provisions come from the GPCL and hence make the GPCL provisions relevant to practice. Freedom of contract was one of the most discussed principles for enacting a uniform contract law (Wang 1999). It was not explicitly stipulated in the ‘three pillars’ of contract laws. Nevertheless, there were provisions based on, and which indirectly guaranteed, the principle of freedom of contract. Further, the extent of (and restrictions on) this principle, as provided in the different sets of contract law, differed significantly. The initial ECL of 1981 was most restrictive in contract formation and performance, although Article 9 provided that a contract was formed as soon as the parties to the contract achieved agreement on the principal clauses of the contract through consultation. This Article remained the same after the 1993 revision. Article 4 prohibited the making of any contract that would ‘violate state plans’, and such a contract would be rendered invalid by Article 7. The 1993 revision substantially removed these mandatory planning requirements and emphasized compliance with the principles of equality, mutual benefit and of achieving agreement through consultation. The revised ECL also prohibited the imposition by either party of its own will on the other party, and other illegal interference in contract formation and performance (Article 5 of the ECL as revised in 1993). Similar provisions apply to Contract Law in common

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law countries in relation to prohibiting ‘unconscionable conduct’. Parties were thus given greater freedom in establishing contractual relationships. However, Article 4 of the revised ECL continued to provide some open-ended prohibitions, vaguely phrased as ‘illegal activities’, acts ‘disrupting the social or economic order’, acts ‘damaging the state or public interest’ or ‘seeking illegal income under cover of economic contracts’. The state retained the right to issue mandatory plans to enterprises, in which case a contract could only be formed in accordance with the relevant laws and regulations in relation to the implementation of such economic plans (Article 11 of the ECL as revised in 1993).14 Also reflecting these restrictions on freedom of contract, the ECL stipulated mandatory provisions on damages for breach of contract instead of allowing parties to make contractual arrangements for such damages (see Chapter 4 of the ECL as revised in 1993). In contrast, the FECL provided much greater freedom in contractual arrangements. Although Article 5 of the FECL insisted that Chinese law must apply to joint venture contracts and contracts for Sino-foreign joint exploration and the development of natural resources, under the same article (and Article 6) there were possibilities for applying foreign law and international conventions and international customs to other kinds of foreign-related contracts. Specifically, under Article 5, parties might choose applicable laws for their contracts. Such a choice could be made even after disputes had already arisen (see Article 2(4) of Interpretation of the Supreme People’s Court on Certain Issues Relating to the Implementation of the Foreign Economic Contract Law (1987)). Further, where Chinese law did not make provision, international customary law would apply. Importantly, under Article 6, international agreements ratified by China prevailed over Chinese domestic law (see also Article 142 of the GPCL). Although foreign-related contracts would be invalid if they violated Chinese law or the public interest of the society, most of the restrictions imposed by the ECL did not exist in the FECL. In strong contrast to the ECL, the FECL specifically allowed parties to stipulate damages for breach of contract by the parties (Article 20 of FECL). Conceptually, the GPCL, in terms of freedom of contract, stands between the ECL and FECL as it emphasizes equality between contractual parties as well as voluntary participation, equity, compensation at equal value, and honesty and trustworthiness (Articles 2 and 4 of GPCL). It also requires parties to respect social moral principles, not to harm the common interest of society, or to damage state economic plans or disrupt the social economic order (Article 7 of GPCL). It invalidates any economic contracts that contravene state planning directives (Article 58 (6) of GPCL). An important restriction on freedom of contract was that all kinds of economic contracts were required to be in written form (Article 3 of ECL; Article 7 of FECL; and Article 9 of LTC). Further, when the approval of a contract by state authorities was required either by law or by administrative regulations, such a contract was only formed after the required approval had been granted (Article 7 of FECL and Article 91 of GPCL).15

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Quite clearly ‘equality’ – as guaranteed by law – is seriously undermined if parties subject to different contract laws enjoy different degrees of freedom of contract. More importantly, if China is to practise a market economy, there is little justification for not providing freedom of contract and equality of economic players in all economic fields (except for limited but well-defined circumstances where restrictions of freedom of contract may be justified). Interestingly, even though the 1999 uniform Contract Law is heavily influenced by the UNIDROIT Principles, it approaches this fundamental principle in an indirect way. It does not provide an explicit principle of freedom of contract. Specifically, the Law contains a number of provisions which either endorse or restrict freedom of contract. Thus, Article 4 emphasizes ‘voluntariness’ in contracting, and prohibits unlawful interference by any individual or organization in contract-making. As mentioned above, Article 3 prohibits the imposition of the will of one party upon the other. Article 5 of the Law is the provision closest to the principle of freedom of contract, providing that parties shall determine their rights and duties according to the principle of fairness. The fairness provision can be interpreted as one of the first provisions that give qualified endorsement to freedom of contract. The detailed rules on ‘offer and acceptance’ can be seen as further enforcing the notion of freedom of contract (Potter 2000: 198). Further, the Law now permits contracts to be concluded in writing, orally or in other forms, unless laws or administrative regulations require otherwise (see Article 10 of the 1999 Contract Law). Where the state, in accordance with its needs, assigns mandatory tasks (or tasks relating to state orders for goods), relevant legal persons and other organizations must only conclude contracts between themselves in accordance with the rights and obligations stipulated in the relevant laws and administrative regulations. More generally, and as with the contract laws that existed before 1999, freedom of contract is restricted by the requirement that, in making or performing a contract, parties must abide by laws and administrative regulations, respect social morality, and must not disrupt the social economic order or harm the public interest of the society (Article 7 of the Contract Law). At face value, these provisions reflect the general trend in the West, where freedom of contract is increasingly qualified by doctrines of equity and unconscionability. The problem with the Chinese provisions is that the qualifications and restrictions on freedom of contract are broad, open-ended and undefined. The notions of ‘social morality’ and ‘social economic order’ have no limit in scope, nor are they ever defined by Chinese law. These provisions may in the end contain the potential to virtually extinguish in the uniform contract law the effective principle of freedom of contract. In this sense, the law reforms on freedom of contract are disappointing. On the other hand, and for practical purposes, provisions on contract performance and remedies are much more flexible, and in most cases allow for mutual agreement and consultation instead of strict, rigid legal requirements as existed in the pre-1999 Chinese contract laws (Article 60–76 of the 1999 Contract Law).

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On the whole, there is no doubt that the making of the 1999 Contract Law represents a far-reaching effort to wrestle with China’s rapidly developing ‘socialist market economy’. As well, it ensures China’s approach to contracts corresponds more closely to international norms. It is therefore not simply an attempt to reorganize China’s range of contract legislation, but a systematic redesign of the form and context of the whole body of Chinese contract law. It establishes a reasonably unified framework for all contract activities and eliminates artificial distinctions between ‘domestic’ and ‘foreign-related’ contractual relationships and between civil law and economic law in the regulation of contractual relationships. By so doing, freedom of contract, and equality and autonomy of parties are largely upheld.

The protection of private property Property is, in any legal system, one of the most important civil and commercial law institutions. Yet it has been one of the most under-developed areas of law in China until very recently. The traditional conception of property is perhaps not particularly conducive to the development of a modern legal institution of property. But the socialist ideology that has public ownership as a central tenet, coupled with the rigid Continental European structure and approach, has played an essential role in preventing the development of this particular branch of law. Not surprisingly, there were only some fragmented and elementary laws on property until the adoption of the Law on Rights in rem in 2007. While the Law on Rights in rem is comprehensive, it is not a complete code of property rights. The GPCL, enacted under the ‘commodity relations theory’, continues to provide some supposedly commonly applicable rules on property. However, constitutional changes and the enactment of the Law on Rights in rem have radically changed the notion of property rights and their protection in China. Strengthening the constitutional protection of private property has taken some 20 years to develop. Initially, Article 11 of the 1982 Constitution defined the individual economy of urban and rural working people as a complement to the socialist public economy. The lawful rights and interests of the individual economy are protected by the state with Article 13 protecting the right of citizens to own lawfully earned income, savings, houses and other lawful property, as well as the right to inherit private property. Here, the individual economy of urban and rural working people refers to the economy in the form of Individual Industrial and Commercial Households and Rural Contracting Households (the so-called ‘Two Households’) (see further Chen 2008: 466–8). This was the only private economy allowed by the Chinese law at the time. The post-Mao economic reforms saw the emergence of private enterprise, defined as ‘a privately funded economic entity which employs at least eight persons’ (Article 2 of the Provisional Regulations of the PRC on Private Enterprises 1988; also see Chen 2000: 468–9). Article 11 of the Constitution

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was then amended in 1988 to ‘permit the private economy to exist and to develop within the limits prescribed by law’ and defines such an economy as a complement to the socialist public economy. The ‘private’ economy refers to (inter alia) private enterprises as defined by law. The rapid development of the private economy again necessitated further elevation of the role of the non-public economy in the state economic system. Through the 1999 constitutional revision the individual and private economies were no longer defined as a ‘complement to the socialist public economy’; they were treated as ‘an important component of the country’s socialist market economy’ (Article 11 of the 1999 amended Constitution). Further, the 1999 revision attempted to treat the individual and private economies on an equal footing, whereas the previous provisions accorded a different degree of state control over them. Because of the specific meaning of the individual and private economies and the continuing flourishing of the private sectors in different business forms and structures such as sole proprietorships and partnerships, there has been a clear need for constitutional protection to be given to these new forms of the private economy. Hence the insertion of the phrase ‘other non-public economy’ into Article 11 in the 2004 constitutional revision. Though the phrase is an ambiguous one, it is meant to embrace the various existing and emerging forms of the private business, including foreign investment in China. In addition to providing protection, the 2004 constitutional revision adds that the state will also provide encouragement and support to the development of the non-public economy. By doing so, the private sector finally achieves equal (constitutional) status to its public sector counterparts in most economic activities.16 Although there have long been uncertainties about Article 13 of the Constitution with respect to individual property, it does provide protection for ‘lawful income, houses and other private property, and the right to inheritance’. The uncertainties are, first, that the listing of lawful income, wages, houses, and so on came from the socialist distinction between the ‘means of production’ and the ‘means for livelihood’ (Hazard 1969: Chapters 8 and 9; and Chen 1995: 144–9). Only the latter was allowed to be owned privately. Second, public property is declared sacred and inviolable by the Constitution (Article 12), while the state only offers protection for limited private property. This implies different degrees of protection for the two types of property. In line with the preoccupation with the notion of ownership in socialist countries (Chen 1995: 144–9), Article 13 refers to ownership rights to property (Suoyouquan) instead of the more universally understood term of property rights (Caichanquan). While private property is not deemed paramount, as it is in the case of public property, it is now declared inviolable. Further, if private property is expropriated (or taken over for state use), compensation must be paid by the state under the revised Constitution. Similarly, as land use rights have been commercialized, compensation for expropriation or taking over for use by the state is also guaranteed by the revised Constitution

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(Article 10). As such, one can comfortably say that, at least on paper, equal protection is now provided for both public and private property. Thus, the 2004 constitutional revision finally does away with a remnant of Soviet law. It is these ideological changes and the revision of the Constitution that cleared the way for the final enactment of a property rights code – the Law on Rights in rem in 2007. Rights in rem The Law on Rights in rem is one of the most comprehensive laws ever enacted in the PRC. It is arranged into five divisions, and comprises 19 chapters and 247 articles in total. Division One on General Provisions contains three chapters, dealing with general principles, the establishment, alteration, transfer and lapse of rights in rem, and the protection of rights in rem respectively. Division Two on ‘Ownership Rights’ provides common stipulations on ownership rights, which are followed by provisions on state, collective and private ownership rights, building ownership rights, neighbouring relationships, common ownership, and special regulations on the attainment of ownership rights. Division Three on ‘Usufruct Rights’ deals with the rights to possess, to use, and to reap benefit from property, and also includes special provisions on land contract rights, construction land use rights, residential land use rights, and servitudes. The next division is on security interests in property, which include mortgage rights, pledges, and lien. The last division is on possession. The general principles in Chapter One of the Law largely repeat the constitutional provisions on equal protection of all property under different ownership forms and to all market players in China. Importantly, this chapter also defines ‘things’ (or property) to include both movable and real property, as well as the ‘rights’ that have been defined by law as being the ‘objects’ of rights in rem. ‘Rights in rem’ are defined to mean the rights by the right-holder to directly and exclusively control specific ‘things’ (property); it includes ownership rights, usufruct and security interests in property (Article 2 of the Law on Rights in rem). On the one hand, the reference to ‘rights’ in the definition of ‘things’ means that the notion of ‘rights in rem’ covers more than ‘rights over things’ and opens the door for some contractual rights to be defined as ‘rights in rem’. On the other hand, it may just be a practical compromise to accommodate the inclusion of the land contract rights in the Law, as it has been controversial whether the land contract right is, in its nature, a contractual right or a ‘right in rem’ (Liang 2004: 185–94). Consequently it is difficult to ascertain whether this inclusion is a deliberate innovation, or simply an odd compromise in the legislation. With the adoption of the Law on Rights in rem, one may say that Chinese property law, after a long detour along the socialist road, has finally come of age. However, from the above outline, it is clear that while the Law is comprehensive in coverage, it is thin in substance. In large part (i.e. construction

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land use, contract land use, security interests, possession, and so on), it breaks little new ground. In many parts, the Law simply consolidates and updates the provisions of other laws. While it includes those in which consensus had been reached (Wang 2003), it also leaves many other provisions out, and in this regard it is clearly a compromise resulting from the amalgam of different schools of thought. As such, it urgently needs supplementary laws and the revision of other laws, to ensure consistency in the legal system on rights in rem. Even more importantly, the GPCL needs to be revised and updated so that the last remnants of Soviet jurisprudence can be jettisoned from the law. Despite these shortcomings, the Law now lays down an outline and a structure of legal principles governing property rights (especially in the general notion of usufruct), allowing further development to occur. Most importantly, the Law now firmly and comprehensively establishes the capitalist notion of ‘property rights’ in the Chinese socialist legal system. This, in a nominally socialist country, represents no less than a revolution in legal thought and legal development.

Conclusion: from ‘status’ to ‘contract’ In terms of civil and commercial law, the transformation of Chinese civil and commercial law may be described as being ‘from status to contract’ – from differentiated treatment to equal status, from mandatory planning to party autonomy, and from restriction to equal protection. However, a note of caution is warranted here: this chapter has discussed the changes in law; it does not address the actual operation of law in China. The latter warrants a separate in-depth analysis (see Chen 2008: Chapter 18). Even on paper, legal modernization, and indeed modernization in general, have not been without flaws and setbacks. The transformation is yet to be completed. To date, much has been left out of the law and many provisions on autonomy, freedom and equality are still the result of the odd compromises of ideological differences. Perhaps all one can say at this stage of the reform process is that these formal legal transformations have indeed established a foundation for future development and, more generally, for the development of a rule of law in China.

Notes 1 This is characterized by the Chinese phrase ‘Mozhuo Shitou Guohe’ [crossing the river by touching the stones underneath]. 2 Thus, according to Chinese scholars, Party policy was translated, through legal procedure, into state will (Liu 1993: 6). 3 Such an assertion is not without challenges (though rather isolated), see e.g. Lin (1994). 4 The present author thanks Professor Wang Yizhou of CASS for supplying me with several unpublished papers by Professor Li Shenzhi. 5 As early as in 1990, in order to determine the terms of joint ventures, China consulted no less than 18 countries/regions, namely the USA, Japan, France, (then) West Germany, The Netherlands, Italy, Belgium, Luxemburg, the (former) Soviet

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Union, Romania, Poland, Egypt, Chile, Indonesia, Thailand, Singapore, Malaysia, South Korea, and Taiwan (Song 1994: 22–4). One can still generally see whether some specific legal institutions and mechanisms are based on civil or common law. Some scholars have specifically called for the bold and massive use of conventions to avoid the question of whether they are socialist or capitalist (see Cao et al. 1992: 3; He 1992: 52). ‘International practice’ is of course a two-edged sword: it could mean common practice among countries, or international law (both treaty-based law and customary law). The present IP protection system from its initial development to its gradual improvement in China could be seen as a product of Sino-US negotiations (see Mertha 2005). Some scholars have, however, offered some qualified defence for Vishinsky (see Sun and Zeng 1996). This was done in 2004 through a constitutional amendment. The General Principles of Civil Law (GPCL), adopted at the Fourth Plenary Session of the Sixth NPC on 12 April 1986 and took effect on 1 January 1987, are seen as a ‘general part of a civil code constructed on the German or pandectist model’, and the structure of the provisions ‘follows the German model exactly’ (Jones 1987: 310–11). In the foreign-related area, China became a party to the United Nations Convention on Contracts for the International Sales of Goods (the CISG Convention, ratified by China in 1986). See further discussions in Potter (2000: 191–4). The decision to follow the CISG Convention would already ensure some common law influence as the principles of the CISG ‘drew heavily from the US Uniform Commercial Code’ (Potter 2000: 191). These issues are now dealt with by the Provisions on Certain Issues concerning the Application of Law in Adjudicating Foreign-related Civil and Commercial Contractual Disputes, issued by the Supreme People’s Court on 11 June 2007. The original Article 11 imposed a much stricter obligation on enterprises to abide by such mandatory plans. Reflecting the effort to rule the country in accordance with law, the implementation of state mandatory plans was now, after the 1993 revision, to be achieved through laws and administrative rules, instead of the direct imposition of such plans. There was no such direct requirement in the ECL and the LTC, but the GPCL requirement is applicable in these cases. In practice, most foreign-related contracts, such as joint venture contracts, require government approval. See Article 7 of the Constitution.

6

The regulation of foreign investment in China Seeking a level playing field? Hui Huang

Introduction China became the world’s largest foreign direct investment (FDI) recipient in 2003 and has since then maintained this status (Gu 2008). With the rapid economic development and the mounting concern over the possibility of ‘foreign domination’ in its national economy, China has reached a new phase of utilizing foreign capital. On 10 November 2006, the National Development and Reform Commission (NDRC) of the People’s Republic of China (PRC) issued the 11th Five-Year Plan on Foreign Capital, marking a significant reorientation of China’s policy towards foreign investment. This document states that priority will be given to quality rather than quantity of foreign investment, putting emphasis on introduction of advanced technologies, management experiences and high quality talents. It sets forth a clear industrial policy that prioritizes geographical areas, industrial sectors, levels of technology, environmental protection and efficient use of natural resources, with a view to upgrading and optimizing China’s domestic industrial structure and technological level. This has had far-reaching implications for foreign investment in China. FDI can be made in two main ways. The first one is mergers and acquisitions (M&A). At the international level, M&A has been the preferred mode of FDI. M&A transactions worldwide account for a high percentage of global FDI, ranging from 62 per cent to 82 per cent in recent years (Li 2007). However, for a variety of reasons, M&A has not yet found favour with foreign investors in China. According to research conducted by the Development Research Centre of the State Council, M&A makes up only an average of 5 per cent of FDI in China (Zhao 2009). But M&A is becoming increasingly attractive for foreign investors, particularly the leading players in their fields, because it offers foreign investors immediate market access with minimal business risk. A more detailed discussion of foreign M&A in China is beyond the scope of this chapter which focuses on the second mode of FDI, namely ‘greenfield investment’. There are three principal forms of greenfield investment in China, including equity joint venture (EJV), contractual/co-operative joint venture (CJV) and

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wholly foreign-owned enterprise (WFOE). Traditionally, they represent the overwhelming majority of total FDI in China, and can be collectively referred to as foreign investment enterprises or foreign-invested enterprises (FIE). The chapter seeks to illustrate the central features of each of the three FIEs, and analyse the legal and regulatory framework for them. As discussed later, the laws for FIEs have undergone significant changes since China joined the World Trade Organization (WTO) in 2001. As a prerequisite for WTO accession, China carried out major revision of the FIE laws and regulations to make them WTO-compliant in the period of 2000–01. In more recent years, there have been calls from both foreign investors and Chinese investors for further reforms – particularly over FIEs being governed by two parallel systems – the ‘general company law’1 and the ‘specific FIE law’. Practical problems have arisen as a consequence of the parallel operations of these laws. By examining the political economy surrounding the FIEs in China, this chapter illuminates how the regulatory regime for FIEs has evolved, and whether or not the parallel systems of FIE regulation are likely to converge in the future.

The relationship of the Foreign Investment Enterprises Law and Company Law: a critical analysis There are large numbers of laws, regulations and rules governing various aspects of FIEs in China. As such, the interaction between specific FIE laws and the Company Law is of critical importance.2 The common form of FIEs established is a limited liability company, although other forms are possible for CJVs and WFOEs. Under Article 218 of the Company Law, the Company Law is generally applicable to those FIEs established in the form of limited liability companies or joint stock limited companies unless there are different provisions in those laws relating specifically to FIEs. This position has been further confirmed by the Implementing Opinion on Several Issues Concerning the Application of the Law in the Administration of the Examination, Approval and Registration of Foreign Investment Enterprises (the FIE Law Application Opinion) in April 2006.3 In short, the relationship between the Company Law and FIE laws is that of general to special laws. As a consequence, where the FIE laws conflict with the Company Law, the former will prevail; where the FIE laws are silent on certain matters, the Company Law will come into play to complement the FIE laws. For brevity, this guiding principle on the relationship between the general Company Law and the specific FIE legal system is referred to as the ‘FIE Law–Company Law Relationship Principle’. The complementary role of the Company Law Since the Company Law is in general operation with respect to FIEs in the form of limited liability companies, it is applied by way of implication to supplement the specific FIE laws. This complementary role performed by

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the Company Law is important as the specific FIE laws are incomplete (or framed in broad terms) without essential details on many matters. For example, Article 26 of the Company Law stipulates a minimum amount of registered capital for limited liability companies as RMB30,000, subject to any higher requirement under any other law or administrative regulation. The Company Law also sets out special rules for one-person limited liability companies, stating that a minimum registered capital of RMB100,000 is required and a natural person is allowed to establish only one one-person limited liability company.4 This is relevant to so-called single-owner WFOEs, namely those WFOEs established by a single foreign investor. Further, Article 27 of the Company Law provides that the cash contribution by all shareholders of a limited liability company must be not less than 30 per cent of its registered capital. This means that non-cash capital contributions can only be up to 70 per cent of the registered capital. As there is no provision to the contrary on those matters in the specific FIE laws, the relevant Company Law rules apply to FIEs. Another example concerns the circumstances whereby FIEs can be dissolved, as well as the procedures for winding up FIEs. For instance, the EJV will be dissolved in any one of the following situations: (1) its specified duration expires; (2) there is a serious deficit and the EJV has no capacity to operate continuously; (3) the EJV is unable to continue operation due to a party’s breach of the joint venture contract or the articles of association; (4) the EJV suffers serious losses due to force majeure; (5) the EJV cannot attain its business purposes and has no development future; or (6) a cause of dissolution as specified in the joint venture contract or articles of association occurs.5 The issue of EJV dissolution was further addressed by a special administrative regulation, namely Measures for Liquidation of Foreign-invested Enterprises (the FIE Liquidation Measures) promulgated by the MOFTEC in July 1996. At the same time, the Company Law sets out provisions concerning the dissolution of companies.6 Apart from some overlapping with the specific EJV provisions discussed above, the Company Law specifies additional circumstances for corporate dissolution, for example, where the company’s business licence is cancelled and where it is necessary to be dissolved due to merger or split-up of the company. There was uncertainty over the application of the Company Law provisions to EJVs. On 15 January 2008, the State Council issued the Decree of the State Council of the People’s Republic of China (No 516) – Decision of the State Council on Annulling Part of Administrative Regulations (the State Council Decree No 516) and the FIE Liquidation Measures were annulled as a result. It is now clear that the Company Law provisions relating to dissolution are applicable to EJVs. Conflict While the Company Law complements the specific FIE legal regime with respect to certain matters, there are circumstances where conflicts may occur

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between the dual systems. As noted before, in case of conflict, the specific FIE laws shall prevail, pursuant to Article 218 of the Company Law and relevant administrative regulations like the FIE Law Application Opinion. But there is some uncertainty over the scope of the term ‘FIE laws’ used in those documents, namely whether the term ‘laws’ is to be strictly interpreted to mean ‘law’ only or should be liberally interpreted to include administrative regulations and rules as well as laws. Under the Chinese legislative system, the term ‘law’ ( falu), in its narrow sense, refers only to the national law enacted by the National People’s Congress or its standing committee, but it can also be used in a broad sense to encompass all legal documents including administrative regulations and rules. It is critically important to determine the scope of the term ‘law’ as the Company Law often conflicts with administrative regulations or rules relating specifically to FIEs rather than the specific FIE laws. If the term ‘law’ is interpreted broadly, then those specific administrative FIE regulations or rules will be treated as ‘laws’ within the meaning of the FIE Law–Company Law Relationship Principle set out above, and therefore prevail over the general Company Law; alternatively, if the term ‘law’ is used in the narrow sense, then those administrative regulations or rules are not ‘laws’, in which case the Company Law shall take priority as it is a ‘law’ with a higher level of legal force than that of ‘regulations’ or ‘rules’. This point is illustrated in the issues below arising from the conflict between the Company Law and specific FIE regulations. For instance, the WFOE Implementing Regulation set a maximum amount of 20 per cent for registered capital contribution by industrial property rights and propriety technology. However, the Company Law, as amended in 2005, has removed such a restriction. The second example involves the instalment amount and timeframe for capital subscription by instalments. The Company Law provides that the first instalment must be of not less than 20 per cent of the registered capital and the balance to be paid off within two years (or five years for investment companies) from the establishment of the company.7 On the other hand, the WFOE Implementing Regulation stipulates that the first instalment is to be not less than 15 per cent of the total capital contribution and the balance must be paid off within three years of the establishment of the WFOE.8 In the above examples, the Company Law has inconsistencies with specific FIE regulations and as discussed before, the final result will depend on the sense in which the term ‘law’ in the relevant provisions is actually used. There has been a difference of opinion here both among scholars and regulators. But the majority view appears to be that the term ‘law’ should be strictly interpreted and thus the Company Law should prevail over those FIE regulations and rules (Junhai Liu 2006; Stender et al. 2006: 45. 49). One of the main supports for this view is claimed to be Article 1 of the FIE Law Application Opinion, which clearly sets out an order of priority in relation to the application of laws and other legal documentations: first, laws applying

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specifically to FIEs; second, the Company Law and its related regulations; and third, regulations, provisions and other legal documentation concerning FIEs. However, the weight of the above provision should be treated with caution as it refers only to the matter on administration of registration of FIEs. Hence, although the FIE Law Application Opinion has provided clarification in relation to some specific matters, there is a great need for a principled answer to the question whether the term ‘law’, as used in the FIE Law–Company Law Relationship Principle, includes administrative regulations and rules. Further, the validity and applicability of the FIE Law Application Opinion as a whole are not without doubt. It is just issued by an instrumentality under the State Council but nevertheless intends to rank the legal forces of laws and administrative regulations promulgated at or above the State Council level.

Future developments: convergence vs. persistence At a more fundamental level, the above issue on the interpretation of the term ‘law’ actually reflects the inherent difficulty with China’s current parallel legal systems for FIEs, namely the specific FIE legal system and the general Company Law system. How the Company Law applies to FIEs will impact on the prospect of China merging the parallel systems of regulation of FIEs. As discussed earlier, due to the special nature of FIEs, there have been so many special rules for them as found in the laws and regulations relating specifically to FIEs. Therefore, in the opinion of this author, the right future direction is towards the convergence of the dual systems, but the process will be gradual and perhaps uneven. Path dependence To predict the future direction of the development of FIE law, it is necessary to understand where it has come from. The structure of the FIE regulatory regime will depend in part on the structure China has developed since the beginning of the opening-up era. Initial structures have such an effect because they can give relevant parties both incentives and power to impede changes in them and because they raise the transaction cost of radical structural reforms due to factors such as sunk adaptive costs and complementarities. As discussed earlier, China has put in place a separate and relatively welldeveloped legal regime relating specifically to FIEs. This is in contrast to many Western countries where the same legal framework, such as corporate law and partnership law, generally governs the incorporation requirements for both domestic and foreign investors. In China, domestic and foreigninvested enterprises are traditionally segregated subject to different laws with different requirements on their establishment and operation. There are two main reasons for this dichotomy. The first one is historical. When China embarked on its effort to attract foreign capital through FIEs

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in the late 1970s, there were no such things as company and partnership in China, not to mention any legal framework for them. When the Law of the PRC on Chinese-foreign Equity Joint Ventures (the EJV Law) was first passed in 1979, it was among the first batch of laws which constituted the first step in the re-creation of a Chinese legal system. This was followed by the enactment of the Law of the PRC on Chinese-foreign Contractual Joint Ventures (the CJV Law) in 1988 and the Law of the PRC on Foreign-capital Enterprises (the WFOE Law) in 1986. Although these laws contained reference to the concept of limited liability companies, the Company Law of the PRC (Company Law) was not enacted until 1994. As the introduction of FIEs predates that of the notion of company, China had no choice but to set up a stand-alone and self-sufficient legal regime for FIEs to meet the pressing needs at the early stage of the economic reform. The other and more important reason behind the dual system is political. At the beginning of the economic reform, the Chinese government was ambivalent towards foreign investors. On the one hand, China desperately took whatever action was necessary to attract foreign investment with a view to rescuing its economy from the brink of collapse. To that end, a number of substantial benefits have traditionally been proffered to foreign investors, including tax concessions and various operational privileges. On the other hand, after many years of confrontation with the Western world, the Chinese government was understandably cautious about the impact of foreign investment in China. The experimental nature of the economic reform dictates that the government is able to effectively monitor the process, and if anything goes wrong, suspend or even terminate it fairly quickly to control damage. These concerns have been well addressed by a separate legal regime for foreign investment. Such a regime makes it easier to identify foreign investment and then afford them preferential treatment. It also has the advantage of being able to be tailored to the particular needs of foreign investors. Further, a separate regime can operate like a firewall between domestic and foreign-invested businesses, which allows the Chinese government to better administer foreign investment. Some 30 years on, although the above two factors have lost most of their original values, they are still relevant to a certain degree. The enactment of the Company Law does not change the trajectory of the specific FIE law which has now developed into a separate system comprised of a myriad of rules and regulations. It would be a formidable task to clean up the field in order for the Company Law to make a soft landing and sit harmoniously with the exiting specific FIE rules. More importantly, as the parallel systems have so far proven a convenient tool for the Chinese government to manage foreign investment, it feels no pressing need to abandon the system altogether. As will be discussed later, with the increasing involvement of foreign investors in China, the frictions between foreign investors and the Chinese government are set to grow, and the parallel systems may still be of value to the Chinese government to curb the flow-on effects to the domestic companies.

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The vested interests of foreign investors It can be further argued that there are also too many vested interests on the part of foreign investors for convergence to happen soon. Historically, in order to attract foreign investment, foreign investors have been given preferential treatment enshrined in various administrative regulations. Further, the specific FIE legal system appears to be more flexible and permissive than the Company Law. For instance, the specific CJV regime provides enormous autonomy in terms of profit distribution, investment retrieval and management structure; the WFOE also has considerable flexibility over management structure. This is in contrast with more stringent and more onerous Company Law rules. For example, the Company Law imposes tight restrictions on capital reduction, and requires all companies to establish three management bodies, namely shareholders’ meetings, a board of directors and a board of supervisors. There are also many areas where the specific FIE legal system is silent, thereby allowing room for foreign investors to manoeuvre. When the Company Law applies to FIEs, it is essentially a move to strengthen regulation of FIEs to the extent that it closes legal gaps, introduces more stringent rules and removes preferential treatments. For foreign investors, although the specific FIE system may have the problem of uncertainty due to its silence on certain issues, it has the advantage of being flexible. Therefore, despite their desire for the convergence of the parallel regulatory systems to facilitate compliance, foreign investors may find it unfavourable to their interests to apply the Company Law to FIEs.9 It follows that foreign investors may choose to object when the term ‘law’ is interpreted broadly so as to allow the Company Law to override the more generous treatment offered under specific administrative FIE regulations. The attitude of foreign investors does matter as they often have sufficient leverage to affect China’s FIE law in one way or another. Due to the significance of their investment, foreign investors are a powerful force that pursue their own interests by influencing the way China’s foreign investment law is made and enforced. For instance, foreign investors reacted very strongly to the draft of the 2008 Enterprise Income Tax Law,10 under which the Chinese government intended to immediately eliminate the tax benefits traditionally offered to foreign investors. It was reported that a total of up to 54 large foreign companies in China together signed a petition to the relevant authorities protesting against the legislative proposal (Mo 2005). Finally, the Chinese government compromised with the tax benefits for foreign investment to be phased out over a period of time instead. Apart from lobbying and petition, some foreign investors, driven by selfinterest, have apparently resorted to the use of some questionable or even illegal means to affect the legal process. Foreign investors are consciously aware that as a matter of tradition and culture, guanxi (connections) is critical to business success in China. Sometimes with the right connections one may even go beyond the limit of the law with immunity. Hence some foreign

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investors have devoted substantial resources to establishing and maintaining good connections with China at both institutional and personal levels. Many FIEs have chosen to set up so-called ‘public relationship’ offices in Beijing for the specific purpose of gathering information and developing connections, even though they may have no ‘real’ business operation in Beijing. This strategy has helped cultivate close relationships, or even a symbiotic one, between some government officials and foreign investors. Such relationships have sometimes become dubious where they sustain the so-called ‘capture theory of public regulation’ – under which regulators fall captive to the entities they regulate. Indeed, many ‘power for money’ trades are seen between foreign investors and government officials in China. To circumvent the Chinese law against bribery, it is now a widely adopted practice for foreign firms to invite relevant government officials to deliver a speech or give a seminar and then pay the latter a handsome amount of money. Of course, such practices are not confined to foreign investors. In essence, this practice is little more than a bribe in disguise for investors to curry favour with government officials. In some more egregious cases, outright bribes are given to corrupt government officials testing the integrity of the regulation of foreign investment in China and highlighting the influence of the nexus of wealth, power and law. The recent high-profile case of Guo Jingyi is an example. Still under investigation, this case is believed to be the ‘tip of the iceberg’.11 On 13 August 2008, Guo Jingyi, the then high-ranking Inspector in the Treaty and Law Department of the Ministry of Commerce, was detained by relevant authorities for his alleged bribery taking and collusion with foreign investors. This case also involved other officials in the Ministry of Commerce and several lawyers practising in the foreign investment area. The investigation into the case has so far revealed some interesting details of what is considered a typical pattern of corruption in the regulation of foreign investment in China. The whole scheme is found to be structured as follows: (1) foreign companies bribe government officials through lawyers who are closely connected to the governmental officials; (2) officials, in conjunction with the aforesaid lawyers, take advantage of their authority and position to make rules which meet the specific needs of the foreign company, or deliberately create loopholes in the regulation to be exploited by the foreign company; (3) the foreign company then makes its application to the relevant department for approval; (4) officials in the approving department suggest the foreign company ‘hire’ designated lawyers; (5) the foreign company pays bribe in the form of inflated legal fees; and (6) with the aid of the officials and lawyers, the foreign company finally secures approval for its investment project. The concerns of the Chinese government Although the Chinese government may have an interest in pushing for convergence of the dual systems, there are certain considerations against doing

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that in a short timeframe. The attempt to apply the Company Law to FIEs (as embodied in the FIE Law Application Opinion) suggests a move towards convergence of the dual systems of FIE regulation. This move is due to the call from some foreign investors, on the one hand, to have a single clearer FIE regulatory regime, and to the outcry from Chinese investors over those privileges associated with FIEs, on the other. There are legitimate concerns that Chinese investors have been at a disadvantage in light of those privileges available to foreign investors under the specific FIE legal system. In an effort to level the playing field for all investors, China needs to gradually reduce or even eliminate the preferential treatments for foreigners by subjecting them to the same rules as Chinese nationals. Another incentive for China to merge the dual systems may be that the dual systems have caused greater costs for the Chinese regulators than if there were a single legal system to administer. Finally, it may also be an opportune time for China to repeal the separate FIE legal system and require all FIEs to take the same organizational forms as domestic enterprises, given that China has now established a relatively complete and modernized business law system consisting primarily of the Company Law and the Partnership Law. However, the Chinese government will have to proceed with care in relation to the move. First, as noted above, foreign investors may react negatively to the reform under which their privileges will disappear over time and all investors are subject to the same regulatory system. Although China can now afford to forego some foreign investments as indicated by its policy shift from quantity to quality, it still needs to be careful to ensure its ability to attract foreign investment of the type it needs. Second, there is presently no urgent need to radically change the parallel regulatory structure for FIEs. The parallel systems of FIE regulation, albeit not without problems, have worked reasonably well thus far. A major overhaul is not justified as the costs might well outweigh the benefits. Therefore, the Chinese government has chosen to improve the workability of the current dual systems in a gradualist fashion, for example, through tidying up and compiling laws and regulations concerning FIEs. Last but not least, it may be problematic to simply apply the Company Law to the FIE issues without considering the special nature of FIEs. For instance, in the case of a joint venture, directors are appointed directly by the joint venture parties and thus are expected to represent their interests. This raises the intriguing issue of whether the Directors’ Duties under the Company Law apply to this pattern of business management and, if so, how. Another difficult issue concerns the role and function of the board of supervisors. Traditionally, EJVs and CJVs have only a board of directors to manage their business. But the Company Law requires the establishment of shareholders’ meetings and a board of supervisors. There is a big question mark over whether it is workable or meaningful to have a board of supervisors in EJVs and CJVs. Under the Company Law, the supervisors have the power to recommend the shareholders to remove directors. In a joint venture, however,

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the recommendation would essentially be made to the joint venture partners who actually hand-picked the directors in question. Further, under the Company Law, one-third of the members of a supervisory board must be elected by the employees of the company. As management power is delicately balanced between the joint venture parties in EJVs and CJVs, the establishment and composition of the supervisory board will be highly sensitive due to its effect on the balance of power. Concerns have been expressed as to whether the employee representative should be considered to be truly independent or effectively another vote for the Chinese Party. Hence, although the dual systems of FIE regulation will converge in the long term, they are likely to persist to some degree in the short term. The Chinese government has to be careful to time the move towards convergence of the dual systems, and there will be difficulties and uncertainties along the way. This is well illustrated in the way the FIE registration authority, namely the State Administration for Industry and Commerce (SAIC), has dealt with the issue whether the Company Law requirement of establishing a supervisory board should apply to FIEs. On 24 April 2006, the SAIC issued the FIE Law Application Opinion to require that the management structure of FIEs should comply with both the specific FIE legal system and the Company Law. However, as noted above, the Company Law conflicts with the specific FIE legal system as to whether FIEs need to establish a board of supervisors. One month later, the SAIC had to issue a Circular to avoid confusion on this issue, stating that the FIEs have discretion over the establishment of a supervisory board.12 This position was found to be inconsistent with the FIE Law–Company Law Relationship Principle under which, when the specific FIE legal system is silent on a given issue, the general Company Law applies. Therefore, on 22 September 2006 – just four months after the Circular – the SAIC changed its mind again, issuing a further Interpretation to clarify that the Company Law does apply and requires FIEs to establish a supervisory board.13 This has caused considerable confusion in practice, and the SAIC has been heavily criticized. At the same time, this shows the difficulties of coordinating the dual systems of FIE regulation. On the basis of these signs the move towards their convergence will not be smooth.

Conclusion The regulatory regime for FIEs has undergone significant change since China’s WTO accession in 2001. The central features of FIEs in China discussed in this chapter have included organizational form, capital contribution, profit distribution, management structure and so on. There are clearly advantages and disadvantages of the three types of FIEs, namely EJVs, CJVs and WFOEs. But more importantly, a critical analysis of the FIE regulatory regime reveals prospects for future development and these law reforms are directly linked to the political economy surrounding the FIEs in China.

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The regulatory regime currently exhibits several distinctive characteristics, the most significant being that FIEs are regulated by the dual systems: the specific FIE legal system and the general company law system. The general company law system supplements the specific FIE legal system, and certain areas have been shown as being in conflict. This conflict has been difficult to deal with as it goes to the heart of China’s foreign investment policy. The application of the company law system to the FIEs is a move towards convergence of the dual systems of FIE regulation. For the foreseeable short term, however, the dual systems of FIE regulation are likely to persist due to the variety of political and economic reasons highlighted in this chapter. Legal convergence is thus unlikely to be quick or smooth, although the evolutionary trends point towards it in the longer term.

Notes 1 Zhonghua Renming Gongheguo Gongsifa [Company Law of the People’s Republic of China] (promulgated by National People’s Congress on 29 December 1993 and effective from 1 July 1994; amended in 1999, 2004, and 2005) (hereafter Company Law). 2 For a more detailed discussion of the Law of the PRC on Chinese-foreign Equity Joint Ventures (the EJV Law), the Law of the PRC on Chinese-foreign Contractual Joint Ventures (the CJV Law) and the Law of the PRC on Wholly Foreign-owned Enterprises (the WFOE Law), see Huang (2009: 189, 190–201). 3 Guanyu Waishang Touzi de Gongsi Shenpi Dengji Guanli Falu Shiyong Ruogan Wenti de Zhixing Yijian [Implementing Opinion on Several Issues Concerning the Application of the Law in the Administration of the Examination, Approval and Registration of Foreign Investment Enterprises] (promulgated by the State Administration for Industry and Commerce, the Ministry of Commerce, the General Administration of Customs and the State Administration of Foreign Exchange on 24 April 2006), art. 10. 4 Company Law, Art. 59. 5 EJV Regulations, Art 90. 6 Company Law, Art. 181. 7 Company Law, Art. 26. 8 WFOE Implementing Regulation, Art. 30. 9 See e.g. Bath (2007:13, 16), stating that as a result of the Company Law applying to FIEs, foreign investors in a WFOE have the disadvantage of having to disclose their shareholders’ agreement to the approval authority. 10 Zhonghua Renmin Gongheguo Qiye Suodeshui Fa [Enterprises Income Tax Law of the People’s Republic of China] (promulgated by the National People’s Congress on 16 March 2007 and effective from 1 January 2008). 11 ‘The former Director-grade Inspector of Ministry of Commerce was arrested for alleged bribery taking.’ Available at: http://www.chinareviewnews.com/doc/1008/ 1/9/7/100819704.html?coluid = 7&kindid = 0&docid = 100819704m (accessed 5 Dec. 2008). 12 Guanyu Shishi ‘Guanyu Waishang Touzi de Gongsi Shenpi Dengji Guanli Falu Shiyong Ruogan Wenti de Zhixing Yijian’ de Tongzhi [Circular on Implementation of the ‘Implementing Opinion on Several Issues Concerning the Application of the Law in the Administration of the Examination, Approval and Registration of Foreign Investment Enterprises’] (issued by the SAIC on 26 May 2006).

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13 Guanyu Waishang Touzi de Gongsi Shenpi Dengji Guanli Falu Shiyong Ruogan Wenti de Zhixing Yijian Zhongdian Tiaokuan Jiedu [Interpretation of Key Provisions of the ‘Implementing Opinion on Several Issues Concerning the Application of the Law in the Administration of the Examination, Approval and Registration of Foreign Investment Enterprises’] (issued by SAIC 22 September 2006).

7

China’s ‘dual track’ legislation on business organizations and the effects of the Anti-monopoly Law Xianchu Zhang

Introduction: creating a level playing field? The historical reform in the past 30 years has made the People’s Republic of China (PRC) the second largest economy in the world. The reforms have irreversibly rooted a market economy in this huge socialist country. As a result, the political and economic infrastructures have been significantly changed and the legal system to a large extent has been modernized. China’s membership of the World Trade Organization (WTO) has further subjected the country to market discipline and the multilateral trading system. The ‘domestic state’, the ‘private sector’ and the ‘foreign investment’, as the three major engines, have made significant contributions to support China’s economic take-off. The state sector has been in a leading position with full government support. By 2007, the number of state-owned enterprises (SOEs) had dropped to less than 150,000; but their profits rose three times between 2003–07 to surpass RMB1 trillion – about 30 per cent of the national (gross domestic product) (GDP) (Ma 2009). In contrast, by 2007, the number of private enterprises reached 4,947,000 with approximately 64 million employees. In addition, there are 25.8 million commercial households in operation with the private sector contributing more than 60 per cent to the national GDP.1 Since the 1970s, accumulated foreign direct investment (FDI) has reached US$770 billion; increasing by 20 per cent annually. By 2008, more than 280,000 foreign investment enterprise (FIEs) had been established in China creating 50 million jobs and contributing 57.7 per cent of China’s import and export volume.2 Although, from the very beginning of the reform process, marketization has inevitably led to privatization in China, this reality has not been officially recognized by the Party-state – at least not ideologically. Some senior officials of the Communist Party of China (CPC) have recently renewed their refusal to acknowledge the concept with statements confirming that ‘the reform will not mean privatization and China must not practice it’ (Renmin Ribao, 13 April 2009). Due to this political conundrum, there has not been a commonly accepted definition of privatization in China to this day.3 Despite impressive economic progress, the distinct characteristics of Chinese socialism have presented strong political resistance to the market

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ideology in the course of China’s modernization. In terms of creating the conditions of a ‘level playing field’ in the market, for example, the variety of business organizations with Chinese characteristics has continued not only to confuse investors, but also to seriously affect competition conditions and the healthy development of a market economy in China. Recently, some commentators even warned that there is a potential danger that the country may lapse back to the old economic model of state control and manipulation (German Daily, 4 May 2009). Against this backdrop of a super-complex political economy, this chapter examines the effects of the dual track legislation on business organizations since the 1970s, and critically analyzes the implementation of the newly adopted Anti-monopoly Law (AML). Indeed, in the current political, ideological and economic context, it may appear somewhat ironic that an anti-monopoly law is being promoted.

The constitutional principles and dual track legal framework for business organizations Since the late 1970s, economic reform and institutional modernization in China have progressed in a pattern whereby the relevant legislation and supporting policy have been adopted following political decisions of the CPC. As such, the study of the development of business organizations in China in the past 30 years has to start with an analysis of key decisions of the CPC and ensuing constitutional amendments. The return of socialist legality The present Chinese Constitution was first promulgated in 1982 as the landmark of the return of socialist legality. In the Preamble, the so-called four cardinal principles, including the leadership of the Communist Party, the guidance of Marxism-Leninism and Mao Tse-tung thought, the people’s democratic dictatorship and the socialist direction were explicitly stated. Article 6 guarantees the public ownership as the basis of the socialist economy. Article 7 provides that the public economy shall be the leading force of the national economy with the safeguard of the state; whereas under Article 11 the private sector within the permitted scope was first defined as the supplement to the public economy under the administration, guidance, assistance and supervision of the state. On 20 October 1984, the reform of the economic system was officially implemented when the CPC adopted the Decision on the Economic System Reform (CPC 1984 Decision). Although the CPC 1984 Decision primarily focused on the liberalization of SOEs, the individual economy and foreign investment were recognized as ‘the necessary and useful supplement to the socialist economy’. To implement economic reform, some laws governing business organizations were enacted for the first time in the PRC history. As Jianfu Chen

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mentions in Chapter 5 in this volume, these include, among others, the Sino-Foreign Equity Joint Venture Law of 1979 (the EJV Law), the Law of Wholly Foreign Owned Enterprises of 1986 (the WFOE Law), the Law of Enterprises Owned by the Whole People of 1988 (the SOE Law), the SinoForeign Contractual Joint Venture Law of 1988 (the CJV Law), the Law of Township Enterprises of 1996 and the Provisional Regulation on Private Enterprises of 1988. On the one hand, these pieces of legislation have ushered in a new era replacing the old government planning and instructional model, with legal means to regulate the business organizations and their activities. On the other hand, the enactments were still guided by the socialist ideology that differentiates ‘ownership’ on the basis of differing rights and obligations. For example, according to Article 57 of the SOE Law, the local governments are under a legal duty to provide the SOEs concerned with the necessary materials and undertake welfare programmes concerning the enterprises; whereas under Article 40 of the Private Enterprises Regulation, the State Administration of Industry and Commerce (SAIC) (i.e. the state organization responsible for market registration and supervision) is required to strengthen its supervision over private firms and deal with their violations and unlawful operation. Public vs. private ownership Following Deng Xiaoping’s famous speech during his visit to Guangdong, the CPC adopted the ‘Decision on Certain Issues Concerning Establishment of a Socialist Market Economy’ on 14 November 1993 (the CPC 1993 Decision), officially introducing the concept to China. According to the CPC 1993 Decision, the so-called socialist market economy means enabling the market to play the basic function in resource distribution under the state macro-control with public ownership being maintained. Other sectors, including individual, private and foreign investment, should then be developed, together with the CPC 1993 Decision calling for the introduction of a modern enterprise system to China. Although the CPC promised to create fair conditions for market competition and treat all types of enterprises equally, Section 2(9) of the CPC 1993 Decision emphasized the prevailing position of public ownership, reflected in holdings of the total assets of society and in the control of national economic lifelines and development. The CPC 1993 Decision led to another constitutional amendment on 15 March 1999. Article 16 in particular upgraded the status of the private sector from ‘supplementary to the public economy’ to an ‘important part of the socialist market economy’. The reform reorientation soon produced a new line of legislation, including the Company Law, the Partnership Enterprises Law and the Sole Proprietorship Law. Together, these new enactments represent a landmark of market development in China with their introduction of new business vehicles with different liability design available to all market players. However,

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the resistance of the old ideology has left clear traces on this legislation. For instance, in the Company Law of 1993, only the state could establish single owner companies, and the issuing of corporate bonds was stipulated as an exclusive privilege for state-owned companies and SOEs. Also, the Partnership Enterprises Law disallowed an enterprise legal person from becoming a partner simply due to the political concern that such a practice could cause a loss of state assets if a SOE joined a partnership (Li and Zhu 1996). With China joining the WTO in late 2001, it was required to accept non-discrimination as a fundamental legal principle. This provided renewed impetus for further reforms to its economic and legal system. In preparing for WTO membership, the government carried out a campaign to verify existing legislation and regulations in China. As a result, and to a considerable extent, the laws governing business organizations or companies have been overhauled. With respect to foreign investment enterprise laws, some discriminatory and restrictive provisions have been deleted. Deletions include the statutory mandate to purchase in China first, restrictions on domestic sale, the self-balance of foreign exchanges and buying insurance only from Chinese insurers. A new round of reform was further accelerated when the CPC promulgated its Decision on Certain Issues Concerning Improvement of the Socialist Market Economy on 14 October 2003 (the CPC 2003 Decision). According to the CPC 2003 Decision, the leading role of public ownership still had to be adhered to, but could be realized through different means. As such, the CPC 2003 Decision called for vigorous development of the non-public economy by eliminating institutional barriers and enabling market access. Section 1(5) clearly stated that private investments should be allowed in infrastructure, public utility and other business areas as long as the law did not prohibit; and be entitled to the equal treatment in finance, taxation, land use and foreign trade. The national legislature quickly responded to the policy adjustment of the CPC with another constitutional amendment on 14 March 2004. Under Article 21, the legal protection to individual and private economy was restated. The government is required, in addition to administration and supervision, to ‘encourage, support and guide the development of the non-public economy’. The initial Company Law reform The Company Law reform of 2005 struck out the restrictions on corporate finance and use of the one-man company, and recognized more corporate autonomy and operational flexibility, management accountability and minority shareholders’ protection. Article 3 of the revised partnership Enterprises Law also allows enterprise legal persons to become partners of partnerships as long as they are not SOEs, listed companies or entities of public interest. Despite this progress, the political considerations of a socialist ideology have also played an active role in the reforms. As a telling example, the Company

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Law of 1993 explicitly stipulated that grass-roots branches of the CPC should be established in companies with supervision power in accordance with the Charter of the CPC. Such a provision was highly controversial in early 1990s when it was included in the Draft. To facilitate its promulgation, a revised version was accepted as a compromise (Jiang and Fang 2003). To the surprise of many, the comprehensive amendments made to the Company Law in 2005 not only failed to reform this political provision, but under Article 19 created a further legal obligation for companies to provide branches of the CPC with ‘necessary conditions for their activities’. Furthermore, in 2008, the initial State Enterprises Assets Law was adopted; applying not only to state-owned and state-controlled enterprises, but also to all enterprises with state investment in any form. Chapter One of the Law sets out the general principle that state assets in enterprises are protected, supervised for increases in value and prevented from any harm. Thus far, this brief overview provides leads as to the effects of the developing dual track legislation system governing business organizations under the current Chinese Constitution. One line of legislation comes under the political classification of ‘ownership’ and the other is based on different forms of ‘liability’. With further legislative reforms in more recent years, the legal environment for business organizations in China has greatly improved. However, given the transitional period in China from a planned economy to a market economy, the current legal framework is still, to a considerable extent, hampered by political ideology in that it fails to provide for a level playing field in the market. It has a clearly entrenched bias in favour of public ownership and the state sector. From a macro-economic perspective, the current legal system reflects some fundamental characteristics of the so-called socialist market economy in China. Indeed, as argued in Chapter 5, a foundation has been established for the dual track legislation in business organizations. But it is a strategy of gradual transformation. First, the well-designed dual or double track system consists of parallel ‘state’ and ‘non-state’ sectors (Lan 1995). Second, unlike the shock therapy adopted by Eastern European countries including Russia (for immediate privatization following the collapse of the former Soviet Union), the path taken in China by the CPC leadership is unique and does not give up socialism. Rather, to make it survive, the reforms are based on an unorthodox model, involving the participation of a private economy (Gonçalves 2006). Third, despite the desire of the political leadership to utilize the capitalist means to develop a socialist market economy, there is an inherent conflict between socialism and capitalism. That this is unavoidable may even constitute a future threat to the political regime. Consequently, the statedriven marketization programme is characterized by government suspicion of non-state institutions that are not under its direct control. Indeed, some are suppressed (Clarke 2007b). After 30 years of reform, the CPC’s ultimate goal still appears to maintain its power as distinct from more fully liberalizing the market and promoting rule of law (Link and Kurlantzick 2009).

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The policy and practice of market reform: progress and barriers Against the above backdrop of the exercise of political power, the laws formally adopted thus far are best read together with government policies and practices to fully understand their practical effects. In fact, there has been for some time many complaints that Chinese legislation often lacks transparency, is ambiguous and provides insufficient practical guidance. This is partially the result of inexperience of the government in dealing with the new market challenges, and partially reflects an unwillingness of the CPC to fully embrace the rule of law (and subject itself to it). As such, it is government policies that may have to be relied on when the law in China has not functioned with sufficient certainty and predictability (Lubman 2006). This uncertainty has affected, among other things, share trading, banking, market regulation and foreign investment in business organizations. Each of these is briefly examined as follows. Shareholdings Under such conditions of policy control, key features of ‘Chinese characteristics’ of the dual track legal system are revealed. For instance, with the establishment of modern company systems and a securities market, the CPC’s policy prioritized the financing of SOE reform (and the leading role of the state sector) from the very beginning. As a result, by 2006, more than 55 per cent of shares issued on the securities market were owned by either the state or by state-controlled enterprises, and these shares could not be freely traded on the market (due to the government worry about potential loss of public ownership). Listings on the securities market to a large extent have become a financial privilege of large SOEs (Beltratti 2006). Under Section 1(4) of the CPC 2003 Decision, shareholding control has therefore been a key means of enhancing public ownership through the securities market and via state monopolies in key sectors of the national economy. Banking The banking system in China, both before and after the reforms, has kept its lending bias against private enterprises. As pointed out in Chapter 1 in this volume, despite the commercialization of state-owned banks in late 1990s, there has been a ‘political pecking order’ in the allocation of credit. This has continued whereby private firms have been discriminated against with the financing of SOEs and the state sector given the top priority. Thus, despite their declining contribution to the GDP and often low efficiency, large SOEs have obtained a disproportionate share of financial resources, which has led to substantial financial barriers to private firms (Poncet et al. 2009). At a practical level, in addition to policy support and tight control by the

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government over market resources (such as rights of land use, market access, taxation and infrastructure development), the culture of heavy reliance on financial control has left the private sector with limited means of providing security (including collateral) to obtain bank loans (Liu Yihui 2009). It can be argued that such a ‘commercial’ policy environment creates the conditions for thriving ‘informal’ loan arrangements, deal-making with corrupt local officials and tax avoidance (see Chapter 13 in this volume). Market regulation In terms of market regulation, market reforms have thus far been shaped somewhat by the government’s Marxist ideology of the ‘instrumentality of law’. In certain extreme cases, the government could even trump the legal provisions with its own policy. For example, in the course of the SOE reform, in order to find sufficient funding to finance SOE bankruptcies, the State Council issued a circular entitled the ‘Supplementary Notice on Certain Issues Concerning Mergers and Bankruptcy and Re-employment of Workers in Certain Cities’ on 2 March 1997, which explicitly stated that the proceeds of land-use rights sales should be used first to pay out employees, even if the land was subject to a mortgage. This may well be a populist government edict, but the commercial outcome is that some of the legal entitlements of security creditors are disregarded. In a biased business environment, the domination of the state sector in the national economy has reached a new peak in recent years and the trend has been accelerated under the ‘national champion’ strategy, after China joined the WTO. For instance, in 1998–2006, the number of SOEs and statecontrolled companies dropped from 64,700 to 26,100 (59 per cent). However, their total assets increased by 78 per cent to RMB13.4 trillion. By 2007, following 77 government rearrangements and reorganizations, the number of huge companies directly under central government control was further down from 196 to 151. Yet their contribution to the national economy reached 44 per cent of China’s GDP. Apparently, the government has used the reform to reposition the state sector. According to the latest plan, the concentration of the state sector will be further enhanced by reducing the number of enterprises directly controlled by the central government from 151 to 80–100 by 2010, establishing 30–50 super-sized companies with international competitiveness (Gao and Ren 2009). With further opening and reform, as well as better legal protection, both foreign investment and the domestic private economy have been taking more aggressive approaches to accessing the market. In addition to the rapidly increased amount, FDIs have witnessed a dynamic trend in recent years of seeking full control over their investment projects, with the percentage of wholly foreign-owned or controlled projects (in all foreign FDI projects) increasing from 35.77 per cent in 1997 to 78.96 per cent in 2008 (Bao 2009).

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Indeed, the central government has in recent years adopted measures to promote private activity in the economy. As political recognition since 2000, more private entrepreneurs have been admitted to the CPC.4 In addition, the Law to Promote Small and Mid-Sized Enterprises and the Law of Real Property Rights were promulgated in 2006 and 2007 respectively. Moreover, the State Council adopted the Certain Opinions to Encourage, Support and Guide Developments of Non-public Economy on 19 February 2005 (2005 Opinions), under which the principles of equal market access and fair treatment were to be applied to the non-public economy. Private capital should be allowed access to business areas in so far as those areas are not prohibited by state regulations. As such, since economic reform started in the late 1970s, Party-state policy has gone through four stages: ‘strict prohibition, tolerance, accommodation and encouragement’ (Peng 2004). All these measures, however, have not brought about fundamental improvement. Ideological resistance and the institutional obstacles have continued to operate to deny market access to and equal treatment of the private economy; in certain areas biased practice against private enterprises by state-controlled monopolies has even increased. Although the leadership of the CPC takes an elitist position, yet wants to incorporate private economic forces into a socialist regime, further development of the private economy in China faces serious challenges. Even before the worldwide financial crisis, the development pace of the private sector had slowed. For instance, decrease of private enterprise registrations since 2007 was recorded in at least seven provinces, including Beijing and Shanghai. The number of individual commercial households also dropped from 31.60 million in 1999 to 25.96 million in 2006 (The Industrial and Commercial Association of China 2009). The latest information indicates that during the crisis the government policy ‘rescue credit’ of RMB4.8 billion issued in the first three months of 2009, less than 5 per cent were provided to small and mid-sized enterprises (which make up 99 per cent of all enterprises in China!). Soon after, the China Social Science Academy published a more detailed report which warned that 40 per cent of small and mid-sized enterprises had been closed down and another 40 per cent were badly struggling for survival.5 As such, the dualist legal policy regime has created a de facto uneven level playing field in that it is biased. The state sector (with full government support, key monopolized business areas and FDIs under superior legal protection), are simply treated better than domestic private firms. Despite improved legal and business regulatory environments, political discrimination still renders the private sector in China as the least favoured part of the national economy (Huang 2004). The ‘red hat’ phenomenon In this context, the difficulties facing the development of a private economy gives rise to further institutional concerns. To fight for their survival many

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private firms have had to develop different schemes to offset the institutional biases, such as tax evasion and other corrupt means. This is well known in China’s commercial system. In particular, two phenomena attract special attention. One is the so-called ‘red hat’ phenomenon where private enterprises seek political affiliation with the government, namely wearing a red hat, in order to get a ‘helping hand’ to access the market and financial resources. A study in 1999–2004 of more than 106,000 private enterprises found that 23 per cent had political connections with the government at different levels and that their affiliations significantly enhanced these firms’ survival prospects. Ironically, the politically unaffiliated private firms performed better in terms of productivity and growth (Jun and Girma 2007). This of course raises the question of where the profit margins disappear to in the affiliated enterprises. In China, a key factor in running a successful private enterprise may not, to a large extent, be the ability to attract profitable opportunities in a transparent way, but rather the ability to form strategic alliances with those in power and control. The ‘false foreign investment’ phenomenon The other phenomenon is known as ‘false foreign investment’ where private firms have either moved their assets to a foreign jurisdiction, or obtained some foreign ownership and then re-entered the Chinese market as a ‘foreign investment’, to obtain a superior legal status and better treatment. Some studies have shown that the discriminatory business environment has actually created this cover of foreign investment, as an incentive to local private entrepreneurs to take such steps in China (Huang 2004). Thus far I have argued that market conditions reflect a serious gap between the nominal legislation and the actual policies and practice adopted. The practical reality is a biased political ideology generating (and in turn then generated by) institutional shortcomings. As such, Huang Yasheng (of MIT) convincingly argues: To a large extent the fact that the private sector was still able to grow in an enormously difficult environment after the Tiananmen crackdown [of 1989] is a tribute to the agility and acumen of Chinese entrepreneurs, not to the wisdom of the policy of the Chinese government. (Huang 2008b: 23)

The Anti-monopoly Law (AML) of the PRC After 14 years of debates and drafting, the AML was adopted by the Standing Committee of the National People’s Congress on 30 August 2007 and came into force on 1 August 2008. The introduction of this law is widely considered crucial to deepening economic reform in China and promoting marketization.

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The AML includes eight chapters and 57 articles. The legislative purposes stated in Article 1 seek to prevent and curb monopolistic conduct, safeguard fair market competition, promote economic efficiency, protect lawful rights of consumers and public interests, and ensure the healthy development of China’s socialist market economy. As such, the AML is loaded with several and, at times, competing goals. What is ‘monopolistic conduct’? The AML does not clearly define ‘monopolistic conduct’, but Article 3 sets out three general categories: (1) any monopoly agreement among undertakings; (2) abuse of dominant market positions by undertakings; and (3) concentration of undertakings that may eliminate or restrict competition. Article 12 of the AML refers to ‘undertakings’ as ‘legal persons, other organizations or natural individuals that engage in commodities and services trades’. This narrow definition flags the government’s unwillingness to directly subject state entities and monopolized businesses under its control to the jurisdiction of the AML. There may be, therefore, competition for some but not for others! In the 2005 Draft of the AML, abuse of administrative power by government agencies and their subordinate departments that would eliminate or restrict competition was included in the list of monopolistic conduct. However, in the final version of the AML, administrative monopoly with abusing government powers was deleted from the monopolistic conduct list. Instead, a vague statement was added in Article 8 of the AML as a general principle that ‘administrative agencies shall not abuse their powers to eliminate or restrict competition in the market’. Thus, on the one hand, abuse of government powers by administrative agencies may not strictly be considered ‘monopolistic conduct’. Article 4 of the AML explicitly stipulates that the government shall formulate and implement competition rules ‘suitable to the socialist market economy of China’. Moreover, Article 7 of the AML in this way allows the government to protect the undertakings of state-monopolized businesses due to their strategic importance to national economic lifelines and national security. In explaining such provisions, the Ministry of Commerce (MOFCOM) makes it clear that the special feature of the so-called socialist market economy in relation to the anti-monopoly regime lies in the leading position of public ownership. Market efficiency, as a crucial antimonopoly goal, may only be achieved if it is in line with the public ownership principle (The Department of Treaty and Law of the MOFCOM 2007). On the other hand, the Law has some separate rules (with a different approach) to deal with administrative monopoly. Chapter 5 of the Law sets out detailed rules against abuse of administrative powers, including forced purchase, regional blockade, discriminating standards, forced restriction on competition and eliminating or restricting competition by enactments in violation of the national laws and regulations. With this approach, some

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legislative branches held that, given current political and market conditions, it would be hard to expect the AML to solve fundamentally the problem of administrative monopoly. But as specific legislation, the AML has at least introduced some rules to reflect the position of the state and limit abuse of monopolistic power in the market. However, a careful reading will further find that Article 33 of the AML merely subjects ‘administrative monopoly with trade of goods’ to its jurisdiction. Arguably, this leaves all other government monopolistic schemes with ‘services trade’ untouched by the legislation. Abuse of dominant market position Another focus of the legislation is ‘abuse of dominant market position’. Article 17 of the AML defines ‘dominant market position’ as the status of undertakings to control the price, quantity or other trading conditions of relevant products so as to eliminate or affect competition within the relevant market. According to Article 13, such a position can be established by proving certain key factors, such as market share and status of the undertakings concerned, as well as the relevant market conditions. Once a market dominant position is established, abuse of such a position will be found through trading at a monopolistic high price, predatory pricing, discriminatory treatment, refusal to deal, exclusive or forced transactions, tie-in schemes or refusal of access to network. Article 20 also sets out rules governing market concentration, which arises in mergers of undertakings, obtaining control of other undertakings by way of acquisition of shares or assets or by contract. A concentration that meets the statutory threshold will not be carried out unless the notification is made to the state anti-monopoly authority. According to Article 9 of the AML, the Anti-monopoly Commission of the PRC is established as the state authority under the State Council in charge of rule and policy making and coordination of implementation. The top leaders of MOFCOM, the SAIC and the State Commission of National Development and Reform (SCNDR) have been appointed as deputy directors and 14 members of the Commission are representative of different state ministries and agencies.6 However, the Commission will not engage in any concrete enforcement, which will be left to the MOFCOM, the SAIC and the SCNDR. Chapter 7 of the AML spells out three types of legal liabilities against violations, including criminal liability, administrative penalties and civil compensation to the victims concerned. If an interested undertaking disagrees with the decision of the anti-monopoly authority, the People’s Court may conduct its judicial review upon the party’s petition as the legal remedy. It should be noted, however, the penalties under the Law are much more lenient compared with the early drafts. For example, the maximum fine has been reduced to RMB1 million from RMB10 million of the 2005 Draft and RMB5 million of the 2006 Draft. The civil compensation of up to twice of the actual loss suffered by the victim in the 2005 Draft has been removed.

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Institutional challenges to implementing the Anti-monopoly Law Monopolized position of the state sector Given the effects of the dual track legislation on business organizations and the uneven playing field that has been established, a crucial concern about the implementation of the AML is the question of the extent to which the legislation can improve conditions for market competition. More specifically, to what extent the dominant position of state sectors in the market will be further strengthened and whether this will generate pernicious abuse of local and sectoral administrative monopolies, such as administrative approvals, discriminative enactments, technical barriers and excessive fee charges (Qi and Zhang 2008). Alternatively, to what extent will the treatment of foreign investors and the domestic private economy be improved? On the positive side, China has come a long way in a relatively short time, to have integrated in the global economy with its commitments to a market economy. The establishment of an anti-monopoly regime, as a crucial institution support to healthy economic development of the country, may be taken as evidence in this regard. However, given the Chinese characteristics of the socialist market economy, the development of an anti-monopoly regime may face, in addition to many technical difficulties, some tough institutional challenges. But thus far it seems clear that the implementation of the AML may not change the government policy of fully supporting the state sector and maintaining its market domination. In 2005, before the Draft AML was submitted to the national legislature for deliberation, Mr Li Rongrong (Director-General of the State Assets Supervision and Administration Commission (SASAC)) made an open statement that in the transitional period: The state authority ought to be more involved in development of stateowned enterprises in order to prevent any shaking-up of the leading position of the public ownership in China . . . [and] that irresponsible withdrawal of the public economy from the market would not only deny the state sector to play its major role, but also cause more trouble to the national economy.7 In the legislative process, this political position was reflected in the complete deletion from the final draft of the section on administrative monopoly.8 Right before the adoption of the AML, the Central government promulgated the Guiding Opinion to Promote Adjustment of State Assets and Reorganization of State Owned Enterprises (drafted by the SASAC) on 18 December 2006. The circular made it clear that the state would maintain ‘absolute control’ in seven business sectors, viz: the military industry, power, oil, coal supply, telecommunications, civil aviation and other transportation

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means. In other key industries such as equipment manufacturing, the auto industry, electronic information, construction, iron and steel production, non-ferrous metal, the chemical industry, exploration and design, and science and technology, the state should keep ‘relatively strong control’. This state policy has triggered deep concern about consumer protection, fair participation of private sectors, rent-seeking and corruption, market efficiency and indeed the nature of further political and economic reform in China. There are many studies in China reflecting such concerns, recording public discontent with such monopolistic conduct and exorbitant profits in protected SOEs (Li and Young 2008). However, the government has shown little intention of changing the current market set-up and even denies the existence of government-controlled monopolies in assuaging public anger.9 Some experts have thus concluded that: The monopolistic interests of SOEs have always been sophistically preserved by the various government departments using commercial and national reasons. In turn, this creates poor services and uncompetitive rates for consumers. A futile regulation like Chapter 5 [of the AML] would only be nominal and symbolic at best. (Li and Young 2008) Foreign mergers and acquisitions: sensitivity and uncertainty For foreign investors, the aggressive expansion of foreign investment in China has given rise to the sensitive question of whether there is equal application of anti-monopoly rules to them. Although the business environment in China is quite different from other jurisdictions due to the extent of government control, foreign mergers and acquisitions (M&As) have been a very dynamic means of attracting foreign investment since the 1990s. The wave of foreign M&As in China has gained momentum from the accelerated marketization, the further opening-up and the improvement of legal conditions under China’s WTO obligations and commitments. In fact, M&As in China were at an all-time high in 2008 with deals worth US$159.6 billion recorded; 44 per cent more than in 2007. The inbound M&As posted a 34.2 per cent increase compared with 2007, making China a global investment haven despite the global financial meltdown (China Daily, 6 January 2009d). To deal with the wave of foreign M&As after China joined the WTO, some state authorities jointly promulgated the Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors on 8 August 2006 (the 2006 Provisions). As a means of control, Article 12 created a compulsory notification procedure for foreign M&As in key industries and where national economic safety (or transfer control over well-known trademarks or enterprises of China) may be affected. Moreover, Chapter 5 of the 2006 Provisions mandated notification of a foreign M&A to the MOFCOM and the SAIC with the separate thresholds. Although the 2006 Provisions lacked

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sophistication, they were still criticized for overt bias in protecting SOEs and some domestically owned enterprises (Davies and Cheng 2005). As a developmental step, however, to build up a uniform anti-monopoly regime in China, the MOFCOM amended the 2006 Provisions with immediate effectiveness on 22 June 2009 (the 2009 Provisions). The unilateral revision of the 2006 Provisions that were jointly promulgated by six state authorities indicates the exclusive jurisdiction of the MOFCOM on foreign M&As in the new enforcement structure. More importantly, the 2009 Provisions deleted Chapter 5 of the 2006 Provisions and shifted subject notifications of foreign M&As to the ‘Concentration Provisions of the State Council’, which was enacted after the implementation of the AML with uniform application to all enterprises. This effectively means that some special foreign M&A rules are being merged into the newly established anti-monopoly regime with equal and unified application. But at the same time, the 2009 Provisions, as a separate set of rules governing foreign M&As, are retained. For example, the unclear provision of Article 3 that ‘foreign M&As shall not cause over-concentration, restrict or eliminate competition, disturb the social and economic order and public interest, or result in loss of state assets’ will continue to be the concern for foreign investors. Some multinational companies have praised the government’s continuing effort to improve the legislation; however, they do not hide their worries about market barriers being created by the new Law and possible abuses of procedure. Some foreign investors have further expressed their concerns with the M&A review on national security grounds (Junfeng Li 2009).10 Recent cases illustrate these worries and uncertainties. For instance, in 2007, two French companies: SEB and Alston, successfully completed acquisition deals with the leading Chinese cookware-maker Supor and Wuhan Boiler, as a large listed power company, although the deals were opposed by the domestic competitors (China Daily 2007b). Further international attention has been directed to the government rejection of the proposed acquisition of an 85 per cent share of Xuzhou Construction Machinery Group Co. (known as ‘Xugong’) with US$375 million by Carlyle (then the largest private investment fund in the world in 2005), with the local government’s support. During the national debate on this deal the State Council issued ‘Several Opinions on Speeding up the Revitalization of Equipment Manufacturing Industry’ on 16 June 2006, to be back-dated with the effect of frustrating the deal, by retrospectively designating the construction machinery industry as ‘a key industry of the nation’. As a result, any transfer of control of a large enterprise in this industry must be approved by the relevant state authorities. In this context, legitimate concerns are raised as to where government political pressure may be imposed on any specific foreign acquisition.11 In July 2008, Carlyle abandoned its acquisition plan after a three-year struggle and despite having agreed to reduce its stake to 45 per cent (Reuters Report 2008). Another controversial decision with an international impact was the rejection under the AML (by the MOFTEC) of the proposed acquisition of

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Huiyuan (China’s largest juice maker) by Coca-Cola, through a wholly owned subsidiary, for HK$17.9 billion. The one-and-a-half page decision leaves more questions than answers. It nonetheless identified MOFCOM’s focus in scrutinizing the proposed merger, under Article 27 of the AML, as including negative impacts of the merger on competition in the market, the combined power of the two well-known brands, and the squeezing out of domestic small and mid-sized enterprises.12 Without further detailed explanation and justification, the rejection seems unconvincing as it also lacks transparency. Some experts argue that in fact the fruit juice market in China has been very open and fully competitive without any business monopoly. As evidence, they cite that currently the per capita consumption of fruit juice is less than 1 kg (which is far below the average annual consumption of 50–70 kg in developed countries).13 As such, the MOFCOM decision has not only divided scholarly opinion (Sun Jin 2009), but also put MOFCOM in the defensive position of denying that ‘protectionism’ lies behind its decision.14 WTO implications WTO membership has also brought further pressure to China in so far as it is required to improve its competition policy and market regulations. In June 2008, for example, Canada and the United States requested consultations with China about measures prohibiting foreign financial information suppliers from directly soliciting subscribers for their services in China. They were concerned their services could only be provided through the only designated local official agent. The USA and Canada both claimed that such a practice was inconsistent with the General Agreement on Trade in Services (GATS) provisions on market access and national treatment. The dispute ended up with the promulgation of a new decree by Chinese authorities to allow foreign institutions to provide information services directly to their subscribers in China (albeit under government approval). Recently the WTO panel handed down another decision on the dispute between the United States and China on China’s domestic measures, inter alia, to reserve the trading rights with respect to imported films, audiovisual entertainment products, sound recording and publications to the statedesignated or state-owned enterprises. The panel found such measures were inconsistent with the rules of the WTO, including the national treatment and market access commitment under the GATS.15 These proceedings may serve an important role by challenging the CPC policy of state monopoly and market access restriction, to pave the way for a new and more level playing field under the WTO’s non-discrimination principle. Limited legal remedies Unlike foreign investors, domestic private investors have not made such clear progress under the new AML. To the government’s surprise, the first batch

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of lawsuits filed under the AML were not disputes between competing enterprises, but all by small and mid-sized private enterprises against the government administrations. Within 18 days after the AML had become effective, the State Administration of Products Quality Inspection was named defendant in three cases for abusing its administrative power to block market access by way of monopolized and compulsory licensing, certifying and fee charging. It was further reported that a department head of the Administration committed suicide in the period after the allegations triggered criminal investigations of the violations and dealings with fee profits. Thus far, the court has refused to accept the lawsuits on the grounds of the statutory limitation period.16 Later, some of the private firms tried to sue two big state-controlled companies: Sinopec and China National Petroleum, for their alleged market monopolistic conduct resulting in the closure of 663 private oil dealers and 45,000 gas stations (even though as many as 14 instructions on equal treatment had been issued by the top leaders of the State Council).17 The Supreme People’s Court has further made it clear recently that in implementing the AML against administrative monopoly, the People’s Court will now only accept legal actions against ‘concrete administrative decisions’, as distinct from those against government provision, regulation and policy. As such, a government monopoly policy can neither be sued, nor be made subject to other legal enforcement schemes.18 Many local governments have, as a consequence, adopted various protectionist ‘policies’ during the international financial crisis in order to protect the local products and enterprises from litigation. This simply further illustrates the gravity of the institutional challenge ahead (Sun 2008). In this sense, implementing laws that guarantee fairness, consistency and transparency is problematic and the current AML is essentially ‘a toothless tiger’ (Huang 2008). Unequal market access and lack of consumer choice The implementation of the AML may not, at least in the near future, change the competition culture and market landscape in China. According to a recent survey, despite repeated encouraging policy announcements of the government, the private economy still faces serious market access obstacles. Among some 80 industries, the state sector has entitled access to 72; foreign investments are permitted to enter into 62, whereas the domestic private economy is allowed access to only 41. Even the State Council in its ‘2005 Opinions’ allowed private businesses access to certain state dominant businesses, the private participating ratio in these areas being less than 20 per cent (with 0.6 per cent in railway transportation as the lowest).19 Such statistics are illuminated by some recent cases. In 2004, a private steel enterprise known as Tieben, with an investment plan of RMB1.06 billion, was ordered to close down in the government ‘macro-adjustment’ to deal with the alleged overheated economy. The private enterprise was thus removed, not by normal market competition, but by government edict. The founder of the enterprise

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was then arrested in April 2004, but the crime he allegedly committed was not determined until five years later (in April 2009), showing the government is prepared to play ‘hard ball’ in enforcing its policies. Ironically, the extent of his detention rendered his sentencing and release as simultaneous (Gong and Wang 2009). In another highly controversial case concerning the survival of 95 per cent of private express mail service firms, a recent amendment to the ‘Postal Service Law of PRC’ saw the government intention to preserve all express mails of intra-city above 50 grams (or intercity above 100 grams) to state service entities. Such intention is allegedly based on the grounds of ‘service quality and safety of national information’. This, not surprisingly, has been challenged by more than 2,000 private firms in this business, as the proposed rule would deprive them of their right of equal competition and consumers’ right of choice.20 ‘Independence’ of the Anti-monopoly Law regime It would be naïve to expect the AML alone to seed fundamental legal change given the prevailing political ideology and market conditions in China. In the current regime, the independence and impartiality of the Anti-monopoly Commission cannot be guaranteed as it is clearly subject to the administrative personnel and budgetary control of the central government. James Rose, Asia-Pacific Editor of Ethical Corporation, considered such structure a sign that de-politicizing anti-monopoly efforts are being curtailed to serve the so-called socialist market economy (Rose 2008). Moreover, assignment of the antimonopoly function to government branches against, inter alia, an administrative monopoly would lead to potential conflict of interests and weakening of their authority. As such, the current design may not be able to allow all the agencies to effectively carry out their duties (Owen et al. 2007). In fact, some members of the Anti-monopoly Commission sitting with MOFCOM and SAIC on an equal footing are actually representatives of state monopolized sectors such as telecommunication, transportation and electricity supply. According to SAIC’s own report covering 1993–2006, over 5,600 monopoly cases were dealt with. Of this number, administrative monopoly cases accounted for just 519. This is a very small percentage in an environment of strong central control of the economy. The reason provided by SAIC is that this is not because there were not many administrative violations, but because the institution was not able to effectively deal with this kind of case.21 Despite the impressive development of the private economy, privatization in China is still profoundly affected by residual state influence. More accurately, privatization in China occurs in all kinds of hybrids where the private economy is growing within ‘tolerated space’, while the Party-state retains their control over strategic industries and the overall economy (Knowledge Wharton 2006). The transition from the planned economy to a market economy is not merely a transformation of ownership, but a transformation

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of state governance with profound implications for reform of the Party-state regime. The reforms will inevitably see increasing conflict between, on the one hand, the state goal of control and, on the other, management efficiency, consumer rights and demands for equal legal protection in the market (Hassard et al. 2002). The real strength and competitiveness of the state sector under the ‘national champion’ strategy seem questionable. In fact, with 50 per cent of all the national industrial assets and government full support, the state sector has produced just 30 per cent of GDP and created 10 per cent of the national employment. The profit of the leading companies in the so-called ‘strategic sectors’ is thus clearly made more from their monopolized status in the market than from their efficient operations (Ye Tan 2009). The initial AML test cases In a recent (2009) and widely reported case, a Beijing lawyer filed a lawsuit against China Mobile for its abuse of its dominant market position. China Mobile is the largest state-owned domestic phone carrier and world’s largest operator by subscribers. The plaintiff claimed the corporate giant abused its dominant market position by overcharging and also charging different fees for substantially similar services. The case was settled with 1,000 yuan paid by China Mobile to the plaintiff as a ‘gratitude payment’. China Mobile also agreed to stop its controversial charging practices. Although such a result may be considered encouraging, the messages of the case are perhaps more mixed. For instance, according to the plaintiff, the mediation settlement meant the market giant actually acknowledged its pricing problems. However, if he had chosen to pursue the lawsuit rather than agree on the settlement, the court simply might have not ruled in his favour (Canaves 2009; Biqiang Wang 2009). Besides the connection between monopoly firms and the government (with its influence on courts), another problem in antimonopoly litigation identified in this case, is that the burden of proof is on the plaintiff. All that defending companies have to do is to block lawsuits by claiming that some material facts are ‘commercial-in-confidence [and then] even the judge may not have access to much of the evidence’ (Biqiang Wang 2009). Indeed, just before this settlement, another anti-monopoly claim against a local online book publisher for abusing its market-leading position was dismissed by the Shanghai court on precisely this ground: ‘lack of sufficient evidence’ (Canaves 2009).

Conclusion and dilemmas The Party-state regime is clearly facing a serious challenge: To legitimate and encourage the development of the private economy in a socialist China, while at the same time controlling its development pace and direction. On the one hand, the rapid development with the dynamic participation of the private

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sector has been used to provide legitimacy for the regime; on the other hand, the Party-state has to be on high alert against the political potential of such development. As Sun Xiaohua, Vice President of the All China Federation of Industry and Commerce stated: If enterprises are too far away from the state authorities, they would not get their support . . . A firm that wants to develop, either public or private, cannot move away from the government. This is a special feature of China.22 This is shorthand for saying private enterprises may only be allowed to make their contribution to the ambitious economic agenda when it outweighs the costs related to the challenges to the CPC’s legitimacy (Nir 2007). In this context, to what extent the authoritarian ideology and the discipline of market forces can be effectively harmonized will pose not only commercial but also political uncertainties to the country’s long-term development. In dealing with such a dilemma, the legal institutions related to business organizations and entrepreneurship have been victims of the old ideology and appear to suffer from the resistance (or inertia) of political rigidities, the top-down approach (aided and abetted by bureaucratic domination), lack of experience of a competitive business environment and culture, lack of impartiality, both local and sectoral protectionism and ‘rent seeking’ (Lubman 2006; K. Yang 2002). With the implementation of the AML in China, new efforts have been made to further improve level playing conditions in the market, such as the 1 March 2007 amendment to the Enterprise Income Tax Law that unifies the taxation systems of enterprises with different forms of ownership, and further reforms to the existing legal framework. Even the separate legislation on foreign investment enterprises is already outdated, but perhaps conditions for further reform are not yet ripe.23 Yet, cosmetic changes to written rules may bring about limited progress in practice. Without the mentality supporting institutional transformation, they will not solve the problems facing the private economy today. Indeed, economic reform has been vigorously advanced in China and apparently has impressed the world because it is different from traditional pathways to privatization. In the Party-state led socialist market economy, although the private sector has made good progress in its development and become a crucial engine of national modernization, the political ideology, the ‘national champion’ policy, and the self-interests of local and sectoral administrations have, in many respects, maintained a de facto discriminatory environment against the private sector. One way to characterize the Chinese economy today is that it is broadly similar to the ‘commanding-heights economics of the 1970s’ Huang (2007: 44). For instance, the dual track legislation and policies governing business organizations with different ownership structures are accorded very different treatments (with the commanding

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heights accorded to the SOEs of strategic industries). This one-sided practice has contributed to the recent deceleration of private sector development, but furthermore the deterioration of its survival conditions, especially in a global financial downturn. Against this background, the newly adopted AML, despite some encouraging provisions, falls short of free market demands and expectations of providing clear and effective rules to contend with monopolistic conduct in the market (including administrative monopoly), and independent, impartial enforcement mechanisms. As a result of these perceived shortcomings, the implementation of the AML may not pave the way to a new level playing field in the short term. The initial test cases tend to confirm this observation although the AML remains in its legal infancy. Assuming privatization becomes sufficiently embedded, it is likely to continue to develop with its own ‘logic’, to address political as well as market conditions, and this logic will continue to test the genuineness and maturity of both China’s market economy and the rule of law.

Acknowledgements The author would like to express his gratitude to the ‘Mrs Li Ka Shing Fund’ of the University of Hong Kong for kindly supporting this research project.

Notes 1 Report of the China News, 6 February 2007 at: http://www.smexm.gov.cn/2007–2/ 2007251916189202.htm. 2 Report of the National Bureau of Statistics of China, 29 October 2008 at: http://www.stats.gov.cn/tjfx/ztfx/jnggkf30n/t20081028_402512576.htm. 3 See the Summary of the Discussion on Development of Private Economy in Mengfu Huang (2007: 282–4). 4 According to Huang (ibid.), the number of the CPC members in private enterprises has surpassed 5 million. 5 See the report of Zhongguo Pinglun (China Review), 12 June 2009. 6 The Notice of the General Office of the State Council Concerning the Major Duties and the Composition of the Antimonopoly Commission of the State Council, 28 July 2008, available at: www.competitionlaw.cn/show.aspx?id = 4487&cid = 32. 7 See Li Rong-Rong’s speech at: http://finance,qianlong.com/26/2005/01/21/ [email protected]. 8 See the report of the Hong Kong Commercial Daily, 12 January 2006, available at: http://www.fayhoo.com/servlet/info.infolanmuxx?lmid = 20100104&id = 20060112:1515128. 9 See ‘The denial of the telecommunication monopoly by the deputy director of the SASAC shocks the public’, Nanfang Zhoumo (Southern Weekend), 14 March 2008. 10 Recently, at least three senior officials of the MOFCOM and the SAIC in charge of foreign acquisition approval were arrested for conspiring to practise corruption. See the report, ‘Senior SAIC official arrested’, Financial Magazine, 28 October 2008 at: http://english.caijing.com.cn/2008-10-28/110024002.html. 11 See the statement of Mr. Zhang Hanya as the Deputy Chairman of the China Investment Association, Jinghua Shibao (Beijing Times), 30 June 2006, available at: http://business.sohu.com/20060630/n244017606.shtml.

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12 The MOFCOM decision with the MOFCOM series number [2009] 22 is at: http://fldj.mofcom.gov.cn/aarticle/ztxx/200903/20090306108494.html. 13 See the report of Zhongguo Pinglun Xinwen (China Review News), 21 March 2008, at: http://www.chinareviewnews.com/doc/1009/1/9/7/100919759.html?coluid = 7&kindid = 0&docid = 100919759. 14 The statement of the MOFCOM on 19 March 2009 is at: http://english.mofcom.gov. cn/aarticle/counselorsreport/americaandoceanreport/200903/20090306117020.html. 15 WTO Dispute DS 363: China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products. The panel findings and conclusion are at: http://www.wto.org/english/news_e/ news09_e/363r_e.htm. 16 See the report of China Review of 27 August 2008, and the report of the progress of the cases by the Chinacourt, 14 August 2008 at: http://bbs.chinacourt.org/ index.php?showtopic = 292451. 17 See the report of Jinghua Shibao (Beijing Times), 12 October 2008; and the report of the Bandao Wang (Peninsula Website), 30 June 2009 at: http://news.bandao.cn/ news_html/200906/20090630/news_20090630_841206.shtml. 18 The statement of the Supreme Court was published on 3 November 2008, and is at: http://news.xinhuanet.com/legal/2008–11/03/content_10299026.htm. 19 See the Report of Jingrong Shibao (Financial Times), 28 May 2009, at http://www. dwnews.com/gb/Consumer/finance/zxs_2009_05_28_23_45_27_233.html. 20 See the report of Beijing Qingnian Bao (Beijing Youth Daily), 27 August 2009, B6. 21 See the report of Shangbao (Commercial Daily), 12 January 2006. 22 Quoted from 21 Shiji Jingji Baodao (21st Century Business Herald), 18 December 2003, 1–2. 23 See the report on the further verification of the existing legislation by the national legislature, Xinhua Wang (Xinhua News Network), 23 June 2009.

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8

China’s labour laws in transition Kay-Wah Chan

Introduction A number of new pieces of labour legislation were adopted in 2007 by the People’s Republic of China. They include the second principal labour law in China: the Labour Contract Law of the PRC (the Labour Contract Law); the first law on labour dispute resolution: the Law on Labour Dispute Mediation and Arbitration of the PRC (the Labour Dispute Law), and the Employment Promotion Law of the PRC (the Employment Promotion Law). Other new legislation includes the Provisions on Employment Services and Employment Management (the Employment Management Provisions) and the Regulations on Employees’ Paid Annual Leaves (the Annual Leaves Regulations). Prior to these legislative developments, there already was a national labour law: the Labour Law of the PRC (the Labour Law), and an administrative regulation on labour dispute resolution: the Regulations of the PRC on Settlement of Labour Disputes in Enterprises (the Labour Dispute Regulations). This is complex legal terrain and, not surprisingly, the drafting and adoption of the Labour Contract Law have generated intense debate. After all, China’s legal and regulatory labour framework is being completely overhauled. When an earlier draft of the law was released for public comment, the authority received over 191,800 responses in one month (Guan 2009: 13). International business organizations such as the American Chamber of Commerce in Shanghai have raised objections to some provisions in the draft (Cooney et al. 2007: 791; Li 2009: 1108–9; Xu 2009: 454–5). Opposing voices were also raised by multinational corporations (Kahn and Barboza 2007) and domestic capital (Xu 2009: 455). The law was finally adopted in June 2007. This chapter examines why there were such extensive legislative activities on labour law in 2007 and why the Labour Contract Law and the Labour Dispute Law were adopted despite the existence of the Labour Law and the Labour Dispute Regulations. Why, for instance, was the Labour Contract Law adopted, notwithstanding strong concerns being expressed by private enterprises, whose investments have been playing a pivotal role in China’s rapid economic growth and development? What precisely are the implications of the changes introduced by the new laws and regulations? Why have

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the changes been made? Are there other key issues that warrant attention? This chapter examines these questions through an analysis of the interaction of socio-economic development and changes to the labour system in China in recent years. To do this, a comparative study is used – examining the new laws against the dynamics of the legal regime before the new laws were introduced. The objectives are to reveal the significance of the changes: What are the implications for domestic and foreign investors in the private sector? What are the implications for SOEs? And what do the changes ‘signify’ about China’s civil and commercial law reform movement more generally?

China’s socio-economic development and labour system, 1994–2007 After the adoption of the Labour Dispute Regulations (1993) and the Labour Law (1994), there has been continuous rapid economic development in China (see Jonathan Anderson in Chapter 1). Annual GDP, according to the statistical data from the China Statistical Yearbook 2008, continuously increased from RMB4.8 trillion in 1994 to RMB25 trillion in 2007. However, wealth is not distributed evenly. Income inequality in fact ‘has steadily increased since 1981’ (Di Dio 2007: 37). The ‘Gini coefficient’ of income distribution rose from a low of 0.288 in 1981 to a high of 0.46 in 2005 (Lai and Teng 2007: 168). Although contested, it is claimed that the wealthiest 10 per cent of the population owns 40 per cent of all private assets (Roberts 2007a; Di Dio 2007: 38). The poorest 10 per cent have only 2 per cent (Roberts 2007a; Di Dio 2007: 38). The richest 10 per cent of urban residents earn 9.2 times that of the poorest 10 per cent (Roberts 2007a). There is also a very wide regional disparity. Urban workers’ incomes are 3.2 times rural residents’ (Roberts 2007a). As Li (2009: 1091–2) points out, social tension grows because people perceive the existence of an unfair wealth distribution. Lai and Teng (2007: 173) put it this way: ‘Inequality breeds instability in China.’ In the past, except during the times of ‘political upheaval’, there were virtually no ‘strikes and other forms of worker demonstration’ (Perry 1995, cited in Solinger 2007: 417). But ‘in and after the late 1990s’ there was a ‘steady increase’ in the number of protests (Solinger 2007: 417). There were 87,000 protests in 2005 as compared with 11,000 a decade ago (Roberts 2007b) and 58,000 in 2003 (Jakes 2005: 28). These protests were not all labour-related. However, labour protests have increased substantially in the 1990s (Solinger 2007: 417) and in the twenty-first century (Cooke 2008: 128). The three main issues have been job security for SOE (or ex-SOE) workers, poor working conditions, and labour rights violations for those in the non-state sector (Cooke 2008: 128–9). There have been massive layoffs of SOE workers since the late 1990s (Wang and Lye 2007: 3; Démurger et al. 2006: 7; Hurst 2009: 49–53) due to SOE reform. The China Statistical Yearbook 2008 reveals data between 1998 and 2007 showing the number of state-owned and state-holding industrial

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China’s labour laws in transition 165 enterprises dropped from 64,737 to 20,680, and their annual average employee numbers fell from 37.5 million to 17.4 million. The same source also shows a substantial growth in the private sector over the same period: the number of private industrial enterprises expanded from 10,667 to 177,080 and their annual average employees numbers rose from 1.6 million to 22.5 million. With the restructuring of the SOEs and the economic development in China, the private sector has grown rapidly. It increasingly has become the significant employer in China with substantial increases in its proportion of the labour force. For instance, in 2007, it hired 40.2 per cent of the labour force as compared with a mere 5 per cent in 1994.1 In this context, Cooke argues that there has been weak state intervention and weak enforcement of regulations in the non-state sector employment (2008: 130). There have also been widespread labour abuses and, with a lack of remedies, discontented workers have increasingly resorted to protests (Cooney 2007a: 1050). There has also been a shift in the sectors that China’s economy relies upon most. A comparison of the different sectors’ respective contributions to GDP from 1993 to 2007 indicates that the tertiary sector has significantly higher growth whereas the primary sector’s contribution has declined over the same period. Correspondingly, the respective proportions of the labour force in the secondary and tertiary sectors have also grown. The China Labour Statistical Yearbook 2007 shows that 54.3 per cent of the labour force were in the primary sector in 1994, while 22.7 per cent and 23 per cent were in the secondary and tertiary sectors respectively. Thirteen years later, the proportion in the primary sector had dropped to 40.8 per cent whereas the secondary and tertiary sectors had increased in 2007 to 26.8 per cent and 32.4 per cent respectively (Ministry of Human Resources and Social Security and National Bureau of Statistics 2008). More than half of the labour force in these two sectors has come from rural areas (Ngok 2008: 56).

Migrant workers (nongmingong) Decollectivization in the late 1970s resulted in the release of the ‘immense labour reserve’ from agriculture and gave rise to a ‘massive pool of peasant migrants’ (Lee 2007: 38). The rapid development of the private sector led to large labour demand. At the same time, there was a loosening of the household registration system (ibid.: 38–9; Zhao 2007: 174–5). Rural residents were permitted to seek jobs in cities (Li 2009: 1088) with the ‘migrant worker’ phenomenon emerging. Called nongmingong in China, this literally means ‘peasant workers’. Their numbers swelled exponentially. Numbering less than two million in the early 1980s, their numbers ballooned to 80 million in 1995 (ibid.: 1088). Now there are estimates of 120–200 million migrant workers. They are mainly employed in ‘labour-intensive’ sectors, or jobs considered by many as ‘dirty, heavy, dangerous and low-paying’, or ‘informal’ employment (Wan 2008: 188–9). Many migrant workers suffer various kinds of labour rights abuses. Only 53.7 per cent of them had concluded labour

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contracts with their employers (Ngok 2008: 57) although the Labour Law (Article 16, Paragraph 2) requires ‘conclusion of a labour contract when a labour relationship is established’. In as many as 61–81 per cent of migrant workers’ employment, employers required bonds (X. Li 2008: 37) even though the Ministry of Labour – the predecessor of the current Ministry of Human Resources and Social Security stipulated in its 1995 ‘opinion document’:2 ‘that employing units on concluding labour contracts with workers cannot secure from the workers any bond by whatever means’ (Article 24). Some employers have clearly violated this law. Another common abuse is delaying wage payments. A survey found over 50 per cent of the migrant worker respondents had experienced occasional or frequent delay in wage payments (X. Li 2008: 38). They are also paid much lower wages than their urban counterparts. The Survey and Research Report on Migrant Workers in China (released by the State Council’s Research Office in April 2006 – cited in Ngok 2008: 57) reports that 39.26 per cent of migrant workers had monthly wages of RMB500–800 (comprising 29.26 per cent between RMB300–500 and 27.9 per cent above RMB800). Other statistical sources indicate average monthly wages for urban workers was RMB1,750 in 2006 and RMB1,842 for those in SOEs (ibid.: 57). Cooney claims that employers have an ‘entrenched view’ that the inferior treatment accorded to migrant workers is ‘acceptable’ (2007a: 1054). Many migrant workers also work long hours and their employers may even fail to pay the mandatory social insurances of pension, medical and work-related injury insurances (Li 2009: 1094–5). A 2002 survey in Guangdong Province found that 80 per cent of migrant workers worked more than 10 hours per day with 47 per cent of the migrant workers rarely having holidays or weekend breaks (Tsui and Ng 2008: 25).3 These conditions of ‘over-work’ are also in clear contravention of the Labour Law which stipulates that workers shall not work for more than eight hours a day (Article 36) and that employers shall ensure that employees have at least one day off in a week (Article 38). Migrant workers’ discontent contributed to an increase in social unrest and violent crime (Kahn and Barboza 2007). Urbanization is also happening at a remarkable pace in China (see Richard Hu in Chapter 10 in this volume). The government has, in its 11th Five-Year Plan, set an urbanization target rate of 47 per cent by 2010 (Kwan 2008). If this target is achieved (or even close), this will mean extensive additional numbers of migrant workers moving into urban areas. To avoid discontent escalating to social unrest and riots, the government has recognized the need for a comprehensive legal regime to cater for migrant workers’ needs and to protect their labour rights.

Urban workers Although migrant workers are the ones who often ‘bear the brunt of labour abuses’ (Cooney 2007a: 1054), they are not the only victims of labour abuse. Urban workers also suffer labour rights abuses. Despite the fact that the

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China’s labour laws in transition 167 Labour Law requires conclusion of labour contracts as described above, a 2005 government inspection found that the signing rate of labour contracts was lower than 20 per cent in small and medium enterprises and non-public ownership enterprises (Xie 2009: 35). Statistics from the relevant authority also indicate that the national rate of labour contract conclusion was only 57.1 per cent and the rate for private enterprises merely 30.5 per cent (Jiang 2008: 24). Some employers have also clearly attempted to avoid payment of social insurance premiums (which they are required to do under the Labour Law). They avoid this obligation by simply not signing written labour contracts with their employees (Li 2009: 1,111). This has the effect of hiding the actual employee number from official records (ibid.: 1,111). Even when contracts are signed, they are usually short-term. About 60 per cent of labour contracts signed were for terms of less than three years (Ngok 2008: 54; Luo 2008: 39). Only 20 per cent were for non-fixed term contracts (or called ‘open-ended contracts’) (Ngok 2008: 54; Luo 2008: 39).4 In some instances, employers chose to sign a series of short-term contracts repeatedly instead of having longer-term contracts (Luo 2008: 39; Xie 2009: 35) even though this unstable pattern may not be in the employees’ interests. Under the Labour Law, while an employer who discharges an employee before the expiry of a fixed-term labour contract normally needs to pay the employee economic compensation (Article 28), there was no such requirement on termination of a labour contract that is the result of expiration of the contract term. Employers simply have no obligation to renew these shortterm labour contracts. The law thus builds in a strong incentive for employers to conclude short-term contracts. At the same time this gives rise to job insecurity among employees. The list of labour rights violation practices does not end here. Workers face the risk of employers not fulfilling their wage-payment obligations. There is evidence of widespread underpayment or non-payment of wages (Cooney 2007a: 1053). In the private sector, many cases of wage under-payment or nonpayment are not because of financial difficulty on the part of the employers, but merely due to ‘fraudulent and manipulative conduct’ (ibid.). Other violations include overwork without rest and breaches of occupational health and safety law (ibid.: 1050) as well as non-payment of social insurance premiums as mentioned above (Ngok 2008: 54).

‘Labour dispatch’ (laowu paiqian) Some of the urban and migrant workers who have suffered labour abuses belong to the category of ‘dispatched workers’. In recent years, the phenomenon of ‘labour dispatch’ (laowu paiqian) has been growing rapidly in China (Li 2009: 1121; Jiang 2008: 27; Labour Contract Law Drafting Group 2007: 178).5 There are now approximately 26,000 labour dispatching companies (X. Wu 2009: 134). About 18,000 of these are organized through or approved by labour security departments (ibid.: 134). It has become a major mode of

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employment in some sectors (Y. Wu 2009: 124). It is also an area where labour abuses occur. Labour dispatching companies may, on their own decision, make deductions from wages without authorization from the employee (Labour Contract Law Drafting Group 2007: 179). Dispatched workers may be given lower wages than regular employees who perform identical work (Labour Contract Law Drafting Group 2007: 179; X. Wu 2009: 132). In some sectors or enterprises which used a lot of dispatched workers, the wages given to the latter could be as little as one-third to one-half of that given to normal workers (X. Wu 2009: 132). There were also illegal labour brokers and illegal labour dispatch companies (Xu 2009: 453). Yet there were no clear national regulations on labour dispatching. The duties and responsibilities were not clear with regard to the three parties: workers, dispatching company, and the company de facto using these workers. When a labour dispute or incidence (such as an occupational injury) arose, both the dispatching company and its ‘customer’ generally disclaim liability (Labour Contract Law Drafting Group 2007: 180; Y. Wu 2009: 124; X. Wu 2009: 132). It is understandable there is a need for dispatched workers (as opposed to regular employees) in posts or sectors where labour demand fluctuates (for example, seasonally). Some employers, however, abuse this usage to cover posts where labour demand is constant simply to reduce costs and evade legal liabilities (Labour Contract Law Drafting Group 2007: 202). Labour dispatch, to a certain extent, has become a means that employers adopt to abuse workers’ labour rights (ibid.: 181). Indeed, the term ‘labour dispatch’ has become a common metaphor signifying that some employers routinely abuse workers’ labour rights. The Labour Contract Law now regulates labour dispatch at a national level (see Chapter 5, Section 2 and Article 92 in Chapter 7 of the Law). It is beyond the scope of the chapter to detail the range and effects of these regulations other than to point out that they are significant in the context of labour law reforms.

Labour disputes With widespread labour abuses reported, labour disputes not surprisingly are increasing. The number of labour dispute cases accepted by the labour dispute arbitration committees rose from 48,121 to 350,182 between 1996 and 2007. The increase is directly attributable to the extent of labour rights violation (Chen 2007: 60). This is reflected in the actions being overwhelmingly initiated by the employees and the much higher success rate for employees than employers. This also indicates that the labour laws at least provide some protection. Data from the China Labour Statistical Yearbook 2007 show that 95 per cent of the labour dispute arbitration cases were initiated by the employees’ side in 2006 with 146,028 lawsuits won by the employees. Employers won just 39,251 cases. Many of the disputes were in relation to labour remuneration. Almost one-third of the cases accepted in 2006 concerned disputes over labour remuneration.6

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China’s labour laws in transition 169 Another contributory factor for the increase in these labour disputes has been the ‘growth of workers’ rights awareness and their willingness to fight for their own interests’ (Chen 2007: 60). This critically includes improved access to legal services. The government and the trade unions have promoted legal education and established legal assistance centres (Zhang 2005: 528). From the mid-1990s, unions, with the backing of local governments, have set up legal assistance centres or agencies to provide legal services to workers (ibid.: 529). The collaboration of the government and unions on this point reveals the significance of the issue as the CPC is clearly keen to avoid labour discontent spreading. With the rapid economic development and corresponding changes in Chinese society and its labour system, there are known and widespread labour abuses. The discontent has led to increasing labour disputes. At the same time, due to reforms of the SOEs and expansion of the private sector, administrative intervention appears to be reducing its role in labour issues. Resolution is increasingly expected to be sought through ‘legal means’. In these circumstances, if the legal mechanism does not provide an effective way of reducing abuses and resolving disputes, workers’ discontent may escalate. This can disrupt the CPC’s stated goal of ‘social harmony’ and may even cause more deep-seated social unrest. The various new labour legislations were adopted under precisely such considerations. The following sections will therefore analyse the changes introduced by the new legislations from the perspective of how labour abuse may be curbed and institutional responses to labour dispute resolution.

Curbing labour abuses The discussions above have highlighted several recurring themes about labour abuse. The principal abuses are non-conclusion of written labour contracts, short-term labour contracts, unfair (or exploitative) contracts, and underpayment or non-payment of wages. The legal changes to tackle these issues will be discussed first, followed by a discussion on the changes to address the problems associated with ‘labour dispatch’ (as a common area of labour abuse) and other kinds of abuse such as the improper holding of bond money. Non-conclusion of labour contracts The Labour Law already provides for the need to conclude labour contracts when a labour relationship is established. Despite this law there has still been widespread non-compliance by employers. Without a written contract, a worker whose rights have been abused by an employer might have difficulty proving the existence of their labour relationship (and its terms). Article 98 of the Labour Law provides that if an employer intentionally delays the conclusion of labour contracts in violation of the Labour Law, the labour administrative

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department shall order the employer to make corrections and the employer shall be liable to pay compensation to the employee7 for the damages caused. This was supplemented by the Measures on Administrative Penalty for Contravention of the Labour Law of the People’s Republic of China (the Administrative Penalty Measures),8 the Measures for Compensations for Contravention of the Provisions in the Labour Law Concerning Labour Contracts (the Compensation Measures), and the Regulations on Labour Security Supervision (the Supervision Regulations). Critically, the provisions in the Administrative Penalty Measures and the Supervision Regulations have not provided for any monetary penalty. There was also no provision made for monetary or other penalties in the Labour Law. However, it has provided for ‘compensation’. In this respect, Article 3 of the Compensation Measures provides a standard for the computation of compensation. It includes ‘any compensation as stipulated in the labour contract’. This will of course rarely apply since, in the absence of a written labour contract, it is very difficult for an employee to prove the existence of any compensation term in the labour contract! Article 3 also stipulates other compensation. However, the widespread problem of non-conclusion of labour contracts indicates that these penalty and compensation provisions did not have a strong deterrent effect on employers. If the employee cannot prove any of the losses or harm as listed in the Compensation Measures, there is no compensation. Even if the employee can prove a loss of wages, the compensation would, besides the originally owed wages, be just 25 per cent of such owed wages (Article 3). Furthermore, as Ngok (2008: 55) points out, the Labour Law does not stipulate a time limit in which a labour contract must be signed. It is uncertain as to exactly how much time may elapse after the establishment of a labour relationship, before it could be considered a ‘delay’. The new Labour Contract Law has remedied this uncertainty. Paragraph 2 of its Article 10 requires the conclusion of a labour contract in written form within one month from the date that the employer starts to use the employee.9 The Labour Contract Law also introduces provisions to the effect that employers who fail to sign labour contracts with their employees will have more serious consequences than before. If a labour contract is concluded after the one month time-limit, but within one year after the date that the employer starts to use the employee, the employer needs to pay the employee double the salary (Article 82, Paragraph 1). The implementation regulations of the Labour Contract Law (the LCL Implementation Regulations)10 further clarify that the ‘double salary’ is payable from the day immediately after the expiry of the first full month of employment – up until the day immediately prior to the labour contract being signed (Article 6, Paragraph 2). In other words, the longer the delay in concluding a written labour contract,the heavier the penalty the employer will face. Further, if the employer fails to conclude a written labour contract with the employee after one year from the date of starting to use the employee, an open-ended labour contract (called a ‘labour contract with no fixed

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China’s labour laws in transition 171 term’) is deemed to have been concluded (Labour Contract Law, Article 14, Paragraph 3). According to Article 7 of the LCL Implementation Regulations and Article 82 of the Labour Contract Law, the employer will also be liable to pay double the salary. In other words, if there is a delay of more than one year, the employer will not only face the consequence of being liable for double the salary, but also having an open-ended labour contract with the employee. These changes should have a much stronger deterrent effect than before. In addition, the adoption of the Labour Contract Law has in practice given a clear, strong message to enterprises that the central government regards this issue as critical. A new law was adopted rather than an administrative regulation being introduced.11 The title of the law has the term ‘labour contract’. Public comments were sought on its draft and much attention was given to the law (and its legislative process) by state media. The clear message given to enterprises was that they must sign labour contracts with their workers. Short-term labour contracts Employers may sign labour contracts but only for a very short term. This approach is not usually in employees’ interests, particularly if the employer did not have an obligation to renew the contracts and no severance payment was required on the expiry of the previous contract. This, as discussed above, had been the situation under the Labour Law. The latter provided for three types of labour contracts: fixed term, open-ended, and contracts to complete a prescribed work (Article 20, Paragraph 1). An open-ended labour contract is one that does not have an expiry date. They only come to an end on termination or discharge – in accordance with the laws. The Labour Law provides for concluding open-ended labour contracts for workers who have worked with the same employer for ‘a long time’. Article 20 (Paragraph 2) stipulates that when a worker had been working for the same employer for ten years or more and requested an open-ended labour contract – if both worker and employer agreed to extend the labour contract – an open-ended labour contract should be concluded. Without the employer’s agreement, the employee would not be able to secure an open-ended contract. Thus, in reality, only a small proportion of the labour contracts were openended with many labour contracts being short-term. Indeed, the prevalence of short-term labour contracts has led to ‘employment insecurity and instability’ (Li 2009: 1113). The Labour Contract Law has provisions to enhance the conclusion of long-term or open-ended labour contracts. Under Article 14, there are three situations whereby an employer is obliged to conclude an open-ended labour contract with its employee (if the employee proposes or agrees to renew or conclude a labour contract – unless that employee proposes to conclude a fixed-term labour contract). The new Law differs from the previous Labour

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Law in several respects. First, there is no need for agreement on the employers’ part. Second, there is no need for the employee’s request for an open-ended labour contract. If any of the three stipulated conditions apply, the obligation (on conclusion of an open-ended labour contract) is triggered once an employee proposes (or agrees to renew or conclude) a labour contract – unless the employee wants a fixed-term contract. Third, the Labour Contract Law extends the obligation to cover two more situations, in addition to where an employee has worked for ‘a long time’ with the employer. These two situations are: (1) where the employer initially conducts a labour contract system, or where the employer is a restructuring SOE and re-concludes labour contracts (and the employee has worked for an uninterrupted period of ten years with the employer and has reached an age that is less than ten years before the statutory retirement age); or (2) a labour contract is to be renewed after a fixed-term labour contract has been concluded twice continuously and the employee is not under any of the situations as stipulated in Article 39 and Article 40(1) and (2) of the Labour Contract Law.12 The extension to situation (2) will likely cover more employees than before. For instance, this covers the situation where, in the past, some employers signed a series of very short-term contracts with employees repeatedly – to avoid concluding longer-term contracts. With the new provision, the shorter the fixed-term labour contract is, the sooner the employer will be obliged to conclude an open-ended labour contract unless the employee wants a fixed-term contract instead. In addition, the Labour Contract Law introduces the requirement of severance pay in cases of termination of labour contracts when their specified terms expire. This was not required under the Labour Law. However, Article 46(5) of the Labour Contract Law stipulates that when a fixed-term labour contract terminates as a result of its expiry, the employer shall pay the employee economic compensation – unless the employee refuses to renew the contract (even though the employer offers to renew the contract on the same or better terms). This shift in the Law clearly favours workers. Furthermore, to enhance compliance, Article 82 (Paragraph 2) of the Labour Contract Law provides that if the employer fails to conclude an open-ended labour contract in contravention of the Labour Contract Law, the employer will be liable to pay double the salary to the employee from the date that a labour contract should have been concluded. The Labour Contract Law also has provisions that are different to the Labour Law seeking to curb abuses of the probation period (discussed in more detail in the section ‘Other Labour Abuses’ below). Such provisions are likely to have the indirect effect of promoting long-term labour contracts. The Labour Law allows parties to agree on a probation period of not more than six months irrespective of the length of the contract term (Article 21). The Labour Contract Law introduces changes. First, no probation period is permitted for labour contracts with a fixed term of less than three months (Article 19, Paragraph 3). Second, for labour contracts with a longer fixed term, the length of probation period permitted under the new law varies (not

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China’s labour laws in transition 173 exceeding: one month, two months or six months), depending upon the length of the term of the labour contract itself. Only longer-term labour contracts (of three years or more) or open-ended labour contracts can have the longest permissible probation period of six months. Predictably, employers may try to avoid the conclusion of open-ended contracts by transferring employees to subsidiary or associated companies before the employees have worked for the same company for ten years. To curb this type of evasion of obligations, the LCL Implementation Regulations stipulate that when an employee is transferred to another employer – not due to the employee’s personal request – the employee’s work experience with the original employer is to be included in the computation of his or her work experience with the new employer (Article 10). The Labour Contract Law therefore has introduced changes to deter the conclusion of short-term labour contracts and to enhance the conclusion of longer-term or open-ended labour contracts. Underpayment or non-payment of wages Underpayment and non-payment of wages are one of the main labour abuses and main cause of labour disputes. The labour law regime prior to the adoption of the Labour Contract Law already had coverage in this respect. Article 50 of the Labour Law provides that wages must be paid in cash to the workers monthly, and there must not be delay or deduction without justification. To deter employers’ violations, the same Law (Article 91) stipulates that if an employer makes deductions or delays in wage payments without reason, the labour administrative department shall order the employer to pay the workers the outstanding wage and compensation for economic loss and may also order compensation payment. These laws are supplemented by a number of other administrative regulations and rules. Article 3 of the Measures for Economic Compensation for Breach and Rescission of Labour Contracts requires the employer to pay an additional 25 per cent of the wage as economic compensation. The Supervision Regulations provides a ‘penalty’ for the employer in the form of additional compensation to the employee. Such provision in the Supervision Regulations is, in principle, reiterated in the Labour Contract Law (Article 85). The regulatory regime in this respect is therefore raised from the level of an administrative regulation to the level of a national law – revealing the government’s determination to overcome rampant exploitation of labour and labour discontent. An illustration of this determination to curb widespread labour rights abuses such as under-payment or nonpayment of wages is the Labour Contract Law. This introduces a change making it easier for an aggrieved employee to seek payment from the employer. Normal procedure for labour dispute resolution requires a mandatory arbitration before a lawsuit can be initiated in the People’s Courts. In relation to cases of workers seeking unpaid wages, this requirement has been modified by the Interpretations of the Supreme People’s Court on Some Issues Concerning

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the Application of Laws for the Trial of Labour Dispute Cases (II) (Judicial Interpretation II).13 Its Article 3 states that when a worker directly institutes litigation at a People’s Court (with the employer’s wage IOU as evidence) and the claim does not include any other ‘labour dispute’, it shall be considered as a ‘wage dispute’ and be accepted as an ordinary civil case. The Labour Contract Law introduces a change to further simplify the procedure for aggrieved employees to seek a remedy. Under Article 30 (Paragraph 2) the employee who suffers non-payment or under-payment of wages can now apply directly to the local People’s Court for a payment order and the People’s Court shall issue such an order according to law. The application procedure is simple and speedy with the Civil Procedure Law of the People’s Republic of China (Civil Procedure Law) requiring the People’s Court, within five days of the submission of the application, to inform the applicant whether the application has been accepted or not (Article 192). If the application is accepted, the court after examining the facts and evidence must issue to the applicant the order of payment within 15 days if the debt is clear and legitimate (Article 193, Paragraph 1). If an employee obtains such an order or payment, the employer must then make the payment or lodge a written objection to the People’s Court within 15 days of receipt of the order (Article 193, Paragraph 2). If no objection is lodged within those 15 days, the order of payment becomes binding on the employer.14 There are of course other abuses that are targeted for reform such as employers requiring employees to provide bonds. Such a practice restricts workers’ freedom of job mobility (Labour Contract Law Drafting Group 2007: 54). The prohibition on thispractice has now been raised from the level of a departmental opinion document to that of a national law (Article 9, Labour Contract Law) which provides for penalty on violations and liability on the employer’s part for any damage caused to the employee (Article 84, Paragraph 2).15

Facilitating labour dispute resolution To facilitate protection of workers’ rights, in addition to comprehensive substantive law, the workers must have easy, ‘user-friendly’ access to an effective and efficient mechanism for enforcing such rights. To do this, the regulatory regime has been raised from the level of an administrative regulation (the Regulations of the People’s Republic of China on Settlement of Labour Disputes in Enterprises [the Labour Disputes Regulations]) to a national law (the new Labour Dispute Law). This is a clear signal that the authority considers protection of workers’ labour rights to be very important. This does not appear to be a cosmetic set of changes to appease a disgruntled few. As Jianfu Chen suggests in Chapter 5 in this volume, a legal foundation is being laid. The new law introduces a number of changes making the labour dispute resolution system more user-friendly, efficient and effective for aggrieved workers to enforce their rights against employers in the event of abuse.

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China’s labour laws in transition 175 Drawbacks have been found associated with labour dispute mediation. This is a voluntary step in China’s labour dispute resolution mechanism. In the past, mediation was conducted by the labour dispute mediation committee of the employer enterprise (Labour Law, Articles 79 and 80; Labour Disputes Regulations, Articles 6 and 7). Many private enterprises did not set up labour dispute mediation committees (Halegua 2008: 260; Lu 2008: 250; Zhao 2009: 414). The establishment rate was only 11.2 per cent in 2003 (Zhao 2009: 413).16 Zhao (ibid.: 414) also stated that, even when set up, many of these committees lacked credibility and the ability to mediate labour disputes. Some workers considered these committees as biased in favour of the employers (Halegua 2008: 260). The success rate of mediation kept decreasing (W. Zhang 2008: 42). In contrast to the high success rate of 87 per cent in 1992 (ibid.: 42), by 2005 it was below 22 per cent.17 Not surprisingly therefore, at the same time there has been a trend of reduction in the use of mediation to resolve labour disputes. Mediation rates fell sharply since 1995 despite the increase in labour disputes (Zhao 2009: 413). Between 1992 and 2003, the ratio of cases accepted by enterprise labour dispute mediation committees, labour arbitration organizations and courts fell from 125.7: 36.5: 1 to 1.18: 1.64: 1 (W. Zhang 2008: 43). The Labour Dispute Law introduces two additional categories of venues for labour dispute mediation: (1) grassroots people’s mediation organization established under laws; and (2) organizations with a labour dispute mediation function established in townships, towns or neighbourhood (Article 10, Paragraph 1). This should enhance accessibility, independence and credibility. To make arbitration (the mandatory step before litigation) more accessible and user-friendly for workers, the Labour Dispute Law removes the service fee requirement (Article 53). In the past, service fees charged by arbitration committees for services rendered could be high and even much higher than the fees charged by courts for the litigation procedure (see Zhao 2009: 422–3, 531; Halegua 2008: 271), thus affecting individual workers’ incentives to pursue their claims (Zhang 2005: 531). The Labour Dispute Law also substantially extends the limitation period for initiation of labour dispute arbitration (Article 27, Paragraph 1). For labour disputes concerning delayed wage payment, aggrieved employees are even allowed to make an arbitration application within one year from the termination of the labour relationship (Article 27, Paragraph 4). The law also shortens the time that may be required to obtain an arbitral award (Article 43). Some arbitral awards are made final (Article 47).

Further challenges The labour regulatory regime has clearly been improved through the introduction of the various new pieces of legislation. Protection of employees’ labour rights has been strengthened. However, the mere existence of comprehensive laws and regulations will not be sufficient to ensure elimination of

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labour rights abuses. It is crucial that employees are sufficiently aware of their legal rights and that the laws and regulations are duly enforced. The adoption of the new legislation in 2007 has attracted much publicity. This should raise the public’s awareness of the labour regulatory regime. At the same time such decisive action in labour law reform enhances the sustainability of the central government’s broader economic agenda. Promoting a prosperous China where some get very rich at the expense of ordinary workers would be incoherent in a socialist state. A survey conducted in Guangdong Province found that many workers had indeed heard of the new Labour Contract Law (Li et al. 2009: 41). But it also found that the workers’ knowledge was superficial. While over 90 per cent of the respondents have heard of the Law, nearly 60 per cent (59.2 per cent) of the respondents did not know the effective date of the Law and 74.5 per cent indicated that they ‘did not quite know its concrete contents’ (ibid.: 41). This finding was confirmed in another similar survey conducted in Ningbo (Zhejiang province) (Wang et al. 2009: 232). Notwithstanding the need to educate workers about their rights, statistical data also reveals a sharp rise in the number of labour dispute cases brought to arbitration venues and courts. In 2008, 693,000 labour dispute cases were accepted for arbitration (Xinhua 2009h), as compared with the figure of 350,182 cases in 2007 (National Bureau of Statistics 2008: 876). A similar surge is also found in the number of labour dispute cases brought to courts with 286,221 labour dispute cases heard in courts in 2008 – representing a 93 per cent increase from 2007 according to the China Daily in 2009. While such phenomena may be attributable to the global economic downturn, another contributable factor is the increase in workers’ awareness of their labour rights and the legal venues made available to enforce such rights (China Daily 2009e). While workers suffering labour rights abuse can enforce their rights by legal means (arbitration and litigation), this may involve costs, effort and time. The workers may not yet be familiar with procedures. As a result, they may prefer complaining to the relevant government department, requesting its help. The Labour Contract Law has provided for this alternative (Article 77). There is, however, the issue of under-funding and under-staffing (Li 2009: 1,101–2). In 2006, each labour supervision agent had to oversee on average 1,600 enterprises for protecting the labour rights of 17,000 workers (ibid.: 1,102). Personnel shortages are also found in the legal arena including a shortage of labour lawyers (Lu 2008: 266). Some lawyers are reluctant to handle labour dispute cases (Zhang 2005: 538) as they may not be as lucrative as commercial cases (Lu 2008: 266). Under-staffing is also found in labour arbitration (Zhao 2009: 428). There are less than 6,000 full-time labour dispute arbitrators (Xie 2009: 36).18 Statistical data from the China Statistical Yearbook 2008 show that 350,182 labour dispute cases were accepted by the labour dispute arbitration committees throughout the country in 2007. Except for simple cases (which can be heard by a sole arbitrator), labour

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China’s labour laws in transition 177 arbitration cases are heard by an arbitration tribunal composed of three arbitrators (Labour Dispute Law, Article 31). Based on a rough calculation with use of the aforesaid figures, a tribunal in average will have to hear about 175 cases in a year. The caseload in some regions can be heavier.19 The situation is aggravated by the significant increase in the number of labour dispute cases brought to arbitration after the introduction of the new labour legislations (Xie 2009: 36–7). Some worries exist that in order to attract investment and maintain economic growth, local authorities may favour enterprises (Chen 2009: 23) over enforcement of laws to protect the interests of the workers (see also Ngok 2008: 55; Cooke 2008: 130; Tsui and Ng 2008: 31). In this respect, the Labour Contract Law, which is ‘more specific and operation-oriented’ than the Labour Law, imposes pressure on officials, who are in charge of labour policies and laws and their enforcement, to duly perform their duties (Ngok 2008: 60). In addition, Article 95 provides that if the personnel of a labour administrative department (or any other relevant administrative department) neglects or fails to perform statutory duties, or exercises duties in violation of law, the personnel shall be responsible to compensate the worker (or the employer) for any damage suffered. If there is a crime, there are also criminal liabilities under Article 95 – which was added ‘at the last minute’ following a forced labour scandal in Shanxi province (Cody 2007; Xinhua 2007b; Ngok 2008: 59). Together with the high level of publicity over the adoption of the Law, this last-minute addition is viewed as an indication of the central government’s determination to protect abused workers and crack down on corruption (Cody 2007). The message from Beijing is clear: social stability is no less important than economic growth. At the Fifth Session of the Tenth National People’s Congress in March 2007, the Chairman of the NPC’s Standing Committee, Wu Bangguo, stated that while work is to be continued to improve legislation on economic issues, there is a need to ‘concentrate on strengthening legislation related to social programs to provide a solid legal foundation for building a harmonious socialist society’ (Xinhua 2007a). Labour discontent may affect social stability. There have been repeated messages from Beijing on the importance of safeguarding workers’ interests and local authorities should be fully aware that they are required to pay serious attention to labour issues. When the various new pieces of labour legislation were introduced, many enterprises raised concerns that these new laws (especially the Labour Contract Law) would lead to an increase in labour costs. Some enterprises have tried to evade the new statutory requirements. An example is the widely reported ‘voluntary resignation’ scheme introduced by a large Guangdong Province-based company to evade the statutory requirement of conclusion of open-ended labour contracts with longer-serving employees. The company asked employees who had worked for eight consecutive years to tender ‘voluntary resignation’ and to sign new labour contracts (after competing for their own posts again) (Xinhua 2008b). The company suspended the scheme

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after the All China Federation of Trade Unions (ACFTU) intervened (ibid.). The wide publicity of this incident may have served as a warning to other enterprises. But it certainly shows that trade union activism is well and truly alive, although Cooke (2008: 131–4), Josephs (2009: 392), Cooney (2007a: 1074–6), Solinger (2007: 424–6), and Zhao (2009: 426–7) have raised concerns about the role trade unions can play in protecting workers’ rights. Another example of union activism is the case of Wal-Mart trying to relocate its mid-level executives. These employees were given three options: relocation to outlets in other cities, demotion, or lay-off (Xinhua 2009g). Local trade unions intervened and Wal-Mart withdrew the plan (ibid.). The ACFTU also actively recruits migrant worker members now. In the past, it only admitted workers with urban residence permits, thus excluding migrant workers from eligibility for membership (Xinhua 2009h). By the end of 2008, more than 66 million migrant workers had taken up membership (ibid.). Despite enterprises’ concerns over increased labour costs, investigations subsequent to the implementation of the Labour Contract Law have found that the law does not have much impact on costs to law-abiding enterprises (Li et al. 2009: 36). They generally are SOEs, large enterprises and enterprises with American or European investments (ibid.). Impact is also small for small enterprises in the high-tech sector (ibid.). On the other hand, there are increased labour costs in small and medium enterprises in labour-intensive and low value-added sectors – because in the past many avoided paying social insurance premiums for all workers (ibid.). The small and medium enterprises sector has already faced severe pressure from rising raw material and rental costs (see H. Zhang 2008 for a discussion of the shoe manufacturing sector in the Pearl Delta region). A survey conducted on 606 enterprises in Guangdong Province found that while 75 per cent of the enterprises replied that the rise in raw material and energy costs was the cause of their relocation to elsewhere, only 22 per cent replied that the implementation of the Labour Contract Law was also a cause of the move (Kong and Han 2009: 132). The introduction of the new labour legislation therefore is not the main factor causing enterprises to relocate. For non-complying enterprises the situation may have been aggravated by a rise in labour costs due to the implementation of new labour laws. But it is worth noting Beijing’s new policy (embedded in the Eleventh Five-Year Plan) to upgrade the industrial structure from the low-end to the ‘high-end’ (China.org.cn 2005; Xinhua 2006). Chen and Funke (2009: 13) also view the introduction of new labour laws as a signal of the government’s policy of shifting focus away from low-end manufacturing (‘low-skilled, low-cost, low-margin manufacturing’) to the high-end sector.

Conclusion The labour regulatory regime has been improved through the introduction of various new pieces of legislation. Protection of labour rights has been

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China’s labour laws in transition 179 strengthened and local authorities have been given a clear signal that ‘social harmony’ is of paramount importance. They must therefore prevent labour discontent. Yet there are clearly still challenges. Some workers are still not fully aware of the contents of the laws that seek to protect them. They remain vulnerable despite the regime’s efforts to give them enhanced rights. Enforcement agents, whether administrative or legal, are understaffed. Labour lawyers are in short supply. Further popular campaigns can help raise workers’ knowledge of their legal rights and mechanisms to enforce those rights. The clear signal from the central government is that labour issues must be attended to. This may put some renewed pressure on local authorities to strengthen local administrative and legal infrastructure to enforce labour laws and regulations. Indeed, they do seem to be more active than previously in labour rights enforcement. For instance, Xinhua (2009i) reported that in 2008 labour administrative departments throughout the country had investigated 1.81 million employers, handled 483,000 labour disputes, and assisted 6.98 million workers to get back RMB8.33 billion in unpaid wages. Some local authorities also now require employers to seek prior approval before ‘mass layoffs’ (Tan 2008).20 Furthermore, in the private sector, the number of lawyers has been rapidly increasing in China. After an amendment in 2007, the Lawyers Law21 now permits the establishment of sole-proprietorship law firms. This should facilitate easier access to legal services by ordinary people (Ni and Chai 2007) including workers. In addition to greater access to legal services is the effect of the transformation of the industrial structure – with upgrading from low-end manufacturing to high-end development.22 This shift is predicted to result in a reduction in labour rights violations. The global economic downturn may, however, pose challenges to the effectiveness of the labour law regime in that enterprises will face particularly difficult business environments and look for cost savings. However, recent statistical data confirm the commencement of economic recovery (see Zhu 2009; Liu 2009). Steps are also being taken by the government to ease the financial pressure on enterprises (the employers) with social insurance payment rates being reduced in Beijing (Xie 2008). Faced with the fleeing of enterprise owners, the local government in Dongguan itself paid the workers’ salaries (Xinhua 2008c). In short, in the course of China’s socio-economic development and changes in the labour system, labour abuses did become rampant. The recent series of legislative changes has sought to address this problem. Labour dispute resolution mechanisms have become more accessible and user-friendly for aggrieved workers to enforce labour rights. At the same time, the adoption of the legislation has also given a strong and clear message to local authorities who appear to have taken on board the message. The tightening of labour laws may bring short-term hardship to enterprises which previously abused labour rights. But these tend to be mainly in the low-end manufacturing sector. Many in this sector may close or relocate due to a combination of

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factors such as rising raw material and energy costs, implementation of the new labour legislation, and the recent global economic downturn since 2008. The ‘weeding out’ of the low-end sector, however, turns out to be facilitating the upgrading of the industrial structure. This is the goal of the new economic policy. From this perspective, the recent wave of labour-related legislation is not only responding to the socio-economic development and changes in the labour system, but also corresponds with the shift in China’s industrial policy.

Notes 1 According to statistical data from the China Statistical Yearbook 2008 (National Bureau of Statistics and Ministry of Labour and Social Security 2005) and the China Labour Statistical Yearbook 2005 (National Bureau of Statistics and Ministry of Labour and Social Security 2007) respectively. 2 The Opinions of the Ministry of Labour on Some Issues Concerning Implementation of the Labour Law of the People’s Republic of China (Lao Bu Fa 1995: No. 202). It was issued on 4 August 1995. 3 Another source stated that, according to a 2000 census, 58 per cent of migrant workers had no rest at all in a week (Zhao 2007: 177). 4 Article 20 of the Labour Law stipulates three kinds of labour contract terms: fixed term, non-fixed term (sometimes called open-ended), and a term to complete a prescribed work (sometimes called ‘project-based’). 5 For a detailed discussion of the emergence and development of the ‘dispatch labour’ industry in China, see Xu (2009: 443–8). 6 The figures are 103,887 out of the 317,162 cases accepted (National Bureau of Statistics and Ministry of Labour and Social Security 2007). 7 The term ‘labourer’ (or worker) 劳动者 is principally used in the labour legislation in China. In this chapter, the terms ‘worker’ and ‘employee’ are used interchangeably with the same meaning. 8 It was issued by the Ministry of Labour on 26 December 1994 and became effective on 1 January 1995. 9 For those labour relationships that were established before the implementation of the Labour Contract Law (1 January 2008) but did not have a labour contract in writing, a labour contract must be concluded within one month from 1 January 2008 (the Labour Contract Law, Art. 97, Para. 2). 10 The Implementing Regulations of the Labour Contract Law of the People’s Republic of China was promulgated by the State Council on 18 September 2008 and became effective on the same date. 11 For discussions on the hierarchy of the different legal documents in China, see Chan (2008: 90–1). 12 Article 39 and Article 40(1) and (2) concern situations under which the employer is entitled to discharge the labour contract, such as: the employee is in serious violation of the employer’s by-laws (Article 39(2)); or the employee is incapable of carrying out his/her job and continues to be so after training or change of job post (Article 40(2)). 13 It was issued by the Supreme People’s Court on 14 August 2006 and became effective on 1 October 2006 (Fa Shi 2006: No 6). 14 If a written objection is lodged within the time limit by the employer, the order of payment will be nullified, but the employee is entitled to sue for the unpaid wage through ordinary litigation procedure (Article 194, the Civil Procedure Law of the People’s Republic of China).

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China’s labour laws in transition 181 15 For further specific details, see, for instance, Li (2009: 1118); the Labour Contract Law Drafting Group (2007: 87); and the Labour Contract Law Implementation Regulations Drafters (2008: 53). 16 Another source stated that only about 1 per cent of the 20-something million enterprises in China had established such a mediation committee (W. Zhang 2008: 41) 17 According to W. Zhang (2008: 42), the rate was 21.8 per cent in 2005 while according to Zhao (2009: 414), it was lower than 20 per cent in 2005. 18 Another source (Halegua 2008: 265) claimed that there were 7,424 full-time and 12,906 part-time arbitrators and that arbitrators in some places had to handle over 200 cases in a year. 19 For example, there are only three full-time arbitrators in Guangzhou, who have to handle over 30,000 labour dispute cases annually (Li et al. 2009: 40). Another source (Xie 2009: 37) stated that labour arbitrators in ‘Guangdong, Shanghai, Beijing and other cities’ have to deal with more than 400 cases in a year. 20 Such measures have been adopted in Shandong and Hubei Provinces. 21 The Law of the People’s Republic of China on Lawyers, promulgated on 15 May 1996, and amended on 29 December 2001 and 28 October 2007 (last amendment effective from 1 June 2008). 22 An example is the self-repositioning of Dongguan (Guangdong Province) from a low-end manufacturing site to a high-tech hub (see Fu 2008; H. Zhang 2008).

9

Secured financing in China Su Lin Han

Introduction On 20 March 2007, the China’s National People’s Congress (NPC) passed the historic Property Law, the country’s first comprehensive law on ownership and use of different types of property rights. In particular, Part Four of the Property Law adopts a number of modern secured financing law principles regarding movable property as collateral. This is a significant departure from the existing antiquated and restrictive secured financing legal framework that was established under the 1995 Security Law (the Security Law) and the 2000 Supreme People’s Court’s (SPC) Judicial Interpretation of the Security Law. Much of the progress came as a result of extensive collateral law reform efforts spearheaded by China’s central bank, the People’s Bank of China (PBOC), with technical assistance from the World Bank, to improve access to credit by the country’s small and medium enterprises – hereinafter referred to as the ‘WB-PBOC Project’.1 Under previous laws, the requirements for taking security interests in movable assets were so stringent and restrictive that business assets such as equipment, inventory and receivables had virtually no value as collateral. This chapter overviews secured financing law and practice in China including the process of reform, and analyzes the impact of the newly adopted Property Law.

China’s secured financing system: the need for reform In most developed economies ‘movable assets’ play a major role in securing financing for businesses. This is particularly important for small and mediumsized enterprises (SMEs) that do not own significant real property but instead hold inventory and receivables as their primary assets. In the United States, for example, 70 per cent of small business financing is secured solely by movable property.2 Such a high level of movable collateral financing is made possible by a legal infrastructure designed to facilitate rather than regulate secured financing. Some critics may argue that this infrastructure did not help the

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USA and other advanced western economies more generally with regard to avoiding the global financial crisis (GFC) of 2009. Notwithstanding the GFC backdrop, however, several counter-arguments must be considered. First, modern secured transactions laws give contracting parties maximum flexibility to structure their commercial transactions. The range of movable collateral is broad. Movable property of any kind, tangible or intangible, presently-owned or future-acquired, can be used as collateral. A borrower may also continue to use the collateral during the course of a loan. This so-called ‘non-possessory’ secured financing allows the debtor to retain possession and control of the collateral after the loan is made so that it can be used to generate revenue and service the debt. With such flexibility, a manufacturer may pledge its equipment and/or products as collateral while retaining use of the equipment and selling its products to buyers. A car dealer may use its inventory, including cars it already owns and those that it plans to acquire in the future, as collateral while continuing to sell cars in the normal course of business. A service provider or supplier of goods may borrow against its income stream generated by payments due from its customers (receivables), regardless of whether the receivables have already been earned but not yet paid, or will be earned in the future. Second, modern movable secured financing laws recognize that in an efficient market secured lending should be low cost and low risk. Otherwise lenders would not be willing to lend against movable collateral. As a result, the law makes sure that it is easy to create a security interest by contract, requiring minimum formalities. No registration is required for the security interest to become valid and enforceable, nor is the secured transaction subject to review by government officials. Registration of minimum identifying information on a centralized electronic registry serves to disclose the existence of the security interest to third parties and to assure its priority status against the claims of other creditors. When a debtor defaults, a secured creditor is given the option, either contractually or by law, to enforce its rights by taking possession and selling the collateral without needing to obtain a court order. Secured financing in China tells a different story. Movable assets offer little value as security. The WB-PBOC Project (World Bank Group 2007: 195–6) found that only 4 per cent of commercial loans are secured solely by movable assets. This is the direct result of a secured financing legal system which gives the government very extensive control over what can be used as collateral and how secured transactions can be conducted. The problem is particularly acute in the area of non-possessory secured financing where the law is so restrictive and the requirements so cumbersome that the secured financing arrangement can generate little benefit for a lender. Under Article 34 of the Security Law, a non-possessory security interest may only be created in two types of movable assets: equipment and motor vehicles. A pool of fluctuating assets such as inventory or receivables cannot be used as collateral because under the Security Law, the types, amount, nature and location of such assets must be specifically described at the time of contract,3 i.e. they must be fixed at the time

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of the contract. The result is: ‘16 trillion RMB in dead capital – assets owned by private firms, SMEs and farmers that cannot be used to generate loans to fund business investment and growth’ (World Bank Group 2007: 195). To the extent movable assets are used as collateral, the government’s heavy hand makes the process of creating, registering and enforcing the security interest unduly cumbersome, expensive and often uncertain. Under the Security Law, a security interest must be registered with a governmentrun registry to become valid and enforceable. However, because there is no centralized registry in China for all types of movable collateral, a lender must navigate through a registration system comprised of more than a dozen individual registries differentiated by the types of movable assets and the status of the debtor. Indeed, there are three general registries operated by the Administration of Industry and Commerce, which registers charges over movable assets of enterprises; the Public Security Bureau which registers charges over motor vehicles; and Public Notary Offices which register security interests in non-enterprise assets (as well as any other types of charges where there is no other place to register). In addition, a number of specialized registries handle charges over specific types of assets, for example, farm tractors by the Agricultural Management Bureau and standing timber by the Bureau of Forestry. As a result, multiple registrations are required when more than one type of asset is involved. It is thus not uncommon for a foreign lender taking security over all of an enterprise borrower’s assets to spend more than a year registering its interests with the appropriate registries (ibid.: 259). The ‘discretion’ of registry officials Registration is itself subject to ‘intensive scrutiny’ by registry officials. Lenders are required to submit excessive amounts of documentation, including loan and security agreements, all of which must be examined by registry officials to determine the legality of the transaction. Registry officials also determine whether the secured loan amount exceeds the value of the collateral, regardless of whether lenders are satisfied with their own valuation.4 Valuations by registry-appointed appraisers are routinely required and their fees are borne by lenders. In some locales, when the collateral consists of multiple assets, the registries even require separate contract documentation and appraisal for each asset component. Some lenders reported that registration-related costs could run as high as one-third of the loan amount. The process also gives registry officials wide discretion in accepting or rejecting registration applications. In the city of Shanghai, the local Administration for Industry and Commerce in charge of registering mortgages for movable property of enterprises accepts an average of only 1,000 registrations a year. The number is even lower in many other major cities.5 In the USA and Canada, because registration does not create substantive property rights, a security interest filing requires only minimum information sufficient

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for third parties to identify the existence of the security interest. This allows for instant electronic registration which does not involve registry officials reviewing the underlying transaction. Such electronic filings often take a few minutes to complete and cost less than US$20. Chinese courts also play a central role in the enforcement of security interests. Upon default, unless the debtor is willing to cooperate, the secured creditor must seek a judgment and an execution order from the court in order to take possession of the collateral. The seizure and sale of the collateral must also be carried out by court officials. Approximately 75 per cent of enforcement actions take more than a year, some even longer (World Bank Group 2007: 284). Since movable assets depreciate much faster than real property, the value of the movable collateral is likely to be greatly reduced during the long enforcement process. The prolonged enforcement also gives debtors the opportunity to hide or fraudulently transfer collateral. When asked about how much a lender can recover from equipment collateral, one Chinese banker curtly replied: ‘Scrap metal.’ This reflects the reality of actual practice with costs to a secured creditor not limited to low recovery rates. Court fees, execution fees, taxes, appraisals and judicial auctions can consume more than 20 per cent of the outstanding claims (ibid.). As a result, many Chinese banks do not pursue default cases and simply write them off as bad debt. In comparison, this research found that enforcement time in developed economies can take as little as seven days and cost less than 1 per cent of the secured debt (ibid.). It is clear that the secured financing system in China is not working well. It is inefficient, potentially open to corrupt practices by some officials, and there are clear arguments for the legal and institutional infrastructure to be changed to allow inventory and receivables to help generate financing for business growth. This would enable secured transactions to be undertaken with flexibility, transparency and efficiency. In order for changes to take place, however, a number of obstacles have to be overcome. The question remains whether a demonstrated need of the market is sufficient to generate a political mandate for further reform and whether such a mandate can be a driving force in shaping a commercial law promoting secured lending in China.

The reform process Although key decision-making within the Chinese government is often a collective matter, the success of a legal reform of this magnitude often hinges on whether the ‘right’ individuals can be convinced of the need for change. The presence of an interested government agency spearheading reform efforts and willing to use its political capital to lobby for reform appears to be critical. In the case of secured financing law reform, the central bank’s focus on the financing woes of SMEs has led to its recognition that reforming the country’s movable secured financing legal system will not only improve access to credit for SMEs, but it will also likely improve the profitability of domestic Chinese banks.

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PBOC research has found widespread financing difficulties among SMEs, which account for 80 per cent of all enterprises in China.6 Unlike SOEs which can rely on state-subsidized credit and large private companies with proven creditworthiness, SMEs have little access to bank loans. One of the biggest hurdles for SME financing is the requirement to provide real property as security (PBOC 2005). Under China’s land system, only use rights of stateowned urban land and buildings can be taken as collateral. Rural land use rights cannot be mortgaged.7 Because 90 per cent of China’s SMEs are rural township and village enterprises (ibid.), most SMEs have little to offer in terms of real property collateral. Even when factory buildings have value, lenders are unwilling to accept buildings on rural land because they are not transferable (see Richard Hu in Chapter 10 for a more detailed discussion of this issue). Meanwhile, inventory and receivables, which account for approximately 50 per cent of SME assets in China (World Bank Group 2007: 196), cannot be used as security due to restrictions under the Security Law. The PBOC concluded that reform of the secured financing system, particularly allowing greater use of movable collateral such as inventory and receivables, would be critical to improve SME access to bank loans. Feedback from Chinese banks is equally compelling. The WB-PBOC Project, for instance, found that 98 per cent of the banks supported reforming the system (ibid.: 199). Many Chinese banks, especially those in the more developed coastal regions, are already pushing the limits of the law in their lending practices. Some of these banks’ best customers have been able to borrow against their future income streams generated from highway toll collection, cable TV services, real-estate management contracts, and so on. However, Chinese bankers understand their risks. One of the bankers interviewed in the research put it this way: ‘These deals are done by “gentlemen’s handshakes” . . . The banks have no legal protection if something goes wrong’ (ibid.). Moreover, the scope of such lending is still limited. For example, in receivables financing, transactions typically involve the bank purchasing a single receivable due from a single customer. The transaction generally requires a three-party agreement under which the customer consents to the sale of the receivable. Such arrangement is necessary because lenders in China are required by law to notify the customer of the sale.8 In most advanced economies, bulk receivables financing can be secured against both earned and future receivables – due from a large number of known and unknown customers (e.g. mobile phone accounts). Such financing can easily be executed because lenders are not required to notify the customers. Backed by these studies and reports, the PBOC has been active in sharing its findings with other key government departments as well as the NPC, the national legislative body currently in the process of formulating the secured transactions section under the draft Property Law. A series of high-level seminars on secured financing law reform has provided a platform for government officials, lawmakers, bankers, judges, lawyers and academics to discuss

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and debate the merits of reform and to compare the existing system against international best practice benchmarks. In collaboration with the World Bank, the PBOC also developed detailed recommendations for reforming the legal system, including adopting principles of modern secured financing law in the draft Property Law. This effort to expand the scope of permissible movable collateral will improve both the movable security registry and the enforcement systems necessary to make secured transactions cost effective. In fact, a version of the Property Law released in July 2009 by the NPC drafting committee expanded the scope of permissible collateral to include presentlyowned and future-acquired inventory. However, broader and more systematic changes are needed in order to remove the major legal and institutional obstacles to secured transactions in China. A reform mandate from the top leadership must also coincide with a more progressive mindset among those charged with implementing change. Instituting changes: the role of the market In designing a legal structure for secured transactions in China, participants in the reform process must decide whether to adopt the market-oriented approach which forms the basis of modern secured transactions systems. Inherent in that approach is the belief that the market, i.e. contracting parties, are capable of assessing and managing their own business risks and that the role of the law is to set parameters within which secured transactions can be structured to the benefit of parties based on their particular needs. Adopting such an approach would be a significant departure from the control-oriented framework of China’s Security Law. It would require a re-evaluation of the relationship between government regulation and market activities and a deeper understanding of both the theory and practical effects of legal rules on financing transactions. Based on discussions with people involved in the legislative process, including many legal scholars who wield much influence as government advisors, resistance to adopting a market-oriented model is still quite strong, underscoring the challenges ahead. First, the idea of allowing parties to control how secured transactions are structured and conducted troubles many people often citing ‘transaction safety’ as a chief concern. Transaction safety is in fact code for a desire for the law (and government officials implementing the law) to retain responsibility for ensuring that commercial transactions are safe, fair and legal to all parties concerned. There is fear that if parties are allowed to create a security interest without going through the government-mandated registration and review process, banks could face excessive risk exposure. Nowadays they will also recite the GFC as further evidence supporting their ‘caution’. This is coupled with the fear that by empowering creditors (and disempowering courts with respect to control over the enforcement of security interests in commercial loan default cases), powerful lenders would have an unfair advantage over smaller, less powerful borrowers. The legitimacy of such fears is not debated

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here. Rather, it should be noted that protecting the interests of third parties is (and ought to be) part and parcel of any market-based secured transactions legal system. Although such protection has been successfully undertaken in other countries without many of the feared problems, internal critics remain unconvinced that such a market-driven model could (or should) be adopted by China. Another source of concern is fraud. In today’s China, fraud of all sorts is extremely common and often goes unpunished despite the numerous government rules specifically promulgated against fraud. Many fear that expanding the scope of permissible collateral to include inventory and receivables would invite fraud because lenders might be incapable of determining the value of fluctuating and intangible assets and of monitoring the collateral after a loan is made. Arguments have also been made that simplifying the registration process as well as making it inexpensive and accessible to the public would open the door to even more fraud. Indeed, the following question is commonly asked: ‘What would stop anyone from registering a fictitious security interest against someone they do not like?’ Still others blame China’s bad credit culture and entertain the notion that Chinese debtors would be more likely to cheat. It has even been argued by some legal scholars that the modern secured transactions enforcement mechanism would not work in China because it simply would not be compatible with ‘socialism with Chinese characteristics’. Interestingly, the same fears are not shared by bankers and other market participants – particularly younger, mid-level bank representatives and officials from government agencies – who have shown a remarkable openness towards a legal system that gives more freedom to parties. Nor do they think that either banks or commercial borrowers in China lack the business acumen to protect their interests in a secured loan transaction. These differing reactions on the part of scholars and others may stem from lack of practical experience with and knowledge of how secured transactions are conducted as well as the economics behind these transactions. In one instance in the research, after learning how foreign lenders use contract mechanisms to monitor the collateral and the debtor’s financial health, a law professor declared: ‘That’s exactly how Western lenders practised hegemony on the poor Latin borrowers!’ A banker, however, showed us his loan and security agreement which contained the standard warranty and covenant provisions commonly seen in transactions in developed financial markets. Chinese bankers will need not only the protection of contract mechanisms, but a law which allows parties to define a breach of a covenant or warranty as an event of default so that a secured creditor can take action against the collateral at the first sign of trouble, thereby reducing the risk of loss. Under the Security Law, a secured creditor can only sue a defaulting debtor in court for damage, a position no better than that of an unsecured creditor. Such disparities in the practical implications of the law, however, are often lost on lawmakers. Commercial lawmaking has a strong paternalistic bias due to the fundamental

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mistrust of the risk management capabilities of transacting parties. It is therefore not uncommon to encounter well-intentioned but ill-suited legislative provisions with potentially disastrous effects on secured financing transactions. Another persistent view is that China, as a civil law country, should look to civil law jurisdictions for reform inspiration and must not deviate from certain civil law principles already in place under the Security Law. Germany is often cited as a possible model, including the use of title retention for nonpossessory secured financing. However, such discussions tend to focus on the mechanics of certain legal concepts, rather than the history and context under which the German system evolved, its progress vis-à-vis other countries and the implications of importing specific elements of the German experience into the Chinese system. In many countries, the development of modern secured transactions laws has often resulted in a blurred distinction between civil law and common law. Changes to the law are driven by the practical need of improving access to credit not by legal traditions. Fifty years ago, the United States abandoned many traditional legal concepts inherited from English common law and developed a codified commercial law system (Article 9 of the Uniform Commercial Code) which makes it possible for secured transactions to be conducted with maximum flexibility and efficiency. The detailed and comprehensive legislation was intentionally designed to reduce both potential litigation and judicial interpretation. Such an approach has been followed in other common law jurisdictions such as Canada and New Zealand. In recent years, many Central and Eastern European countries with long civil law traditions also have embraced key principles of the Uniform Commercial Code in their effort to develop modern secured financing systems. Although the German Civil Code still does not recognize non-possessory security interests, German courts have liberally interpreted the statute to allow secured transactions to be structured by way of title retention, achieving the same effect of non-possessory security interests by transferring ownership of the collateral to the creditor. The downside of such judge-made law is that Germany does not have a publicity system for security interests. To an extent, China’s Security Law has progressed beyond traditional civil law limitations. The Security Law already recognizes non-possessory security interest in equipment and motor vehicles and provides for publicity of the security interest through registration. At the same time, however, the negative impact of traditional civil law principles is evident. For example, the Security Law relies on the principle of numerus clausus in defining the scope of permissible collateral, setting forth a narrow list of assets which may be used as security. Only assets specifically permitted by law may be used as collateral, thus prohibiting security interests in any other form of movable property. Similarly, the requirement to specifically describe the collateral in the contract prevents the use of future-acquired property as security. In reforming the laws, Chinese lawmakers must weigh the pragmatic needs of China’s modernizing economy against the constraints of these traditional legal principles. To this end, a better

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understanding by lawmakers of what motivates commercial transactions is essential. This includes knowledge of how market participants assess risks and analyze the benefits of individual transactions. Furthermore, input from those whose business is directly affected by the law would be a valuable, perhaps crucial step in the reform process.

Key security interest issues under the new Property Law Some of the broad analysis of China’s Property Law is discussed in Hu’s Chapter 10 in this volume. With respect to secured transactions, however, overall the Property Law has made great strides in improving China’s laws and opened the door for the development of modern inventory and receivables financing in China. But the Property Law has not eliminated confusion or else remains purposefully vague in a number of critical areas, notably rules regarding receivables financing, registration, priority and enforcement. Some of the key improvements adopted by the Property Law are: (1) expanding the scope of movable collateral by allowing present and futureacquired equipment and inventory, as well as receivables to be pledged as collateral; (2) simplifying formalities required for creating security interests in tangible movable assets such as equipment and inventory; (3) giving lenders more control over default by allowing events of default to be defined by contract; and (4) granting authority to the PBOC to establish a receivables registry, thereby offering the opportunity to create a prototype of the first modern electronic movable security registry in China. The creation of security interests: formalities and priority rules The Property Law simplifies the formalities required for the creation of security interests and allows more freedom of contract. Specifically, under Articles 188 and 189, pledges of tangible movable assets such as equipment, inventory and motor vehicles can be created by agreement without registration. Under previous law, such interests must be registered to be enforceable. However, the relaxed rules do not apply to pledges of rights to intangible assets, which still must be registered to become effective. As discussed earlier, although Article 185 of the Property Law continues to prescribe the content of the security agreement, the requirement no longer appears to be mandatory. This leaves room for future registry rules to allow a general description in financings involving inventory and receivables. Also, there are fewer restrictions on who can grant a security interest in movables. Article 181 allows ‘enterprises, individual entrepreneurs or persons engaged in agricultural production and operations’ to grant mortgages over inventory and equipment, essentially making secured financing available to all types of businesses in China. Unlike prior law under which an event of default was defined by statute, parties are now allowed to define by agreement what constitutes default (Articles 170, 181, 190).

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Many priority rules remain ambiguous under the Property Law which addresses only a few of the important priority issues, for instance:

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Holder of security interests in tangible movable assets: The law makes it clear that priority among holders of competing security interests in the same collateral is determined by the order of registration (Article 190). However, it does not provide any priority rules for registered pledges of rights. Future-acquired collateral and future advances: The ‘first to register wins’ rule appears to apply to determination of the order of priority relating to future acquired tangible collateral (Article 181) and future advances of specified amounts (Article 203). Buyers of collateral: The interest of buyers of collateral is addressed in Article 189 and Article 191 of the Property Law. These provisions recognize for the first time the necessity of a special priority rule which allows a buyer of encumbered inventory to take the collateral free of any prior security interest in modern inventory financing. However, Article 189 is poorly drafted and does not limit buyers to those who purchase goods sold in a seller’s ordinary course of business. As a result, this priority rule may benefit certain buyers of collateral to the detriment of the secured creditor. For example, a buyer of bulk inventory from a retailer would take goods free of a prior security interest granted with the expectation that the retailer/debtor sells only to consumers. Another concern is the Property Law’s lack of the proceeds rule which allows a security interest in the collateral to automatically extend to the proceeds of the collateral. The proceeds rule is essential for protecting a secured creditor’s rights when the inventory collateral is sold to buyers in the ‘ordinary course of business’ free of the security interest. Under the current structure, a ‘secured creditor’ holding inventory collateral must take separate measures to create and perfect its security interest in the proceeds (such as receivables and cash).

Legal practitioners in particular may wish to note that the Property Law does not provide a purchase money security interest priority rule in favour of lenders who provide credit for the purchase of goods such as equipment, inventory, livestock and consumer goods. Priority rules, or lack thereof, dealing with third party non-consensual claims are thus equally worrisome, as follows:

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Super-priority of statutory liens: Article 230 of the Property Law expands the Security Law definition of statutory liens to benefit any creditor who has possession of the collateral by lawful means. Under the Security Law, only those who obtain possession pursuant to three specific types of contracts (shipping, processing and storage) may hold a statutory lien over the collateral if the debtor fails to make payments to such parties. Article 239 further provides that such liens have priority over prior

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Su Lin Han registered mortgages or prior perfected possessory pledges. The negative impact of these rules on security interests can be enormous: Any creditor, whether it is customs, tax authority, judgment creditor or anyone else authorized to seize the collateral by legal means, regardless of when the claim arises, would have a super-priority over secured creditors. No priority rules regarding government liens: The Property Law fails to provide clear priority rules to resolve the existing confusion over the priority of tax liens, customs liens and judgment liens. Over the years, different and often inconsistent priority rules have been put forth by various Chinese laws (including the tax law) and legal interpretations. These have resulted in numerous priority disputes between lien holders such as the tax authority, the customs and the judgment creditors, and secured creditors. The Property Law missed an opportunity to consolidate these rules and provide a single set of comprehensive and clear priority rules to resolve such disputes. No publicity mechanism for non-consensual liens: The Property Law also fails to provide for registration or other publication mechanisms for determining priority among registered security interests and competing third parties claims held by customs, tax authority and judgment creditors.

Registration and enforcement of security interests Registration Overall, China’s highly fragmented movable collateral registry system remains substantially unchanged under the Property Law. The new law fails to consolidate more than 15 movable collateral registries into a single nationwide system and adds a new receivables collateral registry. Nor does it provide legal guidelines on registry rules and operations. The divergent registry rules and practice will inevitably lead to confusion and inefficiency both for registration and determination of priority, as already demonstrated by existing registry practice. One bright spot in registry reform is the establishment by the PBOC of a nationwide online registry for pledges of receivables (the Receivables Registry) pursuant to Article 228 of the Property Law.9 The Receivables Registry has been in operation since October 2007 and is modelled on the modern registration systems in the USA and Canada. The system touts itself as a notice registration system which requires submitting only key information to identify the borrower, the lender and the collateral. The registry does not require submission of transaction documents or any specific description of the collateral. Nor do registry officials engage in substantive review of any registration documents. Registration information is open to search by the public online. In addition to registering pledges of receivables, the system also allows registration of sales of receivables and since July 2009, financial leases. As of March 2009, the total registered debt secured by receivables

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reached RMB3.5 trillion (approximately US$500 billion) (PBOC Credit Information Centre 2009). The Receivables Registry, with its many features of a modern movable collateral registry, can be a useful model for reforming the existing movable collateral registry system. However, because the Property Law offers little guidance on the fundamental legal principles governing registration of receivables, the Receivables Registry must operate in a legal vacuum. Key issues include:

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Effect of registration: A registration of a pledge of receivables under the Property Law has limited legal effects: (1) registration is required for the validity of the pledge; and (2) a registered pledge has priority over an unregistered interest. However, the Property Law does not provide the basic ‘first to register wins’ rule to uphold transparency and predictability among competing registered pledges. Nor does the law resolve potential priority conflicts between pledges and sale of receivables. Currently, sale of receivables (factoring) is governed by Article 80 of the PRC Contract Law, which relies on notification to the obligor of the receivables to address priority conflict among competing claims. If a receivable is sold and then pledged, there is no publicity mechanism or priority rules to resolve any priority conflicts. The Receivables Registry attempts to address this issue by adopting the North American model which requires sale of receivables to be registered in the collateral registry. However, without a clear priority rule reconciling the different laws and requiring registration of the sale of receivables for priority purposes, registration of sale of receivables offered by the Receivables Registry simply has no legal effect. Effect of the Security Law requirements: Another area of legal uncertainty is whether certain provisions under the Security Law will continue to apply to movable registry practice. This is because the Property Law does not replace provisions of the Security Law which are not in conflict with its provisions (Article 178). One such provision is Article 44 of the Security Law, which requires that registration documents must include transaction documents for review by registry officials. Since the Property Law remains silent on the registration process, Article 44 of the Security Law may continue to apply. Existing registry practice in China indicates that this requirement has been a major hurdle in adopting the modern secured financing principle of non-substantive review by the registry.

To address such concerns, the PBOC issued the ‘Rules Regarding Registration of Pledges of Receivables’ in October 2007 which endorses many of the practices of the Receivables Registry outlined above. It is widely viewed that such regulatory measures are insufficient to clarify the many legal uncertainties under the Property Law. Ultimately, issues regarding scope, registration and priority as well as enforcement of security interests in both tangible and intangible movable property, such as inventory and receivables, will have

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to be clarified or resolved by the Supreme People’s Court of China through judicial interpretation. To date, the high court has not issued any interpretation of the secured transaction portion of the Property Law. Enforcement The Property Law gives parties the freedom to define events of default by agreement (see Articles 170, 181 and 190), which is a major improvement over prior laws. However, the enforcement process remains court-oriented, while private enforcement is largely neither permitted nor feasible. The critical issue of how to improve the judicial enforcement process is left primarily for the judicial system to address. A number of aspects of enforcement remain problematic. For instance, no expedited summary proceeding is provided for judicial seizure and sale of movable collateral in judicial foreclosures. Currently, enforcement time (including time for obtaining a judgment on the merit and for executing the judgment) is between one and a half to two years. Further, there is a lack of any guidelines regarding enforcement of security interests in receivables, notably (1) whether notice to account debtor is required at the time of assignment (cf. Article 80 of China’s Contract Law which requires notification of transfer of debt obligations); (2) whether a secured creditor has the right to notify account debtor to pay directly to creditor; and (3) rules regarding rights and obligations of account debtor upon default (i.e. set-offs, modifications, and so on). Procedural safeguards are also lacking. These are needed to protect the interests of third parties when the debtor and the secured creditor agree to enforce the security interest outside the judicial process. Under modern secured transactions laws, such safeguards include requiring the secured creditor to send notice of the sale of the collateral to interested third parties and notice of strict foreclosure to allow third parties to raise objections or organize themselves accordingly.

Conclusion It cannot be overemphasized that despite progress made by the Property Law reforms, the development of a modern and efficient secured financing system in China requires further legal and institutional development. In particular, this chapter has highlighted the areas of registration, priority rules and enforcement of security interests as being of critical importance. The research has shown that doubts clearly remain in positions of influence as to the extent a market-driven model should be further promulgated in China. This is essentially a political issue. Comprehensive legal guidelines and interpretations more in tune with modern financing practices as well as proper implementation of the law, however, will be crucial to the successful reform of China’s secured financing system.

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Notes 1 The author worked as legal consultant for the World Bank on the WB-PBOC Project in China. All views expressed in this chapter are strictly personal and do not represent those of the organizations for which the author has worked. Except as otherwise noted, this chapter is based primarily on information published by the World Bank (see references below) as well as knowledge gained through the course of the empirical research. 2 Fuller discussion is given in World Bank Group (2007: 195) ‘Reforming Collateral Laws and Registries: International Best Practices and the Case of China’ (hereinafter referred to as the ‘World Bank-PBOC Report’). 3 Security Law, Article 39. 4 Under Article 35 of the Security Law, a secured loan may not exceed the value of the mortgage property. Many registries interpreted this provision as requiring third-party appraisals even if parties have agreed to the value of the collateral. 5 WB-PBOC Report (World Bank Group 2007: 263). More detailed discussions about China’s movable registry practice can be found in the same report. 6 PBOC (2005) ‘Survey of the Financing Mechanisms for China’s Small and Medium Enterprises’ (hereinafter referred to as the ‘PBOC SME Report’). 7 Security Law, Articles 34 and 37. 8 PRC Contract Law, Article 80. 9 Article 228 of the Property Law provides that: ‘A pledge of [receivables] becomes effective upon registration with the credit information agency.’ The PBOC has maintained that the Credit Information Centre of the PBOC is the only entity legally authorized to run such a registry.

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Part III

Wealth and law reform Capitalism with Chinese characteristics?

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10 Property, wealth and law reforms in China’s urban ‘revolution’ Richard Hu

Introduction The word ‘revolution’ is a classic buzzword in China’s discourse, but with new connotations. In the contemporary context it can be used to describe China’s urban changes since gai ge kai fang (‘reform and opening up’) was launched in 1978. China, historically a predominantly rural society, has been moving towards an urban society at an unprecedented and unparalleled speed. This rural-urban shift has been occurring along with fundamental changes to China’s economic structure, social and legal organization and political institutions. These changes are transformative rather than transitory, functioning through a variety of complex and interrelated factors. They manifest themselves in the expanding urban landscape (Morley 2009). Of the numerous scholarly investigations into China’s urban revolution, there is a consensus that China’s urbanization has been largely driven by demographic change, economic growth and changes in land use policies and regulations (Liu et al. 2005). This chapter argues that the driving forces are actually more encompassing and examines how these factors have been working as determinants as well as indicators of China’s urban revolution. The chapter documents China’s urbanization in terms of demographic change and urban area growth. It elaborates on the property boom as both a key driver and an outcome of China’s economic growth during the urban revolution – with new wealthy classes having grown out of this socio-economic reshuffling. The chapter then considers key law reforms which have worked as legal frameworks (and facilitators of change) in three spheres: housing reform, land reform and property law. These interwoven reforms, it is argued, represent the beginning (or early stage) of a process of profound change, with even more dramatic change anticipated in the future.

China’s urban ‘revolution’ Urbanization Urban sociologist Kingsley Davis defines ‘urbanization’ in a particular way: ‘The proportion of the total population concentrated in urban areas, or else

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6 5 4 3 2 1 0

World 2045–2050

2040–2045

2035–2040

2030–2035

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to a rise in this proportion’ (Davis 1965). Based on this definition, Hu (2008) claims that the half century between 1980 and 2030 is China’s ‘urban age’ – because the annual urban population growth rate of China in this period is much higher than that of the world – according to the United Nations Secretariat (see estimations and predictions in Figure 10.1). China’s annual urban population growth rate was particularly high in 1980–2005, during which time China was the statistical centre of the world’s urbanization development. China’s Ministry of Housing and Urban-Rural Development statistics show that China’s urban population reached 607 million at the end of 2008, accounting for 45.68 per cent of the urbanization rate (Du 2009). China’s urbanization rate in 2008 was 35 per cent higher than 1949 when the People’s Republic of China was established, and 25 per cent higher than 1978 when ‘reform and opening up’ commenced. In 2007, for the first time in human history, more people lived in urban areas than rural areas in the world, that is, the world urbanization rate surpassed 50 per cent. It is expected that China’s urban population will be more than its rural population by around 2015 (Hu 2008). China’s urbanization has been driven by massive rural-urban migration. Rural-urban migration was the major driving force of urbanization during the Industrial Revolution in today’s developed world (Davis 1965). Davis’ assertion can be applied to China’s urbanization in that it has occurred in parallel with industrialization processes. The abundance of rural youths provided ready cheap labour required by China’s industrialization and urbanization. Floods of young males and females kept flocking to the mushrooming factories and construction sites from the countryside areas. They have not been well educated and represent the worse-off majority of the rural labour force. They moved into cities as officially unacknowledged ‘floaters’ (Friedmann 2005), and then gradually settled down. Li (2004) finds that the rural-urban migration increasingly bypassed towns and ended up in cities, indicating different growth

Year

Figure 10.1 Annual urban population growth rates of China and the world, 1950–2050. Source: United Nations Secretariat

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patterns of cities and towns: the growth of cities driven by migrants, and the growth of towns driven by urbanizing local rural populations. The other group of the rural-urban migrants is the rural elites who moved to cities through education achievement or successful entrepreneurship. To go to college and then work and live in cities has been perceived as the best way for rural youths to escape the countryside (or ‘jumping over the dragon gate’ – tiao long men). For many rural youth who were unable to access competitive tertiary education opportunities, entrepreneurship was another way to change their lives through succeeding in business and then moving to cities. China’s one-child family plan is another factor determining rural-urban migration as a major driver of China’s urbanization. Since its commencement in the late 1970s, the one-child policy has restricted the natural population growth in cities. Moreover, the policy has been more strictly and effectively implemented in urban areas than rural areas. This is because urban residents are normally organized in work-units and living communities, making it easier to monitor and execute the one-child policy. On the other hand, urban residents tend to have lower birth rates than rural residents even without the one-child policy. The one-child policy has made rural-urban migration a very significant driver of China’s urbanization. This is a different pattern from the urbanization of other populous developing countries which are facilitated by rural-urban migration as well as natural urban population growth. Urban growth Apart from urban population growth, another measure of China’s urbanization is urban area growth. The urban area growth is indicated by changes in the scale and number of cities and towns in China. China’s total number of cities increased from 193 in 1978 to 655 in 2007 – a jump of 2.4 times within three decades of China’s ‘reforms and opening up’ (see Table 10.1). Among them, the number of cities at the ‘prefecture and above’ level increased from 111 in 1978 to 287 in 2007. ‘Small cities’ of less than 0.2 million population grew the most of cities of different population scales as shown in Table 10.1. Until the end of 2007, 371 million population lived in cities at the ‘prefecture and above’ levels, and the built-up urban area reached 28 thousand km2 (National Bureau of Statistics of China, 2008). ‘Town’ is an administrative level below the county in China. The growth of towns is even more dynamic than small cities. The number of towns increased from 2,173 in 1978 to 19,249 in 2007 by almost nine times (National Bureau of Statistics of China, 2008). The growth patterns of cities and towns indicate two scenarios of China’s urban growth. One is the expansion of small cities into large cities, and large cities into megacities. The other is the appearance of numerous small cities and towns which have developed from semi-urban habitats. Of the top 10 China’s cities by population, the smallest (Dongguan) has a population of 3.8 million (Hu 2008). Both Beijing and Shanghai have populations of more

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1978

2007

Difference (1978–2007)

More than 2 million 1–2 million 0.5–1 million 0.2–0.5 million Less than 0.2 million Total

10 19 35 80 49 193

36 83 118 151 267 655

26 64 83 71 218 462

Source: National Bureau of Statistics of China (2008).

than 10 million (and this does not include the proximate emerging city-regions in the Yangtze River Delta and the Beijing–Tianjin Urban Agglomeration). At the same time, numerous small cities and towns are emerging and growing, responding to the government-pushed urbanization mode of upgrading villages and communes into townships and towns into small cities (Chen 2005). The strategy of establishing more towns as a level of administration was partly aimed at urbanizing the rural population on the land without transferring them to established urban areas. This approach has been very effective in China’s urbanization. The small towns are normally centres of agricultural services, trade or mining hubs. They are the incubating localities for rural industrialization and urbanization, transferring surplus labour from agriculture to the industrial and service sectors without leaving the rural areas (Wang and Hu 1999; Cheng 2006). Continuous urban ‘revolution’ China’s urban revolution is far from over and according to the central government’s strategic goal, it is destined to continue. At the 17th Congress of the CPC in 2007, President Hu Jintao committed the country to the target of quadrupling per capita GDP by 2020 compared with the 2000 level. Meeting that goal implies China will continue to urbanize. Urbanization and China’s robust economic growth have developed hand in hand. Cities have been the major drivers of China’s GDP growth over the past two decades and they will become even more so over the next 20 years. Projecting current trends into the future, the proportion of China’s GDP generated by cities will rise from 75 per cent today to 95 per cent by 2025 (Woetzel et al. 2008). At the 17th Congress of the CPC in 2007, President Hu also set the urbanization ratio to be 60 per cent by 2020. Judging from China’s urbanization momentum, this goal will be met with relative ease. The McKinsey Global Institute research report (2008) indicates that if China’s current urbanization trend holds, nearly one billion Chinese people will live in cities by 2030 (Woetzel et al. 2008). An urban population in China of one billion in 2030 will mean 221 cities with more than one million

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people – compared with 35 cities of such amplitude in Europe today. Of these, 23 cities will have more than five million people; 40 billion square metres of floor space will be built; 5 billion square metres of road will be paved; 170 mass-transit systems could be built. China’s urbanization is thus set to continue in an even more robust way. Its overall impact is hard to assess and predict now, but there is no doubt that the socio-economic consequences should be even more profound than what has occurred in the past three decades. It is too early to draw a panoramic view of China’s urbanization if we conceive of urbanization as a process which by definition may end some day (as argued by Kingsley Davis in 1965). For the moment, China is in the middle of its urban age running from 1980 to 2030.

The property boom A market-based boom It is not surprising that China’s urban revolution has been accompanied by a property boom. They are different signifiers of essentially the same socioeconomic transformation. The property boom is a facilitator as well as consequence of the urban revolution. Housing provision was a key component of China’s reform package. It took almost two decades to complete a series of housing reforms, including ideological debates, experiments, policy changes and law reforms. A housing market was established in the late 1990s and the market-based housing supply and consumption substantially rose and a property boom commenced (as indicated in Figure 10.2). China’s achievement in the property boom was remarkable. Between 1949–78, China’s total housing investment was only RMB37.4 billion and total constructed housing area was close to 500 million m2, which means

65000 60000 55000 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0

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Figure 10.2 Sold real estate floor area in China, 1987–2006 (in 10,000 m2). Source: National Bureau of Statistics of China (2008).

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RMB10 of housing investment per capita and 3.6 m2 of housing area per capita (Kai and Zhao 2009; W. Liu 2008). On average, people’s housing conditions did not improve at all in 1978 compared with 1949. However, China’s total constructed housing area amounted to 3.5 billion m2 between 1979 and 1998 (Kai and Zhao 2009); five times the total area constructed in the previous 30 years. The housing area per capita increased from 6.7 m2 in 1978 to 28 m2 in 2008, with 83 per cent of urban housing units self-owned by residents (Kai and Zhao 2009; National Bureau of Statistics of China 2008). Deng Xiaoping set the target of China’s modernization as being a wellbeing society (xiao kang she hui) in 2020. The housing indicator of the living standard in a well-being society is 35 m2 of housing area per capita. To fill the gap of 7 m2 of housing area per capita, China’s property boom is expected to continue along with its urban revolution until 2020 and beyond. The property boom has been nurtured and sustained in an emerging housing market in China. The formation of the property boom depended on a number of critical supply and demand factors in China’s housing market and these are outlined below. Supply factors Driving forces of China’s property boom on the supply side rested with government. The foremost driving force was the central government’s strategy to marketize the housing provision. Before 1978, there was no housing market in China under the planned economy. Housing was provided by the work units (dan wei) as a form of welfare. The overwhelming ideology was ‘heavy production, light consumption’ (zhong sheng chan, qing xiao fei), which resulted in extremely low levels of housing provision. For the chief reformist, Deng Xiaoping, housing marketization was high on his reform agenda – to vitalize housing provision. Housing marketization would also alleviate the welfare burden on SOEs to enhance their economic efficiency and competitiveness. Before (and after) the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China in December 1978,1 Deng talked about housing reform on a couple of important occasions. Specifically, he allowed private construction of housing, private-public joint construction of housing and private purchase of housing by instalments. In the late 1970s and early 1980s, fundamentalist communism ideology was often a barrier to such reforms. But private housing purchase and ownership were ideologically legitimized by the argument that housing belonged to ‘personal consumable commodities’ and thus private transactions did not conflict with the socialist public ownership system. Housing reforms were experimented in a few cities and then gradually spread to more cities in 1982–86 with a focal reform to enhance the rent fees of public housing and sell public housing. During this experimental period, a total of 11 million m2 of public housing was sold to private individuals. The watershed year of China’s housing market reform came 12 years later in 1998. In this year the State Council released its ‘Notice on Further Deepening

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Urban Housing Reform and Accelerating Housing Construction’. This was a very important document as it officially declared the end of the state work-unit provision of housing as a form of welfare. This document marked the legal commencement of China’s housing marketization and proved to be a benchmark facilitator of China’s property boom. Detailed facilitators and impacts of this document are elaborated later in this chapter. Once housing provision was completely marketized, property development has since been the focus of China’s urban development and occupied the minds of government officials at different levels. On the other hand, after Deng Xiaoping’s Southern Tour Talks2 (nan xun jiang hua) in early 1992, China had a renewed round of liberal reforms with much more far-reaching consequences than the earlier reforms of the 1980s. In practice, the latter round of reforms ignited overwhelming scales of urban development and infrastructure investment. In the decade 1992 to 2002, when a new generation of leaders were in power, the policy priority of all government officials was centred on GDP growth – driven by a pro-development mindset. Property development, and its related fixed asset investment, were regarded as an ‘economic growth pole’ to improve GDP growth. Furthermore, GDP growth counted most in the performance assessment and promotion prospects of officials. Apart from substantially contributing to GDP growth, property development is ‘observable progress’ that a city can make. Increasingly local government officials have tended to use property development as ‘vanity projects’ (zheng ji gong cheng) to win the favour of higher officials and recognition of the general public. Another justification for local government enthusiasm in driving the property boom has been the revenues attained from it. In the mid-1990s the Vice Premier Zhu Rongji embarked on a series of tax reforms. Overall, taxing power and resources were more centralized on the central government. This partially resulted in restrictive revenues and expenditures at the local government levels. Property development provided local governments with a good taxing resource (see Garrick forthcoming). Furthermore, local government could gain immense amounts of revenue from selling land use rights to property developers. Selling land use rights for property development has been the most important revenue source for local governments. This has made local government officials particularly ‘supportive’ of property development and legitimized by the discourse of ‘developing local economy through urban construction’. Demand factors The factors on the demand-side of the housing market which have facilitated the property boom are related to consumable needs and consumable behaviour patterns. The conclusion of welfare housing made private purchase in the market the only viable choice for masses of residents who were short of housing or who needed to improve their housing standards. Given the

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housing area of 6.7 m2 per capita in 1978, huge market demand was the most significant driver for China’s property boom. The existing market demand to enlarge and improve housing was augmented by the rapid urbanization process which involved immense rural-urban migrants who needed living space in cities. The better-off elite migrants who possessed either education or business success were more able to afford city housing. China’s unique consumable behaviour played a role in driving the property boom too. Traditionally Chinese people have preferred to purchase housing or land once they got rich. Chinese socio-economic relationships have been centred on families. Self-owned housing has been a foundation of family-centred socio-economic relationships physically and psychologically. This is culturally embedded in the minds of most Chinese people. It represents a social mentality of accomplishment and provides a sense of security. Renting a housing unit may be regarded by some as a status of instability and perhaps lacks a sense of belonging. To purchase housing on mortgage is a priority decision once one is more able to afford the deposit. On the other hand, China’s property boom coincided with the maturity of the first generation of the one-child family plan being of ‘marriageable’ age. They were able to access financial support from both parents and even grandparents to buy housing since they were the only child in both families. Furthermore, their parents’ generation happened to be the main actors (and beneficiaries) of China’s rapid economic growth in the past three decades and thus were positioned to spend more on their only child. These factors partially explain China’s high self-ownership rate of housing – 83 per cent compared to 60–70 per cent in the western world (J. Chen 2006). China’s unequal social wealth distribution and underdeveloped financial market have combined to boost property investment. The most recent statistics available from the central government’s publication Outlook (liao wang) indicate that 20 per cent of high income earners possess 50 per cent of social wealth, let alone those extremely wealthy people who are hidden from publicity. Without other effective investment channels due to the underdeveloped financial market in China, investment in housing is one or maybe the only reliable choice for the wealthy class. In recent years, collective housing purchase groups3 (gou fang tuan) from Wenzhou or Shanxi (known for thei wealth from business and coal mining respectively) were an interesting housing market phenomenon in recent years, penetrating property markets in Beijing, Shanghai and Shenzhen. These collective housing purchase groups aimed at speculating in the booming market. On the other hand, it may partly indicate limited investment outlets for their wealth in their local regions. Overinvestment in housing by the wealthy has generated two direct consequences which are central to debates of China’s housing market now. One is skyrocketing housing prices coupled with high vacancy rates in the property boom (or bubble); the other is unaffordability of housing for most residents – as evidenced by the increasing disparity between housing price increases and the relatively smaller urban resident income increases since 1998 (Ye and Wu

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2006). The property boom was an opportunity for speculative investment for some, generating new winners and losers.

Wealth machine Social inequality Despite China’s urban revolution and property boom, its social wealth distribution is not as glorious. China presents a dual image. One image is of China as the world’s third largest economy (having recently overtaken Germany). China’s enterprises are aggressively taking over overseas assets, its international role is increasingly backed by its economic prowess especially following the global financial crisis and China’s wealthy consumers are now among the most welcomed by global luxury dealers. The alter-image is of China’s per capita income remaining very low with a majority of Chinese not yet well-off, with 254 million (in 2005) living below the World Bank’s international poverty line (China Youth Daily 2009). Many complain about living under the heavy pressure of the new ‘three big mountains’ (xin san zuo da shan): unaffordable housing, education and health.4 The CPC gained power in 1949 with the ideological principle of equal wealth distribution for all and this remains in communist rhetoric. Ironically, China has become one of the most unequal societies in terms of wealth distribution. One commonly used measure of inequality in wealth is the Gini coefficient.5 Statistics from China’s National Bureau of Statistics show that its Gini coefficient was 0.317 in 1978, a normal status according to the international standard. In 2000, China’s Gini coefficient surpassed the international ‘alarm line’ of 0.4 and has continued to increase to 0.496 (in 2006). China’s social inequality in wealth distribution has thus grown along with China’s massive wealth accumulation in the past three decades. Social inequality has become a very serious concern and is a root cause of other social problems. China’s social gaps have long existed between the urban residents and the rural residents, and between the coastal area residents and the inland residents. China’s household registration (hu kou deng ji) system enforced since 1949 generated dual societies – a rural society and an urban society – as well as embedded inequalities between them. Such gaps were widening rather than closing in the post-1978 reforms and opening up. Furthermore, the existing geography-based gaps between urban and rural areas, and between coastal and inland areas, were overridden by an overall gap between the extremely rich and the extremely poor. In 2006, the average income of the richest urban residents (the top 20 per cent) was 5.6 times that of the poorest urban residents (the bottom 20 per cent), while for rural residents, it was 7.2 times (R. Wang 2009). Overall, 20 per cent of China’s population of low income earners only earn 4.7 per cent of total social wealth. The top 20 per cent account for 50 per cent of total social wealth (ibid.). China’s social wealth is thus increasingly concentrated at the top end, seriously impacting on social equity,

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economically sustainable development and the very legitimacy of contemporary government rhetoric. The property boom as a ‘wealth machine’ China’s property boom has facilitated the concentration of social wealth in a very wealthy minority. Property development is identified as a ‘wealth machine’ and developers are the equivalent of a new rich class. This assertion is true in a way – in that property development (and related industries) have generated an identifiable elite of multimillionaires virtually overnight. This is regarded as the fastest way to overwhelming riches. In the Hurun Report6 of China’s richest business people, 23.4 per cent of the listed richest business people were from the real estate industry in 2008, and in 2007/2006, 2005 and 2004, the figures were 24 per cent, 25.5 per cent, 28 per cent and 45 per cent respectively (Hurun 2008). The real estate industry was more highly represented in the top 10 richest business people in China and the trend over the past 10 years was for more and more real estate business people to enter the ‘top 10’ lists (see Figure 10.3). Of all industries, real estate development has generated the largest number of ‘richest business people’ and it has concentrated wealth for those privileged few individuals. Not only has the property boom generated great wealth for some real estate developers, but it has also generated wealth for people in industries related to real estate development. Basically three categories of businesses have benefited most from the property boom through providing services for real estate development. The first category is ‘construction contractors’. Contractors hire very cheap rural labourers to work on construction sites in cities and make profitable margins. The second category is ‘material and equipment providers’. The property boom enhanced the demand for construction materials and generated a group of wealthy businessmen from industries such as steel, cement, mining and timber. Some made fortunes from providing electrical equipment such as lift and central air conditioning systems. The 70% 60% 50% 40% 30% 20% 10% 0% –10%

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Figure 10.3 The percentage of top 10 richest businessmen from property development industry in China, 1999–2008. Source: Hurun (2008).

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third category is ‘real estate professional service providers’. The boom has required special services that did not exist before – such as real estate brokerage, architecture design, engineering, property management, legal services and financing. The most successful of these consultants became quite wealthy through both selling professional knowledge. But their wealth accumulation is not comparable to the real estate developers or the other two categories of real estate-related businesses. The property boom is a wealth machine. It generated wealthy developers directly as well as a string of related businessmen. They comprise an important part of China’s so-called xin gui (new rich). Speculative property investment does not, of course, always pay off and some spectacular losses have resulted in bankruptcy – putting China’s new bankruptcy laws to the test (see Chapter 12). The nexus of power and wealth Marketization has opened the door to new wealth. But in China power remains a key to accessing it. In part this is because of the incompleteness of China’s marketization, allowing space for power to interfere with business matters. It appears that a wealth-power ‘coalition’ is emerging in China: power leads to wealth; wealth facilitates access to power. Two sets of figures illustrate this relationship between power and wealth. A meta-analysis of the government statistics from the State Council, the Central Party School, the Central Propaganda Department and China’s Academy of Social Sciences reveals that 3,220 people owned wealth in excess of RMB100 million in 2006 in China. Of this number, 2,932 were the offspring of high-level government officials and their total wealth (legal and illegal) was estimated to amount to RMB2.1 trillion (Zhao 2006). On the other hand, of the 1,000 richest business people listed in the Huran Report in 2008, 80 were members of the NPC and 68 were members of the national committee of China’s People’s Political Consultative Conference (CPPCC) (Hurun 2008). It is reasonably assumed that many more of them were members of either the People’s Congress or of the Political Consultative Conference at local levels. This power-wealth coalition is proving to be a barrier to China’s economic and social development in terms of sustainability. Incomplete marketization and a non-transparent power structure are foundations of the power-wealth coalition fuelling social inequality. Economic marketization, law reform and political democratization are now commonly discussed in China as keys to overcoming this conundrum. However, as the power-wealth coalition becomes deeply entrenched, resistance to further economic, legal and political reforms (which might impact on their vested interests) must be anticipated. The Hong Kong-based economist, Lang Xianping laments the loss of state assets in the ownership transfer of some SOEs to private ownership. Since 2004, he has sought to arouse public attention to the ‘wealth-power coalition’ – causing the so-called ‘Lang Storm’.7 A paradox of this powerwealth ‘storm’ is that on the one hand, ‘the coalition’ enjoys disproportionately

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large amounts of social wealth. On the other hand, the politically charged relationship upon which the power-wealth coalition is built puts almost every member of it in a perilous situation. This virtually ‘endangered’ status is derived from connections and interests that may be corrupt or illegal. Whether they survive or not may depend on the always shifting power relations. According to China’s popular media, this is why so many Chinese government officials and business people are arrested every year. Whether or not it is a fair accusation, it is commonly believed that they are the ‘tip of the iceberg’. Some sources attribute these arrests as cosmetic on the one hand (to make the government look like it is doing something to tackle the problem) and on the other hand a matter of sheer bad luck (in that they do not survive while a problematic majority continues to thrive). Since the mid-1990s, corruption investigation has been used as a tool against target government officials – often for political struggle purposes. Tax evasion investigations and bribery cases have been used as tools also to target business people who are often related to ‘problematic’ officials. These approaches have led to many corruption convictions. As mentioned, the disproportionate wealth attained by the power-wealth coalition is seriously impacting on China’s social equity, causing social conflict and instability. Thousands of mass contingency events happened in China every year which were not allowed to be exposed by the media. Social stability is a high priority policy objective for governments at all levels. The wealth-hatred mentality, nurtured in recent years, appears to now represent a status quo. At its heart, wealth hatred is a hatred of illegal wealth accumulation through the power-wealth coalition. It is worth noting that the targets of the few influential mass contingency events which were exposed by the internet and mobiles (harder to be controlled) were local governments or police. The credibility of local governments and their agents have been challenged when the interests of wealthy business people and the general public have been perceived to be in conflict. ‘Wealth-hatred’ is expanding to become ‘wealth-power hatred’. The wealth-power coalition may well be an obstacle to China’s immediate future reforms. This is one reason why the nature of law reform is of special interest to the different interest groups and stakeholders.

China’s strategic property law reforms The strategic law reforms involved in China’s urban revolution and property boom occurred in two interrelated spheres: housing and land. Both housing reform and land reform have been carried out as important components of the comprehensive national strategy of reforms and opening up from 1978. The final passage of the Property Law (wu quan fa) in 2007 came after a long period of debate and controversy and it had significant ideological and legal implications for housing property rights as well as what was to become of the land on which new property was built.

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Housing reform The PRC did not have a private housing market before 1978. Housing was allocated by the state work units as welfare under the planned economy system. The post-1978 housing reform was centred on establishing a marketbased housing system. As stated in earlier sections, 1998 was a pivotal year in China’s housing reform. Despite various experiments in selected cities, the overall housing reform was both slow and piecemeal until that time (Wu et al. 2007) with a ‘double-track system’ of both welfare housing and housing privatization in effect (Ye and Wu 2006). In 1998, the State Council under Premier Zhu Rongji took a ‘radical’ approach marketizing housing provision. Previous reforms focused on privatizing public housing, but after 1998 the focus shifted to commodifying all housing. China’s housing was in a dilemma of severe housing shortage and limited central budgetary investment in 1978. The pre-1998 housing reforms were carried out by raising rents, selling public housing and, in building new housing stock, through joint investment between the state, work units and individuals. These reforms were experimental – to enhance housing provision and minimize the shock to the public system. In 1982, the experiments were implemented in 300 counties whereby the state, work units and individuals each paid one-third of the total housing price. This payment formula proved to be too heavy a burden on the state and work units (and was repealed in 1989). In 1984, a new approach was proposed to raise rents – to subsidize housing investment – and was tested in a few cities. In 1988, the State Council released the ‘Implementation Plan for a Gradual Housing System Reform in Cities and Towns’ (The Plan), officially putting housing reform onto the comprehensive reform packages at both central and local government levels. The Plan stipulated a transition from welfare housing allocation to monetary payment allocation with the raising of public housing rent as the first step. The State Council then issued two benchmark documents – ‘On Comprehensive Reform of the Urban Housing System’ and the ‘Decision on Deepening the Urban Housing Reform’ – in 1991 and 1994 respectively. Both policy documents, along with other relevant measures, deepened the housing reforms towards marketization and commodification. These efforts were far from being able to establish a housing market at this stage because of the continuing pivotal role of work units as mediators in the housing market. In a market-led economy, Zhang (2000) argues this role is difficult to justify. The fundamental housing reform of 1998 came when the State Council issued the ‘Notice on Further Deepening Urban Housing Reform and Accelerating Housing Construction’. This highlighted ‘monetization of housing allocation and the establishment of multiple housing supply systems as well as the standardization of housing transaction market’ (Ye and Wu 2006: 51). The 1998 housing policy was regarded as ‘radical’ because it required an end to the in-kind allocation of welfare housing through state work units which

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had been in effect in the PRC for almost five decades. Apart from establishing a market-based housing system, the move was partially intended to relieve the heavy financial burden on SOEs and stimulate domestic demand in the aftermath of the 1997 Asian Financial Crisis. In 1998, most SOEs were losing money. This was partly attributed to the heavy burdens of redundant staffing and overspending on housing and health. Revitalization of SOEs was a central government policy priority. The 1997 Asian Financial Crisis also seriously affected China’s exportoriented economy. The theory was that by completely commodifying housing, real estate development could become a new driver of domestic economic growth. As a new economic driver, a key feature of the 1998 policy was the introduction of a housing finance system, which significantly expanded housing affordability through the availability of mortgages. With mortgages, China began to establish a housing market supported by housing commodification and the housing finance mechanism – in the face of criticism that China’s housing dilemmas were marked by increasing inequality and distributive injustice (Lee 2000). Land reform China’s land use system before 1978 may be summarized as: administrative allocation, unpaid land use rights, infinite tenure of use, and uncirculated land parcel. Like housing reform, China’s land reform has been developing as part of the overall socio-economic reforms. The term China’s ‘land market’ is not, however, strictly correct in that land in China remains owned by either the state or a rural collectivity.8 The Constitution stipulates that ‘no organization or individual may seize, buy, sell land, or make any other unlawful transfer of land’. The stipulation was amended in 1988 to add the clause that ‘the right to use land may be transferred in accordance with the provisions of law’. A more appropriate term is therefore ‘land use right market’. This is constitutional in China, but the expression is often shortened in practice to ‘land market’. China’s land reform also falls into two stages with 1998 a dividing line. Before 1998, efforts were aimed at marketization of land use rights; after 1998, the emphases swung to tightening land supply and building a transparent land use rights market. Table 10.2 lists the benchmark law reforms in this process. Practice preceded actual law reform in the marketization of land use rights before 1998. Experiments were made first in coastal cities and then law reforms were made for wider application. This approach was a basic formula for most of China’s reforms in these early stages. The experiment was first carried out in Guangzhou and Shenzhen to apply paid land use rights to overseas investment. The practice was either to utilize land use rights as capital investment in joint ventures, or to charge lump sums or annual land use fees to overseas investors. This approach was extended to domestic enterprises later with the practice of charging land use fees launched nationwide in

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Table 10.2 Benchmark land law reforms in China Year

Laws or policies

Land reforms

1979

The Law of Sino-Foreign Joint Venture

1986

The Land Management Law

1987

The Provisional Regulation on Cultivated Land Occupation Tax Amendment to the Article 10 of the Constitution

Charge land use fees to foreign enterprises and joint ventures if Chinese partners did not use land as capital input Officially grant local government power in making land use plans, allocating land, acquiring rural land, and tackling illegal land uses Set up the State Land Administration Bureau – a ministerial level authority. Levy tax on non-agricultural land uses by occupying agricultural land

1988

1988 1992

1998

2002

2004

The Tentative Ordinance on Land Use Tax The Tentative Provisions on Management of Administratively Allocated Land Modification of The Land Management Law

The Regulation of Granting State-Owned Land Use Right by Tender, Auction and Quotation (known as No. 11 Decree) The Notice on Continuing Enforcement and Inspection on Granting State-Owned Land Use Right by Tender, Auction and Quotation (known as No. 71 Decree)

Add the clause that ‘the right to use land may be transferred in accordance with the provisions of law’ Charge an annual land use tax based on the size and grade of occupied land Lift the ban on transferring administratively allocated land parcels

Centralize land use management power and restrict converting agricultural land for non-agricultural uses Set up the Ministry of Land and Resources Transfer all land for business purposes (commerce, tourism, entertainment, and commodity housing) publicly either through tender, auction or quotation Require development to be started within two years after land trading Require that land premiums to be paid for land obtained via negotiated conveyance before 31 August 2004 to get land use certificates and development licences

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1984. However, charging land use fees might not be thought of as constituting a land use market because land use right was not allowed to be transacted and the charged land use fees were too low to reflect true market values (Wu et al. 2007). In subsequent years, a series of law reforms were conducted to decentralize the land power to local governments and allow market-based transfer of land use rights (see Table 10.2). The impact of these reforms was profound. Together with the housing reform discussed above, land reform reinforced the pivotal role of the real estate sector in China’s economic growth. It substantially increased local government revenue – through the sale of land use rights. As mentioned above, this encouraged local governments to ‘boost’ real estate development. At the same time, the combination of the state monopoly over land, the prevalence of land transfers through administrative allocation (and negotiated conveyances) and local discretion in land acquisition and supply resulted in rampant corruption, distorted land prices, illegal land transactions and speculation in both primary and secondary land markets.9 Agricultural land and peasant housing plots (zhai ji di) under the rural collective ownership were sometimes forcibly acquired by the state and redistributed to private developers. Not surprisingly this resulted in some disentitlement and impoverishment of villagers (He et al. 2007). Increasing social discomfort was expressed about loss of state equity, unaffordable housing prices, and development-related corruption. In 1998, the Ministry of Land and Resources was established and the Land Management Law was modified to centralize the granting power of land use rights. These moves showed the central government’s intention of tightening regulations of the land use right market. A series of regulations on land uses was then enacted, collectively aimed at curbing corruption, tightening land supply, and refining the land market. First, categories of project types eligible for ‘administratively allocated land parcels’ were specified to avoid ambiguity in local practices. Local government power (and revenues from granting land use rights) were significantly withdrawn (Hin 1999). Second, land use right transfer by tender, auction and quotation was enforced to restrict nontransparent negotiated deals in the primary market (as required in No. 11 Decree and No. 71 Decree – see Table 10.2). This was to avoid potentially corrupt deals between the government officials and developers which involved loss of state assets. Third, illegal land transactions and land speculation were restricted in the secondary market by specifying development requirements and timeframes for land-leasing contracts. The first drive was to curb local government ‘discretion’ in land use. The other two drivers were to improve market transparency in both primary and secondary land use rights markets. These measures should better address problems arising from the earlier stage – if they are effectively implemented. However, two fundamental factors may hinder effective implementation of the wellintended policies. One relates to the complex hierarchical system of primary and secondary markets mixed with multiple players under the state land tenure and

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socialist legacy (local governments, developers and the state land users) (see Hsing 2006). The other is the institutional ambiguity pertaining to the state and collective ownership of lands (see P. Ho 2005). The development of China’s land market is still at a relatively early stage in which corruption and illegal land use remain pervasive (Ho and Lin 2003: 681–707). The Property Law The Property Law, passed by the National People’s Congress in 2007, might be the most influential and controversial law adopted in post-reform China. The law covers the creation, transfer and ownership of property which carry profound ideological and legal implications. Drafting of the Property Law started in 1993. Since its first reading in 2002, debates and controversies have escalated. Major concerns were both practical and ideological. It was feared that the draft law would facilitate privatization and asset-stripping of SOEs and even legitimize illegally procured private assets. Gong Xiantian, a law professor at Beijing University, famously argued that granting equal legal status to state property and private property violated China’s constitutional socialist-state doctrine. After wide consultation and many modifications, the draft law finally went through its eighth reading and was adopted in 2007. A prominent feature of this law is its equal protection of the property of the state, collective and individual – in line with the amendment to the Constitution in 2004 that ‘citizens’ lawful private property is non-violable’ – to ease the concern of the rising middle and upper classes that their wealth was not legally protected. A further practical benefit of the Property Law is that the establishment of national standards for property registration will facilitate efforts by current and prospective holders of real property to establish clarity of title (Wong and Arkel 2007). The Property Law settled a few uncertain issues in the housing and land markets. China’s land market is a leasehold system of land use rights. This means that land parcels have limited tenure of occupation with expiration dependent on land use.10 What happens to land parcels (and property on land parcels) when tenure of occupation expires has been a major concern for both proprietors and land users. The Property Law stipulates that ‘the tenure of residential land use right will automatically renew upon expiration’. However, it does not clarify the measures for ‘non-residential land uses’ as it vaguely states that ‘the renewal of the tenure of non-residential land use rights should be conducted according to laws and regulations upon expiration’. This vagueness leaves legal uncertainty that may need to be addressed in the future. This may prove very challenging as the regulated tenures for non-residential land use rights are shorter than for residential land use rights, creating a significant discrepancy ripe with potential for conflict. With regard to the land market, the Property Law continued the thematic feature of the post-1998 land reforms to enhance market transparency, tighten land supply and protect agricultural land.

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Lastly, the Property Law opened the door for levying property taxes in future. Property taxes have been discussed for years in China and regarded as a useful tool to lever social wealth redistribution and as a mechanism to cool down the overheated property market. The Property Law provides a legal framework for property tax which illustrates the government’s determination to better protect property rights in the domains of state, collective and private. However, the long-term effectiveness of the Property Law remains unclear. It would appear that there will need to be further (and revised) legislation and administrative regulation to clarify and expand the uncertain areas outlined above. These legislative and regulatory challenges will not be easy politically or practically. It will be particularly intriguing to see how the concepts enshrined in the Property Law are interpreted and implemented at the local level given that has been where most problems have arisen to date (Howlett and Hong 2007).

Conclusion The nexus issues of wealth, power and law reform are interwoven in China’s urban revolution. They are both causes and effects. It is clear that the process of urban evolution and transformation is well underway but far from complete. What can be stated with confidence is that China is at an early stage of an array of deeper and longer-term challenges and changes which are hard to measure or predict. Their complexity and profoundness are clear enough. The responses to such challenges will shape China’s reforms in the future. None of the problems mentioned in this chapter stand alone. They are linked to a network of systems requiring an integrated approach to governance, law reform and policy design. It is impossible to provide any confident answer as to how such an integrated approach might be orchestrated politically, economically and legally. But a clear future goal may well be for comprehensive sustainability to encompass economic growth, environmental protection and social equity. The sustainability of China’s urbanization has been emphasized as this challenges all aspects of the economic, environmental and social spheres of contemporary China.

Notes 1 Generally accepted as the commencing year of China’s reform and opening up policy, the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China (in December 1978), saw Deng Xiaoping in power and delivering his ‘epoch-making’ concluding speech on China’s strategic reorientation – from Mao Zedong’s revolutionary leftism – towards economy-focused liberalism. But reformist practices did not happen immediately after the conference. It took another few years for Deng and his colleagues to convince the conservatives with sweeping reforms commenced in 1983 in the rural areas and, in 1984, in urban areas. As history has shown, the transition to a market economy has never been smooth. 2 Deng Xiaoping’s Southern Tour Talks in early 1992 relaunched China’s reforms and opening up which were set back after the Tiananmen Square prodemocracy

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movement in 1989. By the Southern Tour Talks, Deng was determined to make the last as well as the most influential effort to continue his market-oriented reforms. The renewed round of liberal reforms proved to be fundamental. Deng’s market reform ideologies were enshrined as the Party’s and nation’s guidelines in the Fourteenth National Congress of the Communist Party of China held in late 1992. Collective housing purchase groups were formed by wealthy people from the same place as informal investment syndicates. People from Wenzhou Zhejiang province are much wealthier on average from doing business, and people from Shanxi province are known for attaining wealth from coal mining. They formed the investment syndicates to purchase housing in cities with potential of high return, such as Beijing, Shanghai and Shenzhen. To purchase in groups with collective bargaining is more rewarding and efficient than individual transactions. For the target housing markets, such collective housing purchase groups obviously helped boost the market and enhance the housing price. The ‘three big mountains’ was part of past communist propaganda referring to the three forces weighing like mountains on the backs of the Chinese people before liberation in 1949: imperialism, feudalism and bureaucratic capitalism. The ‘new three big mountains’ refer to the contemporary burdens on ordinary people of housing, education and health. The Gini coefficient is commonly used as a measure of inequality of income or wealth. Its value ranges from 0 to 1. A lower Gini coefficient indicates a more equal distribution while a higher Gini coefficient indicates a more unequal distribution. According to international norms, a Gini coefficient of less than 0.3 indicates somewhat ideal status of social equality, a Gini coefficient between 0.3 and 0.4 indicates a normal status of social equality, a Gini coefficient of 0.4 is an alarming line, and a Gini coefficient of 0.6 indicates a precarious status. ‘Hurun’ (the Chinese name of Rupert Hoogewerf) produces rankings of China’s richest people, now very popular and often quoted in China’s media. The loss of the state-owned assets through the wealth-power coalition is known by most people, but Lang Xianping was the first economist who spoke out about it. He was better positioned to speak out because he was in Hong Kong while most of his counterpart economists in mainland China were associated (in some way) with the interest groups themselves. Chinese economists have been severely accused of lack of academic capability and social responsibility in and after the Lang Storm. Land in cities belongs to the state. Land in the rural area that is primarily for ‘farm production’ and ‘rural housing construction’ belongs to the peasant collectives. The ‘primary market’ refers to the transfer of land use rights from the state to the users – through deals reached by negotiation, tender and auction. The ‘secondary market’ refers to the transfer of land use rights among users through land transaction and other land circulations such as leasing land use rights or using land use rights as collateral. Different land uses have different tenures of land occupation: 70 years for residential use; 50 years for industrial, educational, science and technology, cultural, public health, or mixed use; 40 years for commercial, tourism and entertainment use.

11 Women, enterprises and the state Minglu Chen

Introduction In the past few decades, China has seen a series of major social changes which have contributed to the reinforcement of China’s local government and the emergence of a new rich group of entrepreneurs. Under the planned economy, the state government in China exercised a strong hold in allocating resources and planning production, as well as in product exchange. Economic development was under the strict control of the state, while local governments had no right to develop the economy according to their own plan. Moreover, the state also kept a firm hand on the income and expenditure at all levels of administrative units. In these circumstances, local governments had no incentive to increase the fiscal income of the state. As pointed out in Chapter 1 in this volume, with the fiscal reforms in the 1980s and the new taxation system enacted in the 1990s, the state loosened some of its control, and local governments have come to depend on the non-state-owned economic sectors, especially the private sector, as the main source of their income. As a result, local governments encouraged and facilitated the development of non-SOEs more than ever before, as they are playing a crucial role in ensuring employment and generating revenue. Furthermore, private enterprises are also a major source of funds for social welfare.1 For some officials nowadays to establish links with private enterprises and to cultivate personal relationships with newly rich private entrepreneurs not only confers high status, but also provides substantial material benefits. The private sector has become so important to economic development that most local governments and officials regard the growth of the private sector as a central agenda item in their political activities. For example, the Henan Provincial Government has stated that the development of its non-state-owned sector – of which the private sector constitutes a substantial part – would be regarded as a significant goal for the development of its departments and institutions.2 Entrepreneurs can also be summoned to contribute to local infrastructure building, which the local government might otherwise lack the capital to do. As one of the interviewees of the research revealed, the local government ‘came [to her enterprise] every year for donations on school construction, road building and community cultural activities’.

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Women, enterprises and the state 219 The prosperity of the non-state sector has created the group of new rich in China – owner-operators and managers of these enterprises (Goodman 2008). These people have taken advantage of the country’s economic reform and have made a quick accumulation of capital in less than three decades. As this chapter illustrates, economic reform has not only created wealth for China’s new entrepreneurs, but also raised their status in local communities, especially by providing them with access to the Party-state system. On the other hand, despite the fast expansion of the private sector and its current significance in China’s economy, private entrepreneurs still have to depend on the government and local officials for the development of their businesses, as ‘the imperfect market mechanism developed in China has yet to uproot the bureaucratic influence on the economy’ (Yep 2003: 80). Although China has been developing as a market economy for some 30 years, the traces of a planned socialist economic system can be found everywhere. Government and officials still retain influence in economic development. Although they have much more freedom in comparison with SOEs, private enterprises are still restricted by laws, regulations and rules of governments and have to pay taxation and different kinds of administration fees. Moreover, different levels of government control resources, loans and some raw materials, and are an important source of business information and business contacts (Dickson 2003; Yep 2003). Inevitably individual official’s attitudes and predispositions may determine outcomes as regulations and rules are implemented, and in a system relatively lacking in mechanisms of public accountability the personal effect may well be magnified. Consequently, in the eyes of many private entrepreneurs, a close affiliation with the Party-state and its officials is necessary to make better use of capital, resources and information controlled by the government, as well as to ensure their political security.3 As a result, reform has created ‘a system of increasing dual dependency, with entrepreneurs depending on administrators for favours, and administrators depending on entrepreneurs for income’ (Michelson and Parish 2000: 134–56). Based on a series of interviews with 171 women entrepreneurs undertaken from 2003–05 in three localities in China (Jiaocheng County in Shanxi Province; Qiongshan District of Haikou City in Hainan Province; and Mianyang City in Sichuan Province), this chapter examines the nexus between the Partystate and this special group of China’s new rich. It argues that these new rich entrepreneurs obtain their political capital, in four major ways: (1) joining the CPC; (2) holding leadership positions in the local Party-state; (3) obtaining membership in political organizations; and (4) in the award of various titles and honours from the Party-state system. All these lead to a process of incorporation and political socialization. At the same time, interview results indicate that these women were also well connected, and probably in general better connected in any case to the Party-state through their parental and marital families.

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CPC membership Current scholarship has shown that Communist Party membership is a sought-after political capital among China’s ‘red capitalists’; at the same time as it is also an effective way for the Party-state to integrate the private entrepreneurs (Dickson 2008). Table 11.1 provides information on the interviewees’ CPC membership.4 Calculated from the official figures, by the end of 2005, some 2.1 per cent of China’s female population were CPC members.5 At the same time, almost one-quarter of the interviewees in this research held CPC membership. 12.9 per cent of the Jiaocheng interviewees, 15.1 per cent of the Qiongshan interviewees and as high as 41.1 per cent of the Mianyang interviewees reported Party membership. In other words, it seems safe to argue that compared with women in general, new rich women is a group with stronger Party connections. However, the percentage of those interviewees with CPC membership was clearly lower than that of their husbands, their fathers, their fathers-in-law, their siblings and their siblings-in-law. In other words, these women might not have been CPC members themselves, but they were almost certainly wives, daughters, daughters-in-law, sisters and sistersin-law of CPC members. This suggests that the connection between these women entrepreneurs and the Party could be established both by themselves or, more likely, through their family ties. As the importance of the private sector grows, the Party is more and more willing to recruit private entrepreneurs as members, in order to promote its major task of economic development, as well as not to ‘shut itself off from the best supply of human resources’ (Dickson 2003: 38). However, for some time there was no ideological justification for those who used to be regarded as exploiters of the working class to join the Party, as the Party had long claimed itself to be representing the interests of the proletariats and business people were excluded. The problem of legitimacy was finally solved in 2000. Jiang Zemin (then President of China) revealed his ‘Three Represents’ Theory in this year, which asserts that ‘the Party should represent the developmental Table 11.1 Interviewees: family and CPC membership Category

Interviewee Husband Children Father Mother Sibling Father- Mother- Siblingin-law in-law in-law

Enterprise 15 owner (22.1%)

19 3 (27.9%) (4.4%)

28 9 18 27 4 (41.2%) (13.2%) (26.4%) (39.7%) (5.9%)

13 Wife of enterprise (19.4%) owner

18 5 (26.9%) (7.4%)

26 5 25 26 8 21 (38.8%) (7.5%) (37.3%) (38.8%) (11.9%) (31.3%)

Manager

11 (30.6%)

12 2 (33.3%) (5.6%)

12 3 12 17 4 6 (33.3%) (8.3%) (33.3%) (47.2%) (11.1%) (16.7%)

Total

39 (22.8%)

49 10 (28.7%) (5.8%)

66 17 55 70 16 (38.6%) (9.9%) (32.1%) (40.9%) (9.4%)

19 (27.9%)

46 (26.9%)

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Women, enterprises and the state 221 needs of the advanced social productive forces, the promotion of advanced culture, and the fundamental interests of the greatest majority of people’ thereby by extension acknowledging the role of entrepreneurs as an advanced social productive force.6 In his 1 July 2001 speech, Jiang said that talented people who are from other social classes (other than workers, peasants, intellectuals, soldiers and cadres) but who meet the criteria for CPC recruitment should be admitted to the Party.7 Clearly, private entrepreneurs were included in this extended category. Despite the Central Government’s now friendlier attitude towards private entrepreneurs, few of the interviewees with CPC membership joined the Party after Jiang Zemin gave his watershed speech in 2001. Instead, it seems that the rising political status of China’s private entrepreneurs did not inspire these women to seek connections with the Party on their own initiative. Actually, most of them joined the Party when they were working as local cadres or managers of SOEs before they ever became entrepreneurs. A local difference could also be observed here: interviewees from different localities held different attitudes towards obtaining CPC membership. Unlike their counterparts in Jiaocheng and Mianyang, the interviewees in Qiongshan were the only one in the three locations of interviewees who explicitly expressed unwillingness to join the Party. This is unsurprising considering Hainan’s distance from the Central political power. It seems that in the comparatively light political atmosphere of the island, these women attached less importance to CPC membership and could express their opinion more freely. When asked about CPC membership, seven of the Qiongshan women (13.2 per cent) from a range of age groups told the research team that they were not willing and chose not to join the Party. Apart from the distance between the locale and the Central power, another reason that seems to influence these women entrepreneurs’ enthusiasm towards joining the Party is their own business success. In contrast to their Jiaocheng and Qiongshang counterparts, the Mianyang interviewees are the only group that had demonstrated initiative in seeking membership of the CPC when in business as private enterprise owners or managers. The importance here is that generally for the Mianyang interviewees, business success was seen as the entry condition for CPC membership by the women themselves as much as by the CPC. Two of those interviewed joined the Party after establishing their businesses – both after Jiang Zemin’s 2001 speech that officially included private entrepreneurs in the category of potential CPC recruits. Another two interviewees became Party members after obtaining senior management positions in private enterprises. Not only did these women seek to join the Party, but also in the cases of the enterprise owners, they reported having received invitations from the Party. Considering that Mianyang has a higher level of economic development than Jiaocheng and Qiongshan, and the size of Mianyang interviewees’ business was generally bigger than those of their counterparts in the other two research localities, the specific situation here does not seem so hard to understand.

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A friendly and cooperative attitude towards the CPC can also be shown through the establishment of Party branches in the private entrepreneurs’ businesses. In two cases, both interviewees stated they had established Party branches in their enterprises, although they were not CPC members themselves. The Party branch of one of these women’s enterprises was even honoured as a ‘先进基层党支部’ (advanced grass roots Party branch) by the local district CPC committee in 2006. This was regarded as one of the enterprise’s major achievements of the year and was reported in the enterprise’s publicity. Both of the interviewees were running large businesses, one with capital of 100 million yuan and the other with capital of 500 million yuan. This seems to correspond to Dickson’s analysis of the CPC’s co-optation strategy in private enterprises where the larger and wealthier enterprises would be more likely to have Party organizations in them and the size and wealth of these enterprises make them more visible targets for Party building (Dickson 2003: 113–14). By the same token, none of the small or medium-sized enterprises approached in the fieldwork mentioned having Party branches. During the interviews, ten interviewees reported having participated in training classes, or higher education courses delivered by the local Party school at provincial or city level. The classes and courses were generally related to management, finance, law and philosophy, mostly designed to cater to people in business. While five of these women were CPC members, two were not. Presumably, such Party school courses also serve as a link between the CPC and non-Party member private entrepreneurs. Moreover, they can certainly be seen as a sign of the CPC further opening its doors to the private sector (ibid.). Although CPC membership is an effective way for private entrepreneurs to access the political system, the interviews revealed that membership of other political parties (over and above the CPC)8 is also pursued by these people for the same reason. There are two possible reasons for this phenomenon: first, most of these parties (such as the China Association for Promoting Democracy, the China Democratic League, the Jiu San Society, the Revolutionary Committee of the Chinese Kuomintang, the Chinese Peasants’ and Workers’ Democratic Party, and the China National Democratic Construction Association) claim that they are organizations of higher-level intellectuals and professionals. Therefore, membership of these parties suggests a higher education level and even higher social status. And second, these democratic parties are commonly regarded as a short cut to other political assemblies, such as the People’s Congress or the People’s Political Consultative Conference, especially as the latter is mainly composed of members of the democratic political parties and non-CPC members.9 In this research, four interviewees stated that they or their husbands joined other political parties after the establishment of their businesses. Invariably, all of them were members of the local People’s Congress or People’s Political Consultative Conference.

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Women, enterprises and the state 223

Positions in the Party-state system Needless to say, working for the Party-state enables the entrepreneurs to be involved in the system more directly and strongly. Table 11.2 shows the Party-state positions the interviewees and their family members had ever held in village and neighborhood committees, at various levels of government and CPC committee, as well as in the People’s Liberation Army. Interview results show that these women entrepreneurs and their family had extensive experiences of serving in departments of Party organization, public security, employment, taxation, industry and commerce, as well as business planning. No matter whether these positions are at leadership level or not, presumably they are all of considerable power and relevance to the private sector of the economy and ensure more access to resources, loans, and raw materials as well as information and business networks. One fact that is conspicuous in the figures in Table 11.2 is that these women themselves were not as involved in formal politics as the rest of their family. Although higher than the percentage in the general population, only 8.2 per cent of these women had been working for the Party-state. Instead, their interaction with the Party-state came through their families and their marriages; 21.6 per cent of them were daughters, 13.5 per cent were wives and 19.3 per cent were daughters-in-law of cadres at different levels in the government as well as other organizations. This again indicates interviewees’ close interaction with the Party-state through family ties. Actually, such family ties could be so strong that it no longer matters whether these women were themselves a part of the system. For example, one interviewee – the wife of a clothes shop owner – had a brother who was a cadre in the local Labor Bureau, a brother who was a cadre in the local Agricultural Bureau, a brother-in-law who was head of local Women and Children Health Station, a sister-in-law who was vice-director of the local Agricultural Bureau, as well as a brother-in-law and a father-in-law who were cadres in the local Forestry Bureau. Her shop was one of the more successful trading operations in the county. All the county Table 11.2 Interviewees: family and Party-state positions Category

Interviewee Husband Children Father Mother Sibling Father- Mother- Siblingin-law in-law In-law

Enterprise 7 owner (10.3%)

11 1 (16.2%) (1.5%)

17 (25%)

4 9 15 4 (5.9%) (13.2%) (22.1%) (5.9%)

5 (7.4%)

3 Wife of enterprise (4.5%) owner

8 (11.9%)

14 2 6 (20.9%) (3.0%) (9.0%)

10 2 (14.9%) (3.0%)

12 (17.9%)

Manager

4 (11.1%)

4 (11.1%)

6 (16.7%)

2 (5.6%)

8 1 (22.2%) (2.8%)

3 (8.3%)

Total

14 (8.2%)

23 1 (13.5%) (0.6%)

37 6 17 (21.6%) (3.5%) (9.9%)

33 7 (19.3%) (4.1%)

20 (11.7%)

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government’s departments and factories were their clients. When reflecting on her involvement in business, the interviewee revealed that she did not see herself to be any different from men. She said, ‘Whatever men can do, women can do too.’ Considering the possibility of such a profound relationship with the county and even the provincial government, it was not likely that she would encounter much disadvantage in her business. Traces of gender inequality were apparent when considering the interviewees’ responses on their own and their family’s political participation. First of all, these women did not enjoy access to as much political capital as their male family members, such as their husband, father or father-in-law. Second, the women themselves did not seem to have had as much experience of Party-state leadership. Their limited leadership experiences were often at lower level, in deputy positions, or in departments considered to be less ‘important’ or ‘powerful’ (not leadership positions in industry, agriculture, and the economy). This would seem to correspond to information already available about the limited political career opportunities for China’s female population. Nowadays it is not uncommon for private enterprises to employ incumbent or retired government officials as senior employees or advisors.10 This leads to a relationship of mutual benefit: the officials depend on the entrepreneurs for extra income, and the entrepreneurs depend on the officials for their experience in and relationship with government. This phenomenon is reflected in the experience of one of the interviewees, a retired government officer working in a private enterprise as a manager. She had started to work in the county government in 1976. During the next 23 years, she worked at different positions in various departments. From 1976 to 1985, she was an officer of the county’s Bureau of Commerce, in charge of personnel affairs. Then she was transferred to the Personnel Bureau of the county. In 1986, she started to work in the Party Committee of the office of the county government and was later promoted to be the Party vice secretary. On her formal retirement, she was working in the Organization Department of the county’s CPC Committee. Considering her leadership experience, it was understandable that immediately after retirement, she was offered a position by one of the county’s biggest private enterprises, to work as the office director and director of women’s affairs. Her responsibilities in the enterprise include personnel affairs and reception of visiting guests and government officials. Although she did not participate in the enterprise’s strategic planning on important issues such as production and sales, she was invited to attend all the important business meetings.

Leadership and membership in political organizations Sometimes private entrepreneurs are the recipient of ‘appointments in the Party-state system’ made by the government. As China’s private entrepreneurs are still not allowed to hold positions in government departments, such political arrangements normally lead to positions in the local People’s

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Women, enterprises and the state 225 Congress, the People’s Political Consultative Conference (PPCC) and the Federation of Industry and Commerce (FIC).11 Nowadays, access to these three organizations is ‘the most significant and standard means of political participation of private entrepreneurs in China’.12 While the National People’s Congress and local People’s Congresses are ‘the organs through which the people exercise state power’,13 the PPCC provides access to political participation to non-CPC party members, people from ethnic minority backgrounds, all trades and professions,14 and the FIC aims to promote the interaction between the Party-state and entrepreneurs from the non-public sector.15 By co-opting successful private entrepreneurs into these political organizations, the Party-state intends to better motivate the private sector. At the same time, such an appointment is also pursued by private entrepreneurs, as it is commonly regarded as a significant indicator of one’s higher political status, with positive economic and social benefits as well as politically. The opportunity to join the People’s Congress, the PPCC or the FIC is not simply the choice of the entrepreneurs themselves. The interview results show that such political titles were more common among the wealthier interviewees. Clearly, the more successful they are (normally measured by their wealth), the more likely they would be offered leadership or membership positions in such political organizations. Looking at the three research localities separately, the importance of wealth is emphasized once more. None of the Qiongshan interviewees had reported themselves or their family to be related to such organizations, which corresponds to the fact that these women were running small businesses – the majority (64.2 per cent) having capital of less than 1 million yuan. Understandably such political glory always goes hand in hand with business success. Presumably, without accumulation of considerable personal wealth, the political status of these women could not improve significantly. On the other hand, the absence of political experience of this kind among the Qiongshan interviewees and their families might simply reflect the loose connection between the local Party-state and private entrepreneurs in that particular location. During the interviews, eight of the new rich women said they were representatives to the People’s Congress and six were members of the PPCC at the county/district, city or provincial level. In two cases, the interviewees held leadership positions and in another two cases the interviewees were members of the local FIC. A closer examination reveals that such political titles came mostly as a bonus related to their business success. One interviewee was the de facto owner and general manager of a trading company, where her husband acted as the board chairman. The business had started in 1991, with an investment of 9,000 yuan. In 14 years it had grown into a large company with capital of some 100 million yuan. As a result of her business success, she was offered a position as an executive member of Mianyang FIC. Another interviewee owned a vocational school. The business started in 1994 with an investment of 40,000 yuan and six employees. In

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2005, when the fieldwork was undertaken, the school had a capital of 600,000 yuan – more than ten times the initial investment. Moreover, the number of staff had increased more than five times. Considering this interviewee’s entrepreneurial achievement, as well as her close personal relationship with local cadres,16 it is not really that surprising that she also became an executive member of the city’s FIC. It is reasonable to expect that political titles from the People’s Congress, the PPCC or the FIC would provide obvious benefits for the entrepreneurs and their companies, as belonging to these organizations might give delegates regular and recurring access to decision-makers and the opportunity to influence laws and regulations, apart from protection from government seizures of their land and properties, preferential access to loans and licences and discretionary treatment in the implementation of policies (Dickson, 2008: 171). However, evidence of such direct benefits and favours was not found in this research. During the interviews there was hardly any mention by the women entrepreneurs of such cases. The only interviewee who revealed that she had benefited from her political title was the de facto owner of a chicken farm. She was a representative to the People’s Congress of her county at the same time, and stated that she was not troubled by any difficulty in the business world. However, considering that she was also vice-director of the local Science and Technology Bureau and that her husband was vice-director of the local Livestock Bureau – the government department directly in charge of commercial farms – it does not necessarily follow that her business success was a result of her connection with the People’s Congress. In a few cases, the interviewees’ connections with the Party-state were realized through other institutions. Three interviewees reported that they were a representative to the district and city Party Congress. Two of the interviewees stated that they were members of the Self-Employed Labourer’s Association (SELA), three (in Mianyang) were members of the committee of the Women’s Federation at district or city level and one was a member of the local district Labour Union. Another three interviewees were members of the provincial Association of Women Entrepreneurs (AWE). While the SELA, the Women’s Federation and the Labour Union all claim to be nongovernmental, they are all directly led by the government, and the Women’s Federation and the Labour Union even have their officials appointed by the government. The AWE is a non-governmental organization subordinate to the Women’s Federation. Moreover, it claims to be one of the organizations for ‘successful women entrepreneurs, outstanding management personnel, as well as directors and managers of famous enterprises’.17 It is reasonable to regard membership in the AWE as another point of connection to the Party-state, as well as a sought-after honour. All these political roles can be regarded as indicators of the interviewees’ political and social status for several reasons: first, these new rich are co-opted to the political associations because of their professional excellence, their possession of wealth and their

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Women, enterprises and the state 227 18

social reputation; on the other hand, these roles add to their social reputation and presumably their access to or possession of later wealth. Moreover, such roles are commonly regarded as a kind of social recognition (Qin Yan 1999: 138). Research has suggested that these new rich women entrepreneurs are still subject to the rule of the ‘men outside, women inside’ stereotype of the traditional Chinese agricultural economy. This stereotype held that men went out to work in the fields and were responsible for affairs that occurred outside their households, while women were limited to the ‘inside’ sphere – to look after the family (see Jacka 1997; Entwisle and Henderson 2000). Economic development and the ‘opening up’ of China have, to some extent, dissolved this stereotype. For instance, it is not uncommon now to see a group of women sitting in an expensive restaurant drinking alcohol, enjoying themselves at a karaoke centre, or even relaxing at a health and fitness centre – venues formerly heavily dominated by a male clientele. However, the ‘man outside, woman inside’ cliché still affects women’s political participation in China even though understandings of ‘outside’ and ‘inside’ have altered. In 14 cases, the interviewees reported that their husbands had been offered positions in the People’s Congress, the PPCC or the FIC by the local government, although the enterprises were usually managed jointly by the husband and the wife. It seems to suggest that in family-owned business run jointly by the husband and the wife, the husband tends to represent the family in the outside world and also obtain more political recognition. A few interviewees revealed that they had refused offers of memberships in the political organizations, because ‘I’m too busy with my business and family and thus don’t have time for it’ or ‘my husband is already a member. It is enough (to have one member of the family in such organizations).’

Other political awards and titles Another means whereby the Party-state co-opts private enterprise owners, not least because of the publicity that is generated, is to award honours to individuals or to their enterprises. Two interviewees reported that they had been recognized by the local government as a ‘劳动模范’ (model worker). Presumably, this honour enhances these women’s connection with the local Party-state. As Dickson (2008: 45) put it, ‘Despite the irony of naming capitalists as model workers even though they had been persecuted in the past for exploiting labour, the model worker awards are among China’s highest honours, and the CPC signifies its full support of the private sector by giving the awards to private entrepreneurs.’ Two interviewees were ‘模范党员’ (model Party members). One was acknowledged as a ‘致富能手’ (capable person to acquire wealth). One was honoured as a ‘杰出青年创业先锋’ (outstanding young pioneer to start a business) by the Youth League Committee and another as one of the ‘十大杰

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出女性’ (ten outstanding females) jointly nominated by the propaganda department of the CPC Committee and the Women’s Federation. In two cases, the interviewees stated that their enterprises were formally recognized by the Party-state. One woman’s pig farm was honoured by the local government as a ‘农业科技示范园’ (model demonstration park of agricultural science and technology). And another woman’s photocopy shop was honoured by the local Women’s Federation as a ‘精神文明示范岗’ (spiritual civilization demonstration post). Apart from these awards and honours, another kind of connection between these entrepreneurs and the Party-state is for these women to be recognized as ‘监督员’ (observers) or to have their enterprises honoured as ‘监督单位’ (observer units) or ‘合作单位’ (collaboration units) of government departments. Two interviewees said that they themselves, and two reported their enterprises, were observers or collaborators at (and with) departments such as the Taxation Bureau and the Bureau of Quality and Technical Supervision. All these awards and titles, again, not only represent their professional excellence and business success, but also seek to reinforce their connections with the Party-state. However, there is lack of evidence in this study to show the direct benefits, if any, accrued to these women’s business by their political honours.

Conclusion This chapter examines Chinese women entrepreneurs’ connections with the Party-state. Research shows that these women are a group with profound political capital realized in terms of their obtaining CPC membership, holding leadership positions in the Party-state system, joining various political organizations and in the award of various titles and honours from the government which lead to a process of incorporation and political socialization. At the same time, interview results indicate that these women were also well connected (in general, better connected) to the Party-state through their parental and marital families before becoming entrepreneurs and members of the new rich. In other words, those who are not themselves a part of the Party-state system are very likely to be wives, daughters, sisters or daughtersin-laws of Communist Party members and government officials. These women entrepreneurs’ connection to the Party-state is closely correlated to their business success. The size of the business matters, especially when obtaining membership of political organizations and receiving awards and titles from the government. Research shows that such political glories went disproportionately to the wealthier and more successful interviewees. Larger businesses seem to attract more attention from the government and thus their owners have more opportunities to be co-opted into the Party-state system.

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Women, enterprises and the state 229 Research suggests that gender inequality can still be seen in these new rich women’s political participation. Those with experience of working in government departments had often served in lower-level and less important positions. Moreover, in family-run businesses, it is not uncommon for the husband to receive political glories even though it is the wife who might be the de facto enterprise owner. Questions remain: How might the close nexus between the Party-state and the private sector influence the directions of law reform in China? If so, what directions will it take? Such questions are beyond this specific research to answer as interview results were not able to reveal these women’s direct benefits from their political capital. It is not too bold to expect, however, that private entrepreneurs will eventually promote China’s law reform in particular ways that may promote their interests. Organizations such as the People’s Congress and the PPCC are coming to play increasingly significant roles in China’s politics. It is foreseeable that private entrepreneurs in leadership positions will actively participate in such organizations and obtain great influence in local politics, eventually playing more substantial roles in lawmaking. For instance, in the 2008 Chinese People’s Political Consultative Conference, Zhang Yin, founder and chairwoman of the ‘Nine Dragons Paper Industries’ and once China’s richest woman, instigated one of the hottest debates with her ‘pro-rich’ proposal to amend the Labour Contract Law by suggesting enterprises should be exempted from signing permanent contacts with employers.19 Although this attempt failed, it illustrates the intention of some of the new rich to directly influence law-making in China through their political participation.

Notes 1 See Qin Yan, Zhongguo de Zhongchan Jieji [China’s Middle Class] (1999) for more details. 2 See People’s Government of Henan (2005) for a discussion. 3 See, for instance, Tsang (1996). 4 Probationary CPC membership included. 5 According to the Central Government, by the end of 2005, China’s female population was 633.81 million. See ‘Zhongguo Renkou Xianzhuang’ [The current situation of China’s population]. Available at: http://www.gov.cn/test/2005–7/26/ content_17363.htm. By the end of 2005, China had 13,573 female CPC members. See ‘Zhongguo nüganbu duiwu yi yu 1500 wan ren, zhan zong ganbu shu de 38.9%’ [China has more than 15 million female cadres, accounting for 38.9% of cadres in general]. Available at: http://news.xinhuanet.com/politics/2006–8/24/ content_5003594.htm. 6 Jiang Zemin ‘Zai xinde lishi tiaojian xia women dang ruhe zuodao “Sange Daibiao” ’ [How can CPC achieve the ‘Three Represents’ under new historical circumstances?], speech made on 25 February 2000 in Guangdong Province. Available at: http://www.kxdj.com/kxdj2005/html/160/125.html. 7 Jiang Zemin ‘Zai qingzhu jiandang bashi zhounian dahui de jianghua’ [Speech on the 80th Anniversary of the CPC]. Available at: http://www.people.com.cn/GB/ shizheng/16/20010702/501591.html.

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8 The PRC is formally a multi-party state under the leadership of the CPC. Eight registered minor parties are the Revolutionary Committee of the Kuomingtang, the China Democratic League, the China National Democratic Construction Association, the China Association for Promoting Democracy, the Chinese Peasants’ and Workers’ Democratic Party, the China Party for Public Interest, the Jiu San Society, and the Taiwan Democratic Self-Government League. 9 ‘Zhongguo Zhongyang guanyu jianqian Renmin Zhengxie gongzuo de yijian’ [Opinion of the Central Committee of CPC on Reinforcing the Work of the People’s Political Consultative Conference]. Available at: http://www.gov.cn/jrzg/ 2006–03/01/content_215306.htm. 10 Zhang Jianjun ‘Zhongguo minying qiyejia de zhengzhi zhanlue’ [The political strategy of China’s private entrepreneurs]. Available at: http://www.pkubr.com/ showarticle.php?aid = 46. 11 For a detailed account of the People’s Congress and the PPCC, see Dickson (2008). For a detailed account of the FIC, see Kennedy (2005). 12 See Mao Mingbin (2004: 33–4). 13 See the website of the National People’s Congress of PRC at: http://www.npc.gov. cn/zgrdw/english/aboutCongress/aboutCongressDetail.jsp?id = Introduction. 14 See the website of the General Office, National Committee, Chinese People’s Political Consultative Conference at: http://www.cppcc.gov.cn/htm/jianjie/jianjie.htm. 15 See the website of All-China Federation of Industry and Commerce at: http:// www.chinachamber.org.cn/English%20zy/introduction/htm. 16 During the interview, she told the research team that she had cultivated a good relationship with the local government through work. Her school cooperated with the Women’s Federation to provide domestic service courses for girls seeking employment as maids. As a result, many local officials asked for her help to find capable and reliable maids. When Deng Xiaoping’s family asked the provincial governors to find them local maids who could cook authentic local dishes, they came to the interviewee’s school. The one-hour interview with her was interrupted many times by calls from local officials. She talked with them on the phone as a friend. 17 See the website of China Association of Women Entrepreneurs at: http://www. cawe.org.cn/. 18 Li Guoping and Huangqing, ‘Siying qiyezhu de xingqi: yanjiu zhongguo shehui de bianqian de yige shijiao’ [The rise of private entrepreneurs: a perspective to look at China’s social change]. Available at: www.usc.cuhk.edu.hk/wk_wzdetails.asp?id = 3835. 19 ‘Zhengxie weiyuan Zhang Yin jianyi quxiao “qianding wuxianqi laodong hetong” ’ [PPCC Member Zhang Yin suggests enterprises be exempted from ‘signing permanent labour contracts’. Available at: http://news.xinhuanet.com/local/2008– 03/02/content_7698395.htm.

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12 Wealth and loss in changing economic times Reforms in bankruptcy and consumer protection laws Vivienne Bath and Mary Ip

Introduction The implementation of bankruptcy and consumer protection regimes in China has lagged behind developments in commercial and trade law, highlighting the focus of the Chinese government on economic development rather than individual protection. The encouragement and rapid growth of foreign investment and private companies in China, however, necessitated the drafting and implementation of a bankruptcy regime that was capable of dealing with the issues of accumulating bank loans and other debts and the increasingly sophisticated and complex financing structures utilized by Chinese companies. If there are to be companies, there must be a system which is able to conduct, and if necessary to compel, a systemic winding up of those companies (including wholly or partly state-owned companies) which are not able to pay their creditors, and provide for an equitable distribution of corporate assets between rival claimants, including trade creditors, employees, banks and other creditors, both large and small. At the same time, the rapid and virtually uncontrolled growth in the domestic consumer market resulted in numerous well-publicized cases of the distribution of unsafe products to both foreign buyers and Chinese consumers. The well-publicized tainted milk scandal of 2008 clearly demonstrated that the current system of regulation was unable to ensure the safe and responsible operation of Chinese companies and provided a strong impetus for the introduction of a new regulatory regime. In both of these areas the Chinese government’s solution has been to adopt and implement new laws and to create a new administrative and regulatory regime. The approach taken by the legislature was to take away power from the ‘responsible departments’ and give it to the courts and to the new position of administrator in the case of bankruptcy and to provide a higher degree of regulation under a new regulatory framework in the case of food safety. Whether the reforms have succeeded (or are likely to succeed) in changing the centres of power and disrupting the vested interests of government, SOEs and private companies with close connections to local government – while providing protection for creditors and consumers – is the question addressed in this chapter.

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Bankruptcy Law The Enterprise Bankruptcy Law of the People’s Republic of China (Enterprise Bankruptcy Law) was promulgated by the National People’s Congress on 27 August 2006, and came into effect on 1 June 2007. The extended period of time taken to produce the final version of the law highlights the difficulty for the framers of the law in finding a compromise that would satisfy the different interest groups involved: SOEs, private (including foreign-owned) companies, employees, creditors, both secured and unsecured, investors, local government interests, the international constituency, and so on. As a result, the Enterprise Bankruptcy Law represents a compromise. The final version of the law does not cover personal bankruptcies, although a strong argument can be made that Chinese consumers are subject to credit card and mortgage debt and need the protection of a personal bankruptcy regime (Li Shuguang, quoted in Chung 2007). Financial institutions will be covered by a separate regime.1 The issue of cross-border insolvencies is dealt with briefly and inadequately in Article 6. There can be no doubt that a comprehensive law on enterprise bankruptcy has been needed in China for some time. The previous legislation – the Law of the People’s Republic of China on Enterprise Bankruptcy (for trial implementation) (the Old Law) and the succession of notices, decrees and other legislative instruments which were required in order to implement the Old Law – only dealt with SOEs. The bankruptcy of foreign investment enterprises and other private enterprises was dealt with, briefly and inadequately, under Chapter 19 of the Civil Procedure Law. Under the Old Law, although the court nominally controlled the bankruptcy process, in practice, the higher-level authorities of the relevant enterprise played a definitive role. Their consent was required before an enterprise could submit an application for bankruptcy (Old Law: Article 8; Supreme People’s Court Regulations: Article 5) and the liquidation committee which worked to liquidate the company was appointed largely from the responsible government department (Old Law: Article 24). The fact that the responsible government department was also considered to be responsible for the circumstances leading to the bankruptcy was made clear by the requirement that an internal investigation be conducted in order to determine responsibility for the bankruptcy and to ensure that the appropriate disciplinary sanctions against the legal representative of the enterprise or the responsible persons in the government department in charge were imposed (Old Law: Article 42). The bankruptcy of SOEs raised major policy and political questions: the disposition and re-employment of the workers; the transfer or sale of stateowned assets held by the enterprise; the possibility of disciplinary action against responsible officers and officials and the political damage to local government resulting from the bankruptcy of a flagship enterprise. As a result, decisions relating to bankruptcies were made at a governmental rather than a court level and commercial issues relating to the financial viability of

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the enterprise or the repayment of creditors took second place. Indeed, the decision to allow enterprises to go bankrupt was taken in the mid-1980s only after fiery political debate (Li 2001). As a result, the number of bankruptcy filings each year under this regime ranged from a minimum of 32 in 1990 to a maximum of 8,939 in 2001 – a total of only 70,587 bankruptcy cases in 19 years (Cao 2007: 61). An estimated RMB1.05 trillion non-performing loans of SOEs was transferred to the Asset Management Companies set up by the government to handle these loans from the banks from 1999 (Xu 2005: 3), which gives some indication of the quantity of unpaid and unpayable debts which these enterprises had been permitted to accumulate while still continuing to operate. These historical debts continue to present problems for the government, as demonstrated by the recent decision by the Ministry of Finance to allow Cinda Asset Management Corp to roll over RMB247 billion of bonds sold to the China Construction Bank 10 years ago in return for non-performing loans and assets (Yu 2009b). Both the minimal content of the Old Law and the selective way in which its provisions were implemented attracted considerable adverse commentary in the case of several well-publicized bankruptcies of major Chinese government-owned companies. When the political decision was made to allow the Guangdong International Trust and Investment Corporation (GITIC) to go into bankruptcy in 1998, the process, which was largely supervised and coordinated by government agencies (including entities which were themselves major creditors of GITIC) was the source of considerable dissatisfaction among the foreign lenders which had committed large sums to the GITIC group (Chang 1999). Similarly, the collapse of the Zhu Kuan Development Company Limited, an enterprise which effectively represented the commercial interests of the Zhuhai Special Economic Zone Government, demonstrated that neither the Old Law nor the courts were able to deal with a complex large-scale bankruptcy or stop local government from interfering with the liquidation process (Pace 2006). The fundamental issue in establishing an equitable and functional bankruptcy regime is the balance to be struck between the conflicting interests of the various interested parties: the creditors (including the secured creditors); the employees (who in China expected to enjoy lifetime employment and who often have few prospects of secure employment once an enterprise is closed down); and the state (which has an overall interest in preserving social order and full employment and a direct interest in the ownership and control of state-owned assets). The state, however, showed that in practice it was not prepared to accept even the balance struck in the Old Law. Thus, despite the provision in the Old Law (Article 32) that a secured creditor should receive priority in respect of claims secured by the property, the employees came to enjoy a higher priority than the secured creditors (Tomasic and Wang 2006: 18; State Council Supplementary Notice 1997: Article 5). Another major issue for secured creditors was the lack of a coherent and credible regime for the creation of security interests and the enforcement of

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security. The Guarantee Law was not enacted until 1995, and did not completely resolve questions relating to the grant of security interests over stateowned assets such as land (see Supreme People’s Court 2003). Indeed, the ability of local government to revoke the grant of land use rights and thus reduce the value of the assets available for distribution was a major issue for the creditors in the Zhu Kuan winding-up (Pace 2006). The result was that the Old Law was strongly weighted against the creditors, both domestic and foreign. The secured creditors were subordinated to the employee claims. The unsecured creditors, ranking as they did behind the employees and the various tax administrations (Old Law: Article 37), had very little chance of recovering all, or indeed any, of their claims. The debtors, through their ability to resist bankruptcy by the application of political influence, were in a much stronger position. It might be expected that the considerations which cause governments to protect SOEs would not apply where enterprises are privately owned and run. Nonetheless, particularly in times of financial crisis, the various levels of the Chinese government continue to have a strong interest in bankruptcies. In the case of all enterprises, both private and state-owned, local and higher level governments have a stake in the employment opportunities created by the enterprise, the payment of taxes and the prestige and benefits for civil servants and agencies in being seen to encourage investment and create a good environment for development. They may also, of course, suffer a major loss of face where an investment which has garnered the support of local government fails. In addition, local government, or members of the government, may have a financial interest in particular enterprises, and there may be personal relationships between investors and government officials. In contrast to the Old Law, the Enterprise Bankruptcy Law aimed to establish a new and equitable legally based regime. Considerable power is given to the courts to run the bankruptcy process; an independent administrator conducts the liquidation; options are given to the parties to seek reorganization of the company or a composition with creditors if one of these options is preferable to liquidation and the manner of administration and liquidation is clearly set out. There is, at least theoretically, little space in this structure for interference from the political, economic and social interests of government or Party.

Role of the court Under the Enterprise Bankruptcy Law, the court controls the acceptance of the bankruptcy petition and the conduct of the bankruptcy process. Neither debtor nor creditor is obliged to obtain the approval of the local government before filing for bankruptcy or for a reorganization of the enterprise. The petition initiating the bankruptcy process must be filed with the court (Article 7); the court determines whether a bankruptcy petition should be accepted (Article 10); the court appoints the administrator which will conduct the bankruptcy (Article 13); and the court supervises the overall process. In

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practice, however, problems arise from the lack of experience which Chinese courts have in conducting bankruptcies. In addition, there is as yet little formal guidance for courts. The Supreme People’s Court has issued regulations in relation to the appointment and remuneration of administrators (Supreme People’s Court, 2007a, 2007b), but has not yet issued a comprehensive set of implementing regulations (as it did in relation to the Old Law). It has, however, issued a number of opinions (Supreme People’s Court 2009a, Opinion on Enforcement; Supreme People’s Court 2009b, Opinion on Bankruptcy Cases), which provide some insights into the focus the courts are expected to have in relation to bankruptcy cases during the global economic crisis. The message, however, is mixed. On the one hand, the Opinions offer some protection to creditors by making it clear that the debtor cannot fraudulently avoid the bankruptcy process by simply disappearing – courts are still expected to accept cases (Supreme People’s Court 2009c, Opinion on Trial of Bankruptcy Cases; Supreme People’s Court 2008a). On the other hand, there is a strong emphasis on the prevention of social disorder, the protection of the employees of the bankrupt enterprise, and the desirability of reorganizing an enterprise as opposed to liquidating it.

Role of the administrator The creation of the position of an independent administrator appointed by the court (Article 22) was hailed as an ‘important step toward market economy’ (Yang 2008: 534) in contrast to the position under the Old Law where officials from government departments (who may have contributed significantly to the problems leading to the bankruptcy) played a lead role in the liquidation. The Enterprise Bankruptcy Law, however, still allows for the appointment of a liquidation committee comprised of representatives from ‘relevant authorities or agencies’ as well as the selection of administrators from lawyers, law firms, accountants, accountancy firms and bankruptcy liquidation firms (Article 24). A recent study by Tang on listed company bankruptcies and reorganizations indicates that in many of these cases the administrator is still a committee largely composed of government officials (Tang 2009). Issues have also arisen in relation to the appointment of professionals as administrators. The Supreme Court issued rules in 2008 (Supreme People’s Court 2008b) regulating the manner of appointment. In practice, administrators must go through a pre-qualification process conducted locally. The administrator for a particular bankruptcy is then generally selected from the list by a relatively arbitrary process of drawing lots rather than by the court (Yang 2008; Tang 2009). Although the purpose is to avoid collusion between judges and possible administrators (Yang 2008: 540; Anonymous 2006), this selection process may also result in the selection of administrators for large complex bankruptcies who do not have the appropriate experience or resources to handle the role.

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Role and powers of creditors The Enterprise Bankruptcy Law has been described as a ‘law for the protection of creditors’ (Zhang 2009). An issue for creditors, however, has been getting a case accepted at all, particularly when the debtor has simply disappeared (Yu and Chen 2006). As noted above, the Supreme People’s Court has now made clear that the inability of the creditor to produce detailed information about the debtor’s finances, or the fraudulent behaviour of the debtor, does not mean that the court can refuse to accept the case (Supreme People’s Court 2008a, 2009c). The actual administration of the bankruptcy is in the hands of the administrator, which has substantial power to make decisions which may affect creditors. For example, it may transfer the debtor’s property, in which case it is obliged only to notify the creditors ‘promptly’ (Article 69). The administrator must ‘accept the supervision of the creditors’ meeting and the creditors’ committee’ (Article 23). However, the creditors cannot themselves remove the administrator if they are not satisfied with the way in which the administrator responds to their concerns – their remedies are limited under Article 22 to filing an application with the court for removal. Similarly, the law provides no details on the question of how the creditors obtain adequate information to monitor the administrator or how and to what extent the creditors can conduct adequate oversight of individual decisions of the administrator (Zhang 2009). The secured creditors rank ahead of the employees and other creditors, in terms of priority of payment (Articles 132 and 133). The right of the unsecured creditors to receive distributions, however, is ranked after bankruptcy expenses (Article 112); employee payments (including wages, medical subsidies, pensions, retirement and medical insurance contributions and other employee payments), overdue social security payments and taxes (Article 113). As a result of the prioritization of employees and tax payments, in most bankruptcies, it will be questionable whether and to what extent an unsecured creditor will be able to recover any money. Even in the case of a corporate reorganization, employee payments and tax payments must be made in full unless the relevant creditors otherwise agree (Article 87). A further issue for creditors is potentially presented by the reorganization process. Both the debtor and creditors may directly apply to the court for the reorganization of the debtor (Article 70). However, even if the creditor has filed for bankruptcy and would prefer that the company be liquidated, the debtor, or investors in the debtor holding 10 per cent or more of the registered capital in the debtor may, before bankruptcy is declared, request the court to approve a reorganization (Article 70). The debtor, if the application is accepted, is in a relatively strong position. The debtor may continue to manage its property and business if so approved by the court (Article 73); secured creditors cannot enforce their security during the reorganization period, and the debtor can grant additional security over its assets in order to obtain financing for the ongoing business (Article 75). Although approval for a reorganization should be given by each class of creditor (that is, the secured

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creditors, the employees, the tax authorities and general creditors), the court can override the wishes of particular creditor groups if it is satisfied that the creditors will not be disadvantaged (Article 87). As noted above, in this case only the employees and tax authorities are entitled to be paid in full – other creditors are only entitled to an assurance that their claims will be paid at a rate no lower than the rate at which they would have been paid if the bankruptcy had proceeded. Of course, if the debtor continues to trade and does so unsuccessfully, there is no assurance that funds to make these payments will be available, either in the course of the reorganization or at the end of it.

Rights of the debtor and investors A major issue with the Old Law was that the debtor SOE was, as result of the role played by local government, in a strong position in relation to the creditors. Under the Enterprise Bankruptcy Law, the debtor can initiate its own bankruptcy, apply for reorganization of the company or seek a composition with creditors (Article 95). The law does not, however, appear to require the debtor to go into bankruptcy if it is insolvent or penalize its officers if it fails to do so. The investors in the debtor, particularly the minority investors, have only limited rights under the Enterprise Bankruptcy Law. Although there are clear policy reasons for the subordination of owners of a bankrupt enterprise to creditors, in China, finance is often provided in the form of equity rather than debt due to the debt-equity rules for foreign investments (Cao 2008; State Administration for Industry and Commerce 1987). The fact that this is not recognized in the bankruptcy regime raises a range of issues for financial investors. These were highlighted by the well-publicized restructurings of the Asia Aluminum group and FerroChina Limited, both of which were funded through an issue of bonds outside China by an offshore holding company which subsequently invested the proceeds in the Chinese corporate entity (Evans 2009a, 2009b; Wilson 2009).

Implementation of the Enterprise Bankruptcy Law The Enterprise Bankruptcy Law has now been in effect for two years. Tang (2009) cites the relatively low number of 6,000 bankruptcies of unlisted companies in that two-year period. Tang states that there were only 3,500 new cases in 2008, while an estimated 800,000 enterprises went out of business without going through the procedures set out in the Enterprise Bankruptcy Law. Tang attributes the limited numbers to the reluctance of courts to accept petitions due to lack of resources, lack of experience and the desire of judges to wait for the Supreme People’s Court to issue its working rules for bankruptcy cases. Tang quotes Li Shuguang’s opinion that an important reason for the small number of cases is the high degree of government intervention in the bankruptcy process, since local governments do not appreciate the

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importance in the market economy of allowing enterprises to go bankrupt. Obviously informal exit from the market is likely to injure creditors, including employees, and aggravate the difficulty of enforcing debt obligations against Chinese companies through formal means. Who, then, has benefited under the new bankruptcy regime? Under the Old Law, creditors found it very difficult to enforce their debts by use of the threat of bankruptcy. The state-owned banks in particular often found themselves encumbered with substantial amounts of bad debt, which would never be repaid, with little prospect of using their position to enforce their debts (Xu 2005). The Enterprise Bankruptcy Law should in theory have mitigated that position and put the creditors in a stronger position. In practice, however, although the secured creditors no longer rank behind the employees in recovering proceeds from secured property, their ability to enforce their security may still be limited by a court-approved reorganization scheme. The unsecured creditors are still relatively powerless. In addition to the limitations in the law, a major problem for creditors is the problem of fraudulent bankruptcies and the dissipation of assets by disappearing debtors, which is widely recognized as a problem in China, but has not been dealt with adequately by the bankruptcy law regime. A 2006 amendment to the Criminal Law (Amendment No. VI 2006) criminalized ‘false bankruptcies’, while the Opinion on Trial of Bankruptcy Cases requires the court to accept the case even if the debtor is seeking to evade its debts through the bankruptcy proceeding. This suggests that the position of the creditor continues to be difficult.2 The debtor, on the other hand, can delay bankruptcy by applying for reorganization or a composition, and, under the reorganization procedure, can continue to run the company in the absence of fraud. Although the Enterprise Bankruptcy Law at least notionally aims to protect the ongoing rights of creditors in this situation, if the company loses money as a consequence of continuing to trade (and to employ all of its employees), there will not be sufficient assets left to pay them off. At this stage, it does not appear that reorganizations are very common, at least in the case of unlisted companies, but in 2009 the courts have been encouraged to favour reorganization over bankruptcy for the sake of a harmonious society. Where the local government takes a strong role in the bankruptcy process, directly or through involvement in the liquidation committee, the interests of the ‘harmonious society’ can be expected to take priority over the rights of the creditors. The employees, as noted above, continue to receive a high level of priority and protection under the law. Where the assets have been dissipated, or the management has disappeared, however, the employees have very little protection other than to call in local government to assist. The possibility of an ‘incident’, and consequent adverse publicity, as adverted to in the Opinion on Trial of Bankruptcy Cases, may be a factor which will influence the authorities in dealing with the bankruptcy. The close relationship between companies and local government, including private companies, in the Chinese system means that it is difficult to

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ensure that local government will withdraw from the bankruptcy process. Indeed, Articles 4 and 5 of the Opinion on Trial of Bankruptcy Cases specifically refer to the ‘leadership of the local Communist Party and local government’ in handling bankruptcy cases and ensuring social stability, although neither the Communist Party nor local government is directly given any role in bankruptcy proceedings under the Enterprise Bankruptcy Law itself. So long as government is involved, it can impose their own views on the desirable consequences of the bankruptcy process by favouring the interests of owners of companies who are close to local government and the perceived benefits of continued employment of the existing employees over the choice made by the legislature when the law was adopted of allowing the market economy to allocate resources based on efficiency (see Wang 2009, quoting Li Shuguang). As discussed above, there are a variety of factors that have permitted government to move back into the bankruptcy process: the provision in the Enterprise Bankruptcy Law which allows the appointment of a liquidation committee; the well-intentioned decision of the Supreme People’s Court to remove the ability of the courts to decide in each case on an administrator who has the appropriate competence and experience; the inexperience of the courts in this complex area of the law, combined, in many cases with their close links to local government; the lack of detailed guidance from the Supreme People’s Court to the lower level courts in relation to the conduct of bankruptcy cases and the tendency of many debtors simply to ignore the entire process. Although this position may change when the economy improves, the Supreme People’s Court issues its implementing regulations and the courts and potential administrators acquire more experience, the indications at the moment are that the balance of power continues to be weighted against creditors and a minority of offshore investors who do not have the protection of local government, notwithstanding the promise implicit in the language of the Enterprise Bankruptcy Law itself.

Consumer law The United Nations Guidelines for Consumer Protection recognize that consumers, particularly in developing countries, often face imbalances in ‘economic terms, educational levels and bargaining power’ (United Nations 1985: Article 1). Governments should therefore intervene by developing, implementing and monitoring policy for consumer protection in accordance with the particular circumstances and needs of the country (ibid.: Article 2). In China, however, the evolution of the consumer law regime has been overshadowed by the thrust for economic development. In addition, China’s policy on economic development is based on Deng Xiaoping’s ideology of a socialist market instead of a fully-fledged market-based model. Thus, the Chinese government plays an active role in controlling and participating in the country’s economic and commercial activities. The role of the Chinese

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government in the realm of consumer protection is complicated by its dual position as regulator and as a major player in the market. This section examines the impact of the government’s economic power and policies on the development, passage and operation of the Consumer Protection Law and the Food Safety Law. There was no consumer law in the early days of the new China due mainly to the adoption of the Soviet economic system by the new government upon its foundation in 1949. Under the Soviet model, the economy was centrally planned, industry was nationalized and agricultural production was collectivized. Consequently, basic necessities, such as food, clothing, or household items were distributed under a ration system through a work unit (Chao and Myers 1998: 362). Families still received a small amount of income from their labour contribution in the work unit but many consumer commodities were in any event not available. Economic reform focused on the heavy industry sector and the production of consumer goods was kept at a minimum level (Ho 2001: 65). As a result, the activity of consumers in the market played a minimal role in the economy. In addition, the scarcity of goods (Ho 1997: 16) meant that potential consumers were more concerned with the availability of goods than with their quality. The result was that there was felt to be no call for consumer protection. On one view, public ownership of factory output provided no incentive for producers to cut quality for private profit (King and Gao 1991) and consumer protection was therefore in any event not an issue. Management of the Chinese economy in the post-Mao period underwent a fundamental change based on Deng Xiaoping’s economic ideology. The two strategies of Deng Xiaoping’s Four Modernizations were de-collectivization and decentralization. De-collectivization relaxed government control over the flow of commodities (Ho 1997) while decentralization allowed workers to leave their work units to find jobs with better pay (Zhao 1997). Managers of SOEs were allowed to keep revenues in excess of the enterprise’s target profit level (Chen 2003). As a result, household earning greatly increased as did levels of consumption in China (Chao and Myers 1988). In addition, Deng’s policies re-engaged China with the international business community through his Open Door policy, and ultimately re-legitimated private businesses on the basis of the ‘socialist market economy’. All these radical economic reforms resulted in a tidal wave of market forces which further boosted commercial activities, raised household earnings, and strengthened consumer spending power. Marketization, as Hu states (Chapter 10 in this volume), opened the door for the Chinese economy to achieve wealth through boosting the consumer’s power of consumption. Nevertheless, marketization also subjected Chinese consumers to the challenges of business operators’ malpractices in a new marketplace – a phenomenon commonly experienced by developing countries (Hooper 2000). In 1993–95, economic losses resulting from fake, defective or substandard goods were estimated to amount to RMB104 hundred million with counterfeiting of goods and sale of substandard goods provoking consumers’ grievances (Hooper 2000: 108). This counterfeiting

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posed a threat to national economic interests, ultimately compelling the Chinese government to take action (Beijing Review 1992).3

The China Consumer Association (CCA) Despite serious issues relating to consumers and growing calls for protection, the Chinese government initially responded to consumer needs not by passing a law but by setting up a national consumer organization. The establishment of the China Consumer Association (CCA) in 1984 highlights how the Chinese government incorporated consumers’ demands for protection within its overall economic concerns. First, the economic objective of Chinese government behind the assertion of consumer rights was well demonstrated in the Charter of the CCA which stated that its purposes were ‘to protect consumers’ interests, to guide the broad masses in consumption, and to promote the development of the socialist commodity economy’ (King and Gao 1991: 117). Second, the CCA was a semi-official agency as it was partly funded by government and staffed by government officers (Leung 2000: 22), institutionalizing a close association between the CCA with the Chinese government, which was likely to result in the alignment of the interests of the CCA with the concerns of government (Hooper 2000: 110). Third, the founding of the CCA was a gesture by China towards showing its conformity to the international pattern of launching consumer organizations (ibid.: 109) and the CCA was therefore a vehicle aimed at raising China’s reputation in the global business community (Ho 1997: 19). Finally, since majority manufacturers and sellers in the early 1980s were state-owned (Gao 1992: 338), establishing the CCA served the Chinese government’s interests by providing a way of monitoring unscrupulous business operators under the umbrella provided by consumer protection.

The law of the PRC on the Protection of the Rights and Interests of Consumers (1993) (Consumer Protection Law) Notwithstanding the fact that consumers played an ever-increasing role in the Chinese marketplace during the 1980s, resulting in the enactment of consumer protection legislation in a number of prosperous localities (including Shanghai, Guangzhou, Fujian and Beijing), there was no central legislation on protection for consumers. Deng’s economic stimulus tour to South China in 1992, however, was followed by the enactment of a number of important commercial statutes, such as the Company Law (1993), the Guarantee Law (1995), the Securities Law (1998) and Contract Law (1999). National laws for the benefit of Chinese consumers, including the Product Quality Law (1993), the Anti-Unfair Competition Law (1993) and the first national Consumer Protection Law (1993), were also promulgated at this time. Although the Consumer Protection Law is modelled on the United Nations Guidelines for Consumer Protection (United Nations 1985), the

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legislation is basically oriented towards economic efficiency rather than consumer rights. Economic interests of the state play a prominent role in the general principles underlying the law, as set out in Article One, which states that ‘[T]his Law is . . . to protect the legal rights and interests of consumers, to maintain social and economic order and to promote the healthy development of the socialist market economy.’ The protections provided by the Consumer Protection Law to consumers are vaguely expressed and lack teeth. For example the law provides a statutory basis (Articles 31–33) for a consumer association to oversee consumers’ interests, but it does not give a major role to the association in resolving consumer disputes. The consumer association can act as a mediator upon the consumer’s request (Article 34(2)) but only the consumer has given the right to institute legal proceedings in a people’s court (Article 34(5)). The CCA, despite its superior resources, can only assist (Article 32(6)). The range of remedies provided by the Consumer Protection Law to consumers (Articles 40–49) are vague, particularly in relation to how much compensation should be paid and how it should be assessed. The promulgation of the law was not followed by comprehensive implementing regulations, leaving vague the role of the consumer association in consumer disputes and the remedies available to consumers (Articles 35–48). The effect is that state-owned and private enterprises have effectively been immune to substantial civil claims. On one view these provisions were deliberately formulated vaguely so as to protect business operators from civil liability (Callick 2008). An excellent example of the low priority given to consumer claims as opposed to interests of enterprises is Article 49. Article 49 provides that if a business operator practises fraud in providing a commodity or service, at the request of the consumer, the business operator should increase the amount of compensation by the price of the purchased goods or the cost of the service. Article 49 is therefore meant both to induce consumers to make claims by offering additional compensation and to deter unscrupulous businesses by the imposition of a penalty. However, it appears that in practice most consumers have been disinclined to make the claim (Hooper 2000). The amount of compensation is negligible for consumers and it is unlikely to result in an unscrupulous business operator feeling any significant degree of financial pain. The one exception is the enterprising and controversial application of Article 49 by activist Wang Hai, who has made a practice of buying fake goods in bulk and suing for double compensation (ibid.). One explanation for the stipulation of such an ineffective amount of compensation in Article 49 was that it aimed to address concerns relating to the financial ability of businesses to meet consumer claims. As the handling of the Sanlu case has subsequently revealed, the Chinese government is not comfortable with the idea of large consumer lawsuits which could bankrupt businesses, disrupt economic activities and cause social disorder (see discussion below). In contrast to the limited protection provided to consumers by way of civil action, the Consumer Protection Law imposes criminal liabilities and

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penalties for producing and selling a commodity which is adulterated, fake or substandard (Article 50). The range of criminal liabilities and the types of penalty were subsequently spelt out in more detail by the Criminal Law, which underwent a major revision in 1997. The 1997 revision expanded the scope of the Criminal Law significantly. Many of the new provisions related specifically to the issues presented by China’s economic development. In particular, Chapter 3 of Division 2 criminalizes financial fraud, obstructing company and enterprise management order, disrupting the order of financial management, infringement of commercial secrets, infringement of intellectual property, production or sale of fake and substandard commodity and so forth. Articles 140–48 covers production and sale by enterprises with an annual turnover of more than RMB50,000 of a range of fake and substandard commodities, including products, drugs, foods, non-food raw materials, medical apparatus, agricultural chemicals, veterinary drugs and cosmetics. Penalties have also been increased to range up to capital punishment for the production or sale of fake drugs (Article 141) or toxic foods (Article 144) which cause serious casualties. Production or sale of other types of fake or substandard commodity can attract criminal detention, with penalties ranging from two years imprisonment to life, confiscation of offender’s assets or fines of up to twice the sale value of the goods. In the Sanlu case, the Criminal Law was applied with stringency, although belatedly, resulting in death penalty sentences for several defendants on the grounds of selling poisoned food and endangering public security (Xinhua 2009b).

Food Safety Law of the People’s Republic of China (2009) China’s remarkable economic reform and resulting growth, coupled with the increasing sophistication of the Chinese market, have exposed Chinese consumers to many forms of new marketing techniques and related business malpractices. It is reasonable to say that market growth in China has not been accompanied by equally rapid legal developments in the area of food safety. Food has been a long-term concern in the PRC, with issues ranging from scarcities from the early 1950s to recurring safety crises in more recent times. Although the problem of subsistence has been basically resolved (Chao and Myers 1998: 363), food safety is an ongoing issue. At first, food safety was mainly a concern for domestic consumers in China. Examples of wellpublicized domestic food safety incidents that resulted in casualties range from a case where fake liquor was mixed with excessive industrial alcohol (an incident which claimed 14 lives and hospitalized 41 people) (Xinhua 2006a), an instance where rice noodles were bleached with industrial chemical (where nearly 100 students were poisoned) (Bian 2004), an incident involving the production of counterfeit milk power which killed 13 children and caused the sickness of more than 200 babies in Anhui Province (China Daily 2009a), and a case of pork tainted with clenbuterol which sickened 336 people in Shanghai in 2006 (Telegraph 2009).

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However, China’s accession to the World Trade Organization in 2001 has not only increased its export trade, but has also sent its food safety problem abroad. A series of safety incidents related to Chinese food have shaken overseas consumers’ confidence and have prompted their respective governments to tighten their import policy. Thus the European Union banned Chinese animal products and honey in 2002 (BBC 2004); Japan blocked chlorpyrifoscontaminated frozen spinach in 2003 (China Daily 2003a), South Korea destroyed or returned eels contaminated with malachite green, while Singapore, Japan and Hong Kong stepped up checking the illegal antibiotics used in seafood (Taipei Times 2005). In 2006, the United States barred more than 24 shipments of Chinese seafood because of chemical residues (USA Today 2007). Foreign sanctions on Chinese foods import can have a huge financial impact on China. The European Union’s ban in 2002 caused China a US$623 million value of loss in animal products export and a 16.7 per cent drop in the value of exported honey (Turner and Yang 2007). Japan’s blockade of chlorpyrifoscontaminated spinach in 2003 cost more than US$3 million loss to exporters in Shandong province alone; South Korean and other Asian markets’ rejection of contaminated eel in 2005 badly damaged the eel industry which had been worth US$600 million yearly export. The Chinese government responded more quickly and effectively to the loss in valuable export trade than to the human toll resulting from food safety incidents at home. To deal with the export crisis, the Chinese government promptly took a number of remedial steps, including launching a RMB8.8 billion five-year plan to improve food safety infrastructure and supervision, establishing a food safety website to provide up-to-date information, entering into bilateral arrangements with the European Union and the United States of America to strengthen their cooperation on food safety matters (Xinhua 2006; Wearer 2007), imposing criminal sanctions and drafting legislation designated to improve food safety. In 2007, the head of the State Food and Drug Administration was executed for corruption in a case relating to pharmaceutical inspection (China Daily 2007). A food safety bill was first listed in the legislative agenda in 2003. Despite the number of high profile food safety cases in both China and overseas, the food safety bill only passed its first reading at the end of 2007. The Sanlu case, which came to light in September 2008, made the passage of a food safety law a matter of urgency. The food safety bill completed its third and forth readings within a period of five months and became law on 28 February 2009. Unlike the Consumer Protection Law or indeed the Enterprise Bankruptcy Law, implementing regulations were drafted promptly and came into effect only a month after the law itself (State Council 2009). What, however, was the real impetus for this rapid action? In 2008, the value of China food exports was more than US$31 billion (Xinhua 2009a), of which milk products accounted for approximately US$300 million (China Daily 2009b). Exports of dairy products alone plunged 10.4 per cent after the Sanlu case surfaced (Xinhua 2009a). The main factor behind the acceleration of the enactment of the Food Safety Law may well not have been the 55,000

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babies suffering from kidney illness, but the financial impact of the restrictive measures taken against Chinese dairy products in overseas markets. The Food Safety Law came into effect on 1 June 2009. It embraces western concepts such as food safety risk monitoring and assessment (Articles 11–17), product recall system (Article 53) and food safety incidents management (Articles 70–75). It also mandates food safety standard (Articles 18–26), and toughens penalties for violation (Articles 84–98). Even though the expression ‘development or promoting socialist market economy’ are no longer used to describe the legislative goal of the Food Safety Law, the Chinese government’s focus on economic matters manifests itself throughout the law. The operational requirements stipulated for food production and trade (Articles 27–56) appear to be focused on larger enterprises rather than small food operators. Several important provisions specifically state that they apply only to enterprises (Articles 32, 33, 35, 36, 37, and 39). Requirements that food producers or business operators employ food safety and management professionals (Article 27 (3)), implement a health management system for staff handling food (Article 34) and establish a check and verification system (Articles 36–41) can realistically only be satisfied by enterprises with significant financial resources and therefore appear to be focused on the larger operators engaged in the export trade. Most of the domestic food safety cases were caused by small food operators with less than 10 employees (China Daily 2009b) which make up 70 per cent of the Chinese food processing industry (Thompson and Hu 2007: 4). The Food Safety Law, however, contains only two provisions dealing with small operators. Article 29 requires small food processors to comply with the production and operation requirements stipulated by the Food Safety Law in accordance with their production scale and conditions. ‘Relevant departments’ should strengthen their supervision of small food processors according to the measures which are to be formulated by the local people’s congresses. Article 30 requires local governments above country level to encourage, rather than to compel, small food processors to improve their production conditions and to conduct their business in a centralized market or fixed stores. It is difficult to understand how the domestic food safety problems, which stemmed mainly from unruly and scattered small food processors, could effectively be resolved by these sketchy provisions. On the one hand, the purpose of these provisions may be to respond to the concerns of small operators which are unable to implement the requirements of the law. On the other hand, the different approaches taken by the Food Safety Law to monitoring the operation of enterprises and small food processors could suggest that the law is mainly designed to address the concerns of overseas consumers or affluent Chinese consumers rather than to respond to the basic safety needs of general consumers in China. A related issue is that the Food Safety Law has only marginally improved the ability of the Chinese consumer to seek compensation. Pursuant to Article 96 a violator which clearly knows that it is producing food which is inconsistent

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with the requisite standards is liable to compensate an affected consumer for his/her personal, property or other loss and to pay exemplary damages of up to 10 times the purchase payment on the consumer’s request. If a violator is liable both to pay compensation and a fine and its assets are insufficient to pay both, Article 97 gives priority to the payment of compensation to the consumer. The terms of Articles 96 and 97 are not new to Chinese consumers. Similar provisions are found in the General Principles of Civil Law (Article 122), the Consumer Protection Law (Article 49) and the Product Liability Law (Article 64). However, given that, in general, foodstuffs are not expensive, it is unlikely that these exemplary damages would either amount to a significant payment to the affected consumer or serve to dissuade enterprise from their unscrupulous behaviour – a similar problem to that encountered pursuant to Article 49 of the Consumer Protection Law and discussed above. In addition, neither the Food Safety Law nor the Food Safety Regulations provide any guidance on the position of the affected consumer in event of the bankruptcy of the relevant enterprise. The last and most notable failure of the new food safety regime is the failure of the legislature to restructure the food safety administration so as to provide a powerful, specialized and effective body to administer food safety in China. Instead, it creates a National Food Safety Commission with responsibilities divided between the Ministry of Health, the Ministry of Agriculture, the General Administration of Quality Supervision, Inspection and Quarantine, the State Administration for Industry and Commerce and the State Food and Drug Administration, with roles also given to the Ministry of Industry and Information Technology and the Ministry of Commerce (APCO Worldwide 2009). It is difficult to see how this bifurcation of regulatory responsibilities can result in a responsive and effective regulatory regime.

The example of the Sanlu case The case of the Sanlu Group Share Limited Company (Sanlu Jituan Gufen youxian gongsi) provides an interesting example of the application of the Enterprise Bankruptcy Law and the Consumer Protection Law and the extent to which economic and political interests can prevail over the legal and indeed moral rights of consumers notwithstanding the intention and terms of the relevant legislation. The case related to the presence of melamine in milk powder produced by Sanlu (and indeed other producers of milk products), an illegal additive which could, and indeed did, cause substantial injury to consumers of the products, mainly children. Although, according to reports, indications of problems with the milk first arose at the end of 2007, they were apparently not reported to the board of directors of Sanlu until early August 2008. It was not until September 2008 that the company recalled the milk powder – and only then, according to some reports, because the New Zealand government, at the behest of Fonterra, the foreign partner, had reported the matter to the

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Chinese central government (Yardley and Barboza 2008). The recall triggered a major scandal which resulted in the bankruptcy of Sanlu and the criminal prosecution of Sanlu’s officers and other persons implicated in the matter. The case highlights the difficulties for consumers in calling on government, the law or the legal system in order to obtain protection or compensation. The conduct of the bankruptcy process has also been the subject of adverse comment. First, the Consumer Protection Law gives a role to the relevant consumer association pursuant to which it should accept consumers’ complaints, carry out investigation and mediation (Article 32(4)) and assist consumers in instituting legal action (Article 32(5)). In the Sanlu case, reports suggest that neither the China Consumer Association nor its local counterpart assisted consumers in any way. Indeed, in September 2008, lawyers representing victims appealed to the Ministry of Health and the China Consumer Association to contribute and participate in the discussion about formulating a compensation plan with the responsible milk producers (China Daily 2008a). As discussed previously, consumer associations in China were set up under the auspices of the government and, since 2007, have been totally funded by the government (Singtao 2007). The silence of the consumer association in such a significant case strongly suggests that Chinese consumer associations are more aware of their obligations to the government than their duty to consumers. Similarly, reports suggest that both local government (the regulator) and the media (which often acts as a watchdog in difficult or controversial cases in China) were aware of the issue and took no action, partly in order to avoid a scandal during the Olympics (Yardley and Barboza 2008). As a result, the campaign for action on behalf of consumers has been led by lawyers, a number of whom have suffered reprisals as a consequence of their public stance, as discussed below. Under the Consumer Protection Law (Article 34(5)), the Product Liability Law (Article 47) and the General Principles of Civil Law (Article 2), a Chinese consumer has a right to institute a court action to resolve disputes relating to shoddy products and services. Under Article 50 of the Civil Procedure Law, a consumer also has a right to be represented in a court case. It has been reported, however, that the courts were unwilling to accept the cases, notwithstanding legal requirements that they do so. In January 2009, lawyers for a number of consumers finally sought to institute an action in the People’s Supreme Court, as the lower level courts had been unwilling to accept cases (Wong 2009). It was not until March 2009, however, that a local court finally accepted a case (Wines 2009), by which time Sanlu had been declared bankrupt. Some families of victims were reportedly visited by local officials and pressured to withdraw from their legal claims (Chang 2009). It has also been reported that lawyers have been harassed by local officials and on a few occasions arrested in attempts to pressure them not to become involved in the melamine milk legal matter (Buckley 2008) or suffered consequences to their business (Sainsbury 2009). In contrast to the plight of the consumers, the government levied a fine of RMB49

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million on Sanlu in January 2009, after the bankruptcy petition was accepted but before bankruptcy was declared, even though it was clear that there was very little chance that all or indeed any part of the fine would ever be paid (Xinhua 2009a). There are a number of possible reasons for the difficulties sustained by the prospective plaintiffs. Local governments were undoubtedly concerned to minimize embarrassment (Ford 2008; Wong 2008); there was also concern about the possible economic impact of widespread litigation. There are 22 milk producers involved in the melamine milk scandal, including Sanlu. As a result of the combined impact of the melamine scandal and the effect of the global economic downturn, the top milk producers, Mengniu, Yili, and Bright Dairy suffered an announced loss of RMB948.6 million, 1.69 billion and 286 million respectively in 2008 (China Daily 2009b). Massive lawsuits, if successful, could only increase the financial burdens of the milk producers. In one case, for instance, 63 victim families tried to demand compensation worth RMB75 million (Caijing 2009). The government’s response was to put together a compensation package for consumers funded by the milk producers, to be administered by the National Dairy Association. Of this amount, RMB900 million came from Sanlu (Xinhua 2009a). The scandal had an immediate impact on Sanlu. News reports indicated in late 2008 that at least one of Sanlu’s 30 major suppliers was already on the brink of bankruptcy as a result of Sanlu’s failure to pay it (Singtao 2008b). The bankruptcy petition relating to Sanlu was presented to the Shijiazhuang Intermediate Court by a branch of the Shijiazhuang Industrial and Commercial Bank and accepted by the court on 18 December 2008 (Xinhua 2009a). On 19 December 2008, before the petition was formally served on Sanlu (from which time, pursuant to Article 15 of the Enterprise Bankruptcy Law, the company’s executives could no longer act as officers of the company), Sanlu apparently borrowed RMB900 million and paid it into the compensation fund. It is not clear who lent the funds to Sanlu and, indeed, in January 2009, the Shijiazhuang branch of the Industrial and Commercial Bank specifically denied that it had provided the funds (Xinhua 2009f). It is, however, difficult to envisage any entity other than a bank or other enterprise owned or at least controlled by government lending such a substantial sum to Sanlu the day after the court accepted the bankruptcy petition (or indeed at any other time after the scandal unfolded). The role played by government and government-related entities in the bankruptcy was noteworthy. As noted above, the filing creditor was the Shijiazhuang Commercial and Industrial Bank, a predominantly state-owned bank (ICBC 2009). The Shijiazhuang Intermediate Court chose to appoint a liquidation committee to administer the bankruptcy rather than an independent professional organization (Jingji Cankao Bao 2009). Before the first creditors meeting, it appears that the claims of all or part of the creditors were acquired for 20 per cent of face value by Hebei National Trust and Investment Operating Company Ltd, an entity owned by, among others, by

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the Shijiazhuang government state-owned assets bureau and various stateowned banks (Xinhua 2009a; Zhang 2009). The result of this, according to Zhang, is that there would be only a few creditors at the creditors’ meeting – state-backed banks, the state-owned investment company, and so on. Although the reasons for this are unclear, one would expect the question to be raised as to why Sanlu borrowed RMB900 million after the bankruptcy petition had been accepted in order to pay it into the compensation fund at a time when, if the reports are accurate, no litigation against the company had been accepted. The addition of such a large liability to the debts of the company would have significantly diluted the rights of the general creditors – including any consumers who subsequently managed to litigate a claim successfully. Separately from the bankruptcy proceedings, steps to deal with the financial problems of Sanlu’s distributors as a result of the recall were also taken by local government (Xinhua 2008). In the criminal trial, by contrast, company officers and officers of suppliers were ultimately convicted and harsh penalties were handed out (Caijing 2009), including two cases in which the death penalty was ordered and carried out (Xinhua 2009b). In summary, the Sanlu case raises a number of significant issues about the content and implementation of consumer protection and bankruptcy laws and illustrates the variety of ways in which local government and enterprises with strong connections with local government can influence and avoid – at least for a time – the application of the law.

Conclusion The bankruptcy and consumer protection laws in China provide excellent examples of the stresses in the Chinese economic model. Government influence is still strong in both market and economy activities, and it is clear that the central government intends to retain an influential role not just through regulation but through ownership. At the local level, government plays a number of roles as a regulator and as owner of SOEs under local control. Local officials may maintain close relationships with officers of enterprises which are privately owned. As a result, there is a major and continuing conflict between the efforts made by some divisions and departments of the Chinese government to draft and effectively implement laws which meet international standards in providing for protection and equality of treatment for consumers, creditors and debtors, on the one hand, and the attempts of powerful political and business sectors of the Chinese economy to orient and utilize the system in a way which is most advantageous to their own economic and political interests. This conflict not only affects the content of new legislation which is principally designed to change the traditional balance and to benefit such parties as small creditors and consumers; it also affects the implementation of the laws by courts and regulators and limits the ability of the beneficiaries of the legislation to enjoy the rights and protections provided by it.

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Notes 1 Pursuant to Article 134, the State Council may formulate special measures relating to the bankruptcy of financial institutions, although it has not yet done so. In addition, the Enterprise Bankruptcy Law gives the China Banking Commission the right to institute a bankruptcy action against financial institutions even though it is neither creditor nor debtor. 2 The Supreme People’s Court in the Company Law Second Regulation issued in 2008 (Article 19) clarified that in such a case a creditor who has suffered loss can sue the responsible shareholders or directors. This of course relies on the creditor being able to locate them. The problem of debtors fleeing China was highlighted by the issue by the Supreme People’s Court in late 2008 of the Guideline for the Chinese Interested Parties Related to the Abnormal Pullout of Foreign Investment to Conduct Transnational Investigation and Litigation, identifying that there are relatively small numbers of remedies available to the Chinese creditors in such a situation. 3 It has been reported that in the 1980s, China spent at least RMB15 billion every year in policing product quality (China Daily 1989); and a counterfeit engine caused a Changzhou exporter to lose US$4 million value of sales in one year.

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13 Where are China’s economic and legal reforms taking the People’s Republic? Democracy with ‘Chinese characteristics’? Feng Lin Introduction The Communist Party of China (CPC) came to power in the Middle Kingdom facing suspicion and prejudice from the international community, especially the Western capitalist countries. At the first meeting of the Strategic Economic Dialogue between the United States and China, President Obama said: ‘The relationship between the United States and China will shape the 21st century, which makes it as important as any bilateral relationship in the world. That really must underpin our partnership. That is the responsibility that together we bear.’1 US Secretary of State Hillary Clinton, and Secretary of Treasury Timothy Geithner further stated that: [F]ew global problems can be solved by the U.S. or China alone. And few can be solved without the U.S. and China together. The strength of the global economy, the health of the global environment, the stability of fragile states and the solution to nonproliferation challenges turn in large measure on cooperation between the U.S. and China.2 In addition to politicians, many scholars hold similar views: ‘We cannot solve the climate change problem without direct engagement between the United States and China’.3 Indeed, both popular media and scholars have started to talk about a ‘G2’ of the USA and China, or a ‘G3’ including the USA, China and the European Union.4 In 1978, when Deng Xiaoping urged his countrymen to adopt the ‘open door’ policy, China’s GDP was 3,645.2 million yuan. By 2008, GDP had increased to 300,670 million yuan. At the end of 2009, China had the largest foreign exchange reserve at US$2.4 trillion. Her economic, legal, political, and social stability has a ripple effect on the global community. This chapter therefore seeks key indicators of China’s future directions. To do this, economic, legal and social indicators – both past and present – are examined. These indicators are of course interwoven with China’s political developments and a detailed analysis of the internal democracy of the CPC and local grassroots democracy is provided.

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The chapter commences with a brief overview of China’s development over the past 60 years and from Deng Xiaoping’s time in particular. As China does not have a model to follow for its reform, its pathway was best described by Deng as ‘Mozhe Shitou Guohe’ (‘groping for rocks while crossing the river’). The CPC has progressed from being reactionary to proactive in many portfolios. Political reform has been cosmetic. The chapter discusses whether democracy will be the logical next step for China after its 30 years of rapid economic development. A review of existing literature highlights encouraging signals although some scholars are cautious, given the CPC shows no intention of relinquishing its autocratic governing position. One political reform initiated by the CPC itself, internal democratization of the CPC, is examined, revealing that some slow progress has been made. The CPC’s intention appears to be to move gradually and methodically from internal democracy to people’s democracy. Arguably the most essential part of people’s democracy – direct election at grassroots-level people’s congresses (including township and county levels) – is then examined. Analysis indicates the CPC maintains tight control over both levels of direct elections. The chapter concludes that China will eventually (and incrementally) arrive at a customized democracy; with ‘Chinese characteristics’.

China’s development since 1949 Economic development and legal reform When the CPC came into power in 1949, its agrarian society of about 450 million comprised 90 per cent rural peasants.5 In 1947, over 100 million people suffered from starvation, accounting for 22 per cent of China’s total population at that time.6 As covered in early chapters, from 1949 to the mid1950s, China focused on economic development. But China entered into a series of political movements from the late 1950s culminating in the Cultural Revolution (1966–76) (see Andrew Chan in Chapter 4). With the arrest of the ‘Gang of Four’ in 1976, the extreme political turmoil ended with Deng Xiaoping coming to power in 1978. There were still over 250 million Chinese people living in poverty at that time.7 Harvard Professor Roderick Macfarquhar noted that Deng Xiaoping decided that the CPC ‘had to promote economic growth for the prosperity of the country and the people, otherwise they’d be out’.8 This message was not lost on China’s leadership and from 1978 economic reform and the adoption of Deng Xiaoping’s open-door policy to foreign investors accelerated. After almost 20 years of reform China had managed to reduce its population in poverty to 58 million by 1997.9 This vast improvement in the poverty rate by 1997 – after two decades of economic development – may be regarded as the first stage of the modern economic development. The second stage is from the late 1990s to the present. During this period China’s primary focus has remained on economic reform and, as Anderson

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notes in Chapter 1, its economy has continued to rapidly develop including through the global financial crisis.10 By 2010, China had surpassed both Germany and Japan to become the second largest economy in the world.11 China’s radical economic evolution in the past three decades has been called a ‘miracle’ (see Garrick’s Introduction). It has even overshadowed the economic development of the ‘four little dragons’ in Asia in the 1980s.12 But economic evolution is only one aspect of a country’s development. There are many other vitally important aspects which also need the country’s attention. Rule of law was not incumbent prior to the CPC and it is foreign to a communist regime. Economic reform has thus far been supported by progressive law reform. Arguably, this unheralded underpinning has been China’s ‘quiet revolution’. Chan in Chapter 4 (and others) have argued that China has realized the importance of developing a proper legal system after suffering the tumultuous Cultural Revolution years. Since the 1975 Constitution was itself a result of Cultural Revolution, legal reform started with the promulgation of a new Constitution in 1978. Some 60 Articles were contained in the latter, compared to 30 in the earlier version. Under the 1978 Constitution, state organs and their functions had been set out in more detail and more fundamental rights had been added. However, it was still marked by the Cultural Revolution; especially the insistence on class struggle. Due to the defects in the 1978 Constitution, China enacted its fourth Constitution in 1982. Many Chinese constitutional scholars regard this as the best Constitution China has ever had (see Lin Feng 2000: 121–44). The preamble highlights the four cardinal principles, namely the leadership of Communist Party; the guidance of Marxism-Leninism and Mao Zedong thoughts; the adherence to people’s democratic dictatorship, and the adherence to socialism, and identifies the basic tasks of the state during the new period, relevant national policies and the supremacy of the Constitution. This Constitution formally confirms that the Constitution is the pinnacle of the legal hierarchy and the foundation on which other legislation is enacted. No laws or administrative rules and regulations may contravene the Constitution. The 1982 Constitution has been amended four times: in 1988, 1993, 1999 and 2004 respectively. The 1988 amendments include two articles which permit the private sector of the economy to exist and develop within the limits prescribed by law. ‘The private sector of the economy is a complement to the socialist public economy. The state protects the lawful rights and interests of the private sector of the economy, and exercises guidance, supervision and control over the private sector of the economy’ (see Article 1 of the 1988 Constitutional Amendments). Also, ‘no organization or individual may appropriate, buy, sell or otherwise engage in the transfer of land by unlawful means. The right to the use of land may be transferred according to law’ (see Article 2 of the 1988 Constitutional Amendments). These two landmark provisions are concerned with the economic system, and their incorporation into the 1982 Constitution formally legitimized the existence of private economy and the transfer of land-use rights.

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The 1993 amendments include nine articles aiming to build ‘socialism with Chinese characteristics’ (see Han 2000: 230–5). The 1999 amendments include six articles with the primary aim of incorporating certain decisions made by the 15th Central Committee of the CPC; most notably the three amendments concerned with the ‘establishment of market economy with Chinese characteristics’ by giving the private economy equal status with state-owned public economy, and legitimizing other means of allocation (see Articles 14–16 of the Constitutional Amendments). The 2004 amendments contain 14 articles giving more protection to private economy, individual property rights and human rights. After all these amendments, the 1982 Constitution looks like a constitution which can be found in most countries, apart from the insistence on CPC leadership. The problem is, however, that the Constitution remains non-justiciable though some have advocated for its ‘implementation by the judiciary’ (see Wang 1999: 28–36). After approximately 30 years of development, China has enacted more than 100 new national laws. In addition, there are also now hundreds of administrative regulations (promulgated by the State Council), departmental regulations (passed by various ministries), local legislation (made by local people’s congresses and governments with legislative power), as well as judicial interpretation (issued by the Supreme People’s Court and Supreme People’s Procuratorate). It is therefore fair to say that China has established foundations for its own legal system, with legal rules as comprehensive as most other advanced countries in the world. While acknowledging the progress in China’s legal reform, it should also be noted that China is not a rule of law country as yet. Law is still very much used as an instrument, with enforcement of law still facing many problems and these are considered in the sections that follow. But first we turn our attention to the critical issues associated with democracy in China.

Democracy in China: has it happened? China’s undertakings on political reform The CPC realized the necessity of political reform in the 1980s. At the 13th National Assembly in 1987 the (then) Secretary-General of the Central Committee of the CPC, Zhao Ziyang, discussed political reform in his Working Report ‘Moving Forward Along the Socialist Road with Chinese Characteristics’, concluding it was time for China to undertake political reform. After the Tiananmen incident on 4 June 1989, however, the political environment became tenser. Political reform was no longer a priority for China. The fall of the Soviet Union and the accompanying ‘velvet revolution’ in East European countries taught China to be wary of political reform. The CPC leadership has acknowledged such reform towards socialist democracy is required for sustainable economic advancement. Indeed, scholars in China

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have been arguing since the early years of this century that China needed to start its political reform. Hu An-gang, Wang Shao-guang and Zhou Jian-ming (2003) have expressed the view that it is now time for China to move from concentrating on economic development to concentrating on the development of various democratic systems. In their view, China made its first transformation from the old system of a planned economy to a market economy in 1978 and that it was now ready for the second transformation; from economic development to democratic systems development. Professor Zhou Tian-yong (2004) also expresses the view that China’s political system has arrived at a stage whereby it has to be reformed. Key questions are: what precisely is to be reformed (content)? How is it to be reformed (process)? And to what extent should it be reformed (detail)? It is clear that both the CPC and some Chinese scholars have realized that it is necessary for China to reform its political system – to establish a more democratic political system – and that now is an opportune time to do so.13 What follows in this section will first be a brief review of scholarship on the question of whether economic development leads to democracy (and the CPC concerns in this regard). It will then focus on two interrelated topics: internal democracy within the CPC and the direct election of local people’s congresses. The discussion centres on how the CPC has responded to demands for democratic reform in China.

Economic development and democracy Whether economic development will inevitably lead to democracy has been a contentious issue for over 100 years with arguments that there is a strong, positive correlation between economic development and democracy.14 The arguments revolve around whether the more developed a country is, the more likely its citizens are to value democracy and support a democratic system. It has also found that with increased wealth the question of ‘who rules a country’ becomes less important, as governments have less power to affect the lives of an increasing number of citizens who have sources of wealth that do not necessarily depend on the state. Most developed countries are associated with democratic political regimes.15 A study of the relationship between wealth and democracy over the years 1976–2000 found that there was a positive correlation between them ‘during the third wave of democratization (1976–90), but that such positive relationship was not that clear and often delayed during the fourth wave (1990– 2000)’.16 There are, of course, scholars who hold the view that there is no causal relationship between economic development and democracy, noting how well China has fared economically without a democratic system in recent times.17 Though scholars worldwide hold different views on the nature of the relationship between economic development and democracy, there are some vivid examples that a connection exits. Some of the ‘small dragons’ of East

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Asia including South Korea and Taiwan, have had decades of fast economic development leading to positive experiences of democratic political development. Such examples have attracted CPC attention which is possibly why the CPC has issued various documents and undertaken reforms to consolidate its governing position. Such measures do not repudiate the examples but rather seek to ensure the CPC maintains its governing position in China. The measures and reforms to consolidate one-party rule cannot simply remove fundamental questions of legitimacy of governance by the CPC in China. Article 2 of the 1982 Constitution states explicitly that all powers come from the people. In fact, the CPC has always claimed that its power to govern has come from the people and it represents the fundamental interests of the people. It simply does not follow that ‘the people’ cannot have the right to choose their representatives to govern them! Indeed, how can the CPC continue to justify that it has been ‘authorized’ by the Chinese people to govern without the right to choose? This is arguably the most critical issue and one which the CPC cannot avoid if it wants to convince Chinese people (and the outside world) that it has the legitimacy to govern China. Of course the CPC recognizes this issue and this may be why it started internal democracy within the Party some time ago.

The internal democracy of the CPC Historical evolution The CPC realized the necessity to have internal democracy within the CPC as early as 1956 at the Eighth Central Committee of the CPC.18 But it was not practised due to a series of political movements starting in 1958. After the Cultural Revolution, the over-concentration of power (within a few individuals at the pinnacle of the CPC) was realized by Deng Xiaoping (as mentioned in the ‘Resolution on Several Historical Issues of the CPC after the Founding of the PRC’ adopted by the Sixth Plenum of the Eleventh Central Committee).19 The Report adopted by the Thirteenth Central Committee of the CPC goes on to state that internal democracy within the CPC should be developed to promote people’s democracy. The development of internal democracy within the CPC was believed to be a feasible and easily effective means to develop a socialist democratic polity in China.20 That was not implemented following the Tiananmen incident in 1989. Internal democracy was again mentioned in 1994 by the Fourth Plenum of the Fourteenth Central Committee of the CPC.21 The policy of promoting people’s democracy through the development of democracy within the CPC became widely known among people in China in 2006 after the journal Qiushi (Seeking Truth) published an article written by Professor Zheng Xiaoyin from the Central Party School, entitled ‘Promoting People’s Democracy through Internal Democracy within the CPC’.22 That article attracted much attention, generating strong debate about the development of internal democracy within

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the CPC in China. At the heart of Zheng’s argument was that without ‘people’s democracy’ there would be no future for the CPC and that the development and implementation of internal democracy within the CPC is the proper route to develop people’s democracy. Shortly after the publication of that article, Professor Li Junru, then Vice President of the Central Party School, expressed a similar view in an interview published by the Xinhua News Agency. He made the additional point that this was a new approach to reform China’s political system.23 It is a common perception that views expressed by authors from the Central Party School represent views of the Central Committee of the CPC. Furthermore, the journal Qiushi is an official journal of the CPC and the Xinhua News Agency is the official news agency of the Chinese Government. Based on these factors, it appears that the road-map for China to develop its own version of democracy is to first develop democracy within the CPC. Once there is democracy within the CPC, it is commonly expected that such internal democracy will lead to the promotion, development and realization of people’s democracy in China.

Election rules As early as 1993, the Regulations on ‘Election Work of Local Organizations of the CPC’ were enacted to improve the election system within the CPC. For instance, Article 2 of the Regulations applies to elections of Party Congresses, Party committees and disciplinary committees of provinces, municipalities directly under the State Council, municipalities which are divided into districts, municipalities not divided into districts, autonomous prefectures, counties, and districts under municipalities. Several general principles were laid down in the 1993 Regulations that are of analytical interest. First is that the election of deputies to Party Congresses at all local levels, and elections of members to Party committees, standing committees, or disciplinary committees must be held according to the principle that the number of candidates should be more than the seats available.24 Second is that elections must be democratic and the democratic rights of voters must be guaranteed. Third is that voting must be by secret ballot. There are also detailed rules on the election of deputies in the 1993 Regulations. At local levels, all members of a Party committee shall elect its first and deputy secretaries as well as members of the standing committee. The election results must then be approved by the Party committee at the next (higher) level.25 Election practice One fundamental reform at the local level is to bring in competition by allowing all CPC members to directly elect their deputies. Direct election of deputies to a CPC congress at county level in Ya An City of Sichuan Province in December 2002 was believed to be the first of its kind in China.26 In Ya An

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City, one county and one district were selected to experiment with public direct election of deputies to the Party Congress at county/district level by CPC members.27 Related procedural reforms also included the requirement that a CPC member nominate him/herself to compete in an election and procedures for making campaign speeches. Other experiments relating to the election of deputies include: (1) reduction of quota for deputies, which usually amounts to a decrease of more than 20 per cent in the number of deputies; (2) making election units smaller so that CPC members within an election unit will have a better understanding of and supervision over the candidates; and (3) the number of candidates has been increased to 40 per cent more than the number of deputies to be elected.28 Comments on these experiments have not been consistent. Some suggest the reform will make it possible for a CPC congress to play its role and contribute to democracy within the CPC. Others suggest the costs of such reform may be too high (and therefore reform may negatively affect the efficiency of decision-making within the CPC). It is also noted that some cadres, including Party secretaries of township Party committees and governmental officials, lost in the election. Professor Bai Gang (Public Policy Research Centre of the China Academy of Social Science) observed that a democratic election had never before been adopted for the election of deputies to a Party Congress. The experiment in Ya An could thus be seen as a starting point for the development of internal democracy within the CPC. The experiment can have positive effects by promoting changes to governance style as well as democratization of decision-making processes within the CPC. From March to October 2003, direct elections of deputies to county Party Congresses were also held in Yidu County and Luotian County in Hubei Province. In Luotian County all preliminary candidates were put before Party members to elect formal candidates in a pre-election through a secret ballot. Those formal candidates were then elected by CPC members, to produce deputies. Only those obtaining more than 50 per cent of the vote would become deputies. In one election unit, for example, there was a quota of 10 deputies, but only eight candidates got more than 50 per cent of votes. Therefore, only eight deputies were elected from that election unit.29 In other words, the use of the procedure eliminated two deputies. Similarly, from November 2004 to March 2005, a direct election of deputies to the Party Congress was held in Luqiao District of Taizhou City, Zhejiang Province. In these electoral reforms, several breakthroughs have been identified by a group of researchers from Beijing. First, the nomination method has been changed from that stated in the Charter of the CPC. The new method allows nomination by a candidate himself/herself, the Party organization, or other Party members jointly, while the primary method is voluntary nomination by Party members themselves. Second, the difference between the number of formal candidates and the number of deputies to be elected has been expanded from 20 per cent to ‘more than’ 20 per cent and in some places up to 50 per cent. Third, campaign speeches were delivered by formal candidates. The

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formal candidates were subject to direct election by Party members and the votes were counted on the spot. Fourth, the whole election process was public; requiring preliminary candidates, formal candidates and election results to be publicly announced.30

Discussion: internal democracy? There are clear indicators that the CPC has a policy to develop internal democracy. Although the relevant rules and regulations governing elections within the CPC are not fully democratic – in that election results are subject to approval by higher level Party committees – there is some progress. Election practices carried out over the past eight years to the end of 2009 indicate that electoral reform has been trialled within the CPC at actual elections, up to county level in different provinces. In some places it was the initiative of Party organizations at the next higher level. In other places the reforms were carried out with the approval of the Central Organization Department of the Central Committee of the CPC. Such reforms may represent an expanding trend and democratic reforms trialled in places such as Ya An are encouraging signs. The need for internal elections within the CPC to be democratic has now been grasped. For example, a Central Party School scholar recently noted that without election, there will be no democracy. Another further notes that competitive elections are an indispensable element of internal CPC democracy whether from the perspective of the meaning of democracy or from the perspective of protecting Party members’ rights. Fair, competitive elections are the indicator of democracy. Hence, in order to develop internal CPC democracy the first requirement is to establish competitive elections within the CPC that are representative of the will of CPC members. It follows that to protect the rights of Party members the most important thing to do is protect their rights to fair and competitive elections.31 To do this, it is necessary to have competitive mechanisms in place within the CPC including elections whereby the number of candidates is more than the number of persons to be elected. On the surface this may sound simple. But it is not. There must be genuine competition and competition is reflected through elections.32 It has been further suggested that improvements are necessary to the election mechanism within the CPC including democratic election of candidates being expanded to controlling the role of the ‘number one person’ either in the CPC or people’s government in the relevant process.33 Such reform would help eliminate autocratic rule. For internal CPC elections, the following method has been proposed for nomination of candidates: the Party organization decides the proportion of different kinds of candidates, and specific candidates are proposed from the bottom up by Party members to ensure that recommendations are made on the basis of members’ discussion and agreement. Party organizations should respect the will of their members, and not arbitrarily change the list of

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candidates. Before the election, candidates should be allowed to meet with CPC members or their deputies. Websites of information on candidates can be established and candidates be allowed to deliver campaign speeches. Information about candidates must be detailed and accurate to ensure proper protection of CPC members’ right to be informed and the right to vote.34 Again, it is encouraging to see that the 2006 election in Ya An City has met most of the suggestions proposed above. In particular, the Party committee at the next level above no longer dictated the candidates for secretaries of Party committees at the next lower level. Rather, it only selected formal candidates from those already approved by the CPC members. While it is undeniable that such reform has made elections within the CPC at local level (mainly county/district level) more democratic, it is a fact that such reforms are not consistent with the existing rules and regulations governing elections within the CPC more broadly. They are the exceptions rather than reflections of existing rules and regulations common in China. But now in China the CPC has publicly vowed to follow the rule of law principle, which by definition means ‘doing things according to the law’. With regard to the electoral reform within the CPC, one must remember that it is still at a preliminary stage and remains, as of 2009, limited to those levels at/or below ‘county level’. There are also different views with regard to whether competitive elections are ‘a must’ and about the criteria for assessing whether or not there is internal democracy within the CPC.35 Internal democracy is merely a means and not an end. This is because it is only within the CPC which has about 70 million members. Set against the total population of China (now according to official statistics36 over 1.3 billion), this is a relatively small percentage of the population at large. While it can be argued that democracy within the CPC can lead to significant changes of CPC working style including governance of organs such as the people’s congresses, people’s government, people’s courts and people’s procuratorates, it can by no means replace democracy for society as a whole. The fundamental principle of democracy is election of people’s representatives to govern the country through truly representative voting.

Local electoral reform The people’s congress system is the fundamental political system in China. The 1982 Constitution defined the National People’s Congress (NPC) as the national organ of state power and local people’s congresses as organs of local state power.37 There are five levels of people’s congresses: national, provincial, municipal, county and township. The 1982 Constitution classified the five people’s congresses into two sub-categories: One consists of township and county – which are directly elected by voters; the second consists of the other three levels – which are indirectly elected by the deputies to the people’s congresses at the next lower level.38 This following section of the chapter examines

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how election rights have been exercised in China at the grassroots-level direct election so as to provide an insight into the development of democracy in China. At the same time these direct elections at grassroots level of the people’s congresses illuminate whether the practice of internal CPC democracy has had an impact on the development of people’s democracy and, if so, what sort of impact. The evolution of CPC attitudes towards elections Before taking over power in mainland China, the CPC made it clear that it would organize democratic elections once it came to power.39 This never happened. After claiming power in 1949, the CPC believed there were great difficulties in having democracy in a country which was still poor, undeveloped and populous. Various senior CPC officials expressed, on different occasions, the view that it was not appropriate for China to have universal, equal, direct and secret elections. Professor Cai Dingjian (2002) summarized their arguments as: (1) it was difficult for China to have direct election immediately as China had too huge a population; (2) it was difficult to implement the principle of equality in elections as the population of peasants was too large (otherwise most deputies to the people’s congresses would be peasants); (3) the education level of Chinese citizens was too low and many were illiterate (making it very difficult to have a secret ballot); (4) China did not have enough experience in conducting mass elections and the population did not have a good understanding of elections and were not enthusiastic about elections; and (5) if conditions 1–4 (above) were not satisfied, it would be meaningless to have completely democratic elections. The CPC emphasized the substance of elections rather than the formality. It is therefore clear that the CPC did not accept direct elections and was not willing to do so during the early period after it came into power. After the Cultural Revolution, the CPC recognized the need to reform its political system and its electoral system. This recognition led in 1979 to the enactment of the Election Law. The reason for the reform was that some senior CPC leaders held the view that the expansion of direct elections and the democratization of the electoral system would put the masses in direct control of the county people’s congresses and in indirect control of provincial congresses (as well as the NPC). In so doing, 900 million people could participate in the administration of national affairs. This was seen by those officials as desirable and consistent with China’s socialism. Some senior officials further expressed the view that reforms to the electoral system would be fundamental to preventing any recurrence of the Cultural Revolution (ibid.: 10–11). Such views show that within senior CPC ranks there were genuine intentions to develop a democratic electoral system at the end of 1970s. By 1987, at the Thirteenth National Assembly, the CPC’s Secretary-General of the Central Committee stated with regard to the electoral system of the people’s congresses:

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Feng Lin In recent years, the degree of democracy in election in China has been increasing. But the electoral system is still not yet satisfactory and existing statutory provisions have not been implemented fully and effectively. In the future, we should fully respect the will of voters and ensure that voters have the freedom to vote. We should insist on the principle that the number of candidates should be more than positions available, improve the methods for the nomination of candidates, and the methods to introduce candidates. Practice has proved that rigid statutory provision on the ratio of candidates of different backgrounds is against the freedom of voters to express their own wills through election. In order to ensure that candidates represent different interests, methods other than geographical election can be introduced, including functional constituencies or any other feasible methods.40

The above quotation tells us that the CPC had already formed opinions on how to reform the electoral system of people’s congresses. With the Tiananmen incident of 1989, however, the political environment became tense and the process of political reform was dramatically arrested. The CPC Central Committee stated that for elections held in 1990 it would be necessary to comply with the four cardinal principles and to prevent ‘bourgeois liberalization’. At the same time it also confirmed the achievements in elections at town and county levels since 1979 and re-stated the requirement to organize elections according to the principles established in the 1979 Election Law. Despite this rhetoric Cai Dingjian (2002: 25–30) persuasively argues that the 1990 election was a step back in the development of democratic election and that the CPC policy on the election of people’s congresses had retreated. This retreat is illustrated by the Working Report of Jiang Zemin, the then CPC Secretary-General of the Central Committee, delivered to the 14th National Assembly of the CPC. This report, entitled ‘Jiakuai Gaige Kaifang he Xiandaihua Jianshe Bufa Duqu you Zhongguo Tese Shehuizhuyi Shiye de Gengda Shengli’ [To Speed up Economic Reform, Open-door Policy, and Modernization so as to Achieve Greater Success in the Socialist Course with Chinese Characteristics], discussed political system reform very briefly. It pointed out that in principle the objective of political reform was to establish a socialist democratic political system rather than a Western multi-party system or a parliamentary system. He made no mention of the electoral system of people’s congresses. After 1992, however, it can be argued that China’s political environment became somewhat more liberal. For instance, at the Fifteenth and Sixteenth National Assemblies of the CPC (1997 and 2002 respectively), Jiang Zemin’s Working Report devoted an entire chapter each time to discussion of political reform (Parts VI and V respectively). Both Reports referred to the electoral system as requiring ‘Democratic election, democratic decision-making, democratic administration and democratic supervision, to protect the broad

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rights and freedoms enjoyed by people according to law, and to respect and protect human rights’. While following the ‘tone’ adopted by the Working Report of the 16th National Assembly, the Decision on Strengthening the Governing Capacity adopted at the Fourth Plenum of the Sixteenth Central Committee (the 2004 Decision) has further emphasized the establishment of ‘democratic systems’. Moreover, the Seventeenth Central Committee has decided that China will definitely develop ‘socialist democratic polity and expand people’s democracy and in particular that a vote from a peasant shall have equal value to a vote from an urban resident’.41 A democratic electoral system for the people’s congresses? The establishment of democratic systems includes the establishment of a democratic electoral system for the people’s congresses. From a policy perspective, the CPC accepts in principle the concept of the democratic election of people’s congresses. With regard to the implementation of this principle, however, there are significant challenges for legislation and how to actually do it in practice. For instance, when should the scope of direct elections be expanded? To what extent should voters be given more autonomy in the election of deputies to people’s congresses? Answers remain unclear. What is clear is that the 2004 Decision confirmed the importance of establishing democratic systems for China, and the Seventeenth Central Committee confirmed the necessity of expanding people’s democracy. Yet no specific proposals on electoral system reform have been promulgated. At the same time, the need to combine the leadership of the CPC, democracy and rule of law has been officially emphasized. This emphasis means a balancing act between the leadership of the CPC and the democratic election of people’s congresses. As to how such a balance is to be reached and the extent to which the electoral system should be democratized, the CPC has made no clear decision. There is no firm policy as yet. Hence, future reforms to the electoral system of people’s congresses remain uncertain notwithstanding the CPC’s historical rhetoric that supports such reform as outlined above.

Current election law and practice The CPC’s first Election Law in China was enacted in February 1953 which formally established the election system of the PRC. After the Cultural Revolution and in order to protect people’s election rights and improve the people’s congress system, the fifth NPC adopted on 1 July 1979 the second Election Law of the PRC (the 1979 Election Law). The 1979 Election Law made the following major amendments: First, the scope of direct elections was expanded from township to county level. Second, the rule that the number of formal candidates equals the number of deputies to be elected was changed so that the number of formal candidates should be

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more than the number of the deputies. Third, voters and deputies to a people’s congress obtained the right to nominate candidates. Fourth, the principle of secret ballot was to be followed in the election of people’s congresses at all levels. Fifth, liberal provisions were incorporated on the promotion of candidates allowing all political parties, other organizations and voters to use ‘various means’ to promote their nominated candidates. Sixth, if too many candidates were nominated, a pre-election could be held. Seventh, the rule that a candidate would be deemed elected if he or she obtained a simple majority of the voters (in the case of direct election) or deputies (in the case of indirect election) was changed so that a candidate must obtain more than 50 per cent of all voters or deputies to be elected (Dingjian 2002: 9–10). Indeed, amendments to the Election Law have been made from time to time, with the latest proposed and discussed by the NPCSC at the end of 2009. The most important change anticipated is the proposed amendment to the existing Article 16. This will require each deputy to represent the same number of voters. Another major change is the provision requiring the election to be conducted according to law and be subject to supervision. No organization or individual can interfere in any manner with the freedom of a voter in exercising their election rights. It is widely anticipated that the newly proposed amendments will be adopted by the NPC in March 2010 as this item has already been placed on the NPC’s March meeting agenda. For those hopeful of democratic reform, this is an encouraging sign. Indeed, since the enactment of the 1979 Election Law, there has been some progress towards democratic elections. But direct election remains at township and county levels only. Direct election has not been allowed for the other three levels of people’s congresses and thus the actual degree of democracy is, in practice, still quite low. Experience of the actual practice is also quite revealing. Research conducted on the 2003 district elections in Shenzhen and Beijing makes several valuable points.42 This study found that only seven sought nomination as candidates without the support of the CPC organization. One was a member of the CPC, three were members of other political parties, and the other three had no political background. As far as nomination was concerned, two became formal candidates by getting nominated by ten or more voters, the other five participated in the election as ‘self-recommended’ candidates. Of these five, three were initially nominated as ‘preliminary candidates’ by other political parties and were then screened out during the consultation process to determine formal candidates. The other two recommended themselves. The investigation found that the election campaign process for all seven candidates was not without obstacles, and these appeared mainly in two aspects. First, the three who were ‘screened out’ by the election organizing committees within the electorates (which were in fact community residence committees); second, the election organizing committees within the electorates had either prevented them from participating in the election, or objected, prohibited, or removed their election campaign posters after they were posted

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(ibid.). The election outcome was that the candidate who was a CPC member got elected and the other six lost. In Beijing, there were about 20 such candidates and the majority failed to get elected but the election process was reported to be better organized. Other trials of election of deputies to township and county/district people’s congresses have subsequently been held such as Zibo City of Shangdong province (and elsewhere) with mixed results. This raises a key constitutional issue, that such equal value for each vote is consistent with the right to equality under the 1982 Constitution, but is in violation of the relevant provision of the Election Law which provides that in the countryside four votes equals one vote in urban areas. The most fundamental problems appear to be that elections might not reflect the true choices of voters, and the election organizers can interfere with and influence election results. These remain very significant problems to be overcome. As the election of people’s congresses is related to the election of the state power organ, it is, in theory, very important. Successful reform of the electoral system for the people’s congresses can have a serious influence on the ruling position and governance style of the CPC. The CPC has not at this stage made any specific policy with regard to the direction of the electoral system reform of people’s congresses. It has, however, shown tolerance and implied consent towards citizens standing for election at local people’s congresses under existing electoral laws rather than any specific new guidelines. Zou Shubin, Tang Juan and Huang Weiping (2004: 35–43) argue in relation to the Shenzhen elections that ‘in an authoritarian society, any reform can’t succeed without interaction with the government, and the reform progress can’t deviate too much from the existing system and structure’.43 This conservative view is quite common in China. On the one hand, the electoral system reform should not deviate too much from existing system, but, on the other, full use should be made of the rights that do exist under the current electoral system. When citizens increasingly take their constitutional and legal rights to vote seriously and stand for election, such rights under the Election Law might be realized. The effectiveness of some informal procedures established under the Election Law (with the function of substituting for formal elections) can then be reduced. Only when the CPC accepts and promotes the electoral system reform of people’s congresses and exercises self-restraint (by not using informal procedures to interfere with and influence the election of local people’s congresses) can the electoral system of local people’s congresses be changed in substance.

Democracy in China: will it happen? Professor Minxin Pei expressed concern in 1999 that China’s fast economic development may be unsustainable without corresponding political reform. More than a decade later China’s economy has continued to grow rapidly despite the lack of corresponding political reform. Some therefore argue that China’s ‘command-economy’ is legitimized by success. Others argue that

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even with such economic success, future developments may eventually lead to political reform. It certainly appears that China’s economic success has delayed political reform. This is a subject of much debate among political scientists worldwide. For instance, Harvard Professor Macfarquhar in 2006 predicted that all the elements for the CPC to collapse were already there. The elements identified in the inaugural Carnegie Debate included loss of faith in the party among the middle class, massive corruption, widespread dissent, and only a trigger was needed for implosion to happen and it might happen soon. On the other hand, Columbia Professor Nathan disagreed, arguing that the CPC’s leadership was sustainable and that the CPC is able to continually adapt to a moving game to keep itself empowered. Such binary oppositional debates are academic. In practice, in the three years since that debate, the CPC has remained firmly in charge; China has emerged from the global financial crisis in a strong global position and political reform does not appear to be a priority on the immediate horizon. The internal democracy within the CPC does, however, illustrate that after years of almost breathtaking economic progress, the Party realizes the necessity to start political reform to strengthen and legitimize its governing status. Such reform has taken a different route from other former Communist/Socialist countries. China has learned lessons from such countries and as a consequence decided to start with the experiment of internal democracy within the CPC. Only then are we likely to see gradual movement to people’s democracy. In the meantime, the CPC (which has total control of the experiment of internal democracy) has paid lip service to the reform of the electoral system for the direct election of deputies to the people’s congresses, even at the grassroots level. The internal democracy experiment, now some years old, has not yet led to any significant improvements to either the Election Law or the most recent election practice in 2007 and 2008. Given that there are over 70 million CPC members who actually occupy most of the positions in other constitutional organs, if internal democracy within the CPC can be consolidated, a significant impact on the promotion of people’s democracy in society will be made. With internal democracy being tried only at the lowest level of the CPC, it remains to be seen as to whether the experiment will be extended to the higher levels. Such an expansion of internal democracy would need the approval of the CPC’s senior leadership and, in particular the nine Political Bureau members. Given that the CPC has been empowered by China’s economic success of the past 30 years, the pressures for political reform may have been reduced. The political will to make changes to the existing electoral system is a significant key to whether China will move gradually towards democracy. MacFarquhar is pessimistic on this point. His view is that democratization is unlikely to happen while China continues under CPC leadership, asserting: There are 70 million members of the CPC, and counting. And they did not join the Communist Party to lose power, privilege and the chance of

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corruption. So, there would be an enormous weight in favour of any leader who opposed [an alternate] leader who was offering the prospects of democratization. (MacFarquhar and Schoenhals 2006) Nathan again differed, viewing the CPC nowadays as more resilient and stating that any democratization that it undertakes will be under control, and the unexpected kind of things that got out of control in Taiwan are not that likely in China. Peking University professor Xu Xianglin presents another view, that the CPC today is no longer the CPC of three or four decades ago. In those earlier times, China could be described as a ‘Party state’. The CPC then had a strong ideology. Even after 30 years of economic reform, the CPC still espouses the ideology of Marxism-Leninism. But the substance has been subsequently modified by ‘Mao Zedong thought’, ‘Deng Xiaoping theory’ and ‘Jiang Zemin’s Three Represents’. In other words, China has added its own elements to Marxism (or at least adapted traditional Marxist theory to China’s own practice). MacFarquhar notes too that China has weakened its emphasis on Marxist ideology starting from Deng Xiaoping’s famous aphorism: ‘a cat is a good one so long as it can catch rats no matter whether it is black or white’. This ‘weakening’ may partly account for China’s current, so-called, ‘ideology vacuum’ referred to in Garrick’s Introduction. For instance, one recent study reveals that about 80 per cent of CPC members no longer believe in Marxism and Leninism/Communism.44 Such data give rise to the assertion that the CPC is at present ‘a utilitarian party’ whereby members join for personal career development including promotion within a governmental organ, material gain or to further interests in a private/state commercial joint ventures (also see Minglu Chen in Chapter 11 in this volume). At the same time, there are 20 per cent who hold other views and from this number some ‘hard-liners’ remain in pivotal positions of power. The CPC’s position is that China will develop its own socialist state with ‘Chinese characteristics’. ‘Chinese characteristics’ seem to be a socialist market economy. From this, ironies emerge. For instance, two pivotal factors of socialism are: minimum protection and the value of equality. China now provides less social welfare protection and has a wider income gap compared with many capitalist countries (and regions – including the Hong Kong Special Administrative Region which is often regarded as typifying a capitalist system). The socialism of China today is definitely not the socialism of four decades ago! Furthermore, Professor Xu argues that the CPC no longer has such strong control of China’s economy as, in earlier years (pre-Deng), the CPC had absolute control of the economy because private economy was not permitted. State-owned enterprises, which had exclusively controlled the national economy, must follow the plans of the government controlled by the CPC. Although the CPC and SOEs still control a large portion of the national economy and remain enormously (and strategically) powerful, after

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30 years of economic reform, the SOE contribution to GDP is actually lower than the private economy. His point is simply that the government is no longer in complete control of the national economy with more than 50 per cent of GDP coming from non-SOEs. This may be a favourable indicator of possible future democratization in China. There are also various other influences now allowed in mainland China such as non-government organizations, private enterprises, religious groups, the internet and modern telecommunications. People are more mobile, better educated and information is more accessible in China than ever before; notwithstanding strong government censorship. It is simply more difficult nowadays for the CPC to maintain absolute control over China’s dynamic modern society. This is not lost on the CPC and Professor Cheng (in press) identifies some specific measures being taken by the CPC to legitimize its continued rule – including economic development to improve people’s living standards, strengthening access to education and standards and undertaking legal and administrative reforms. But not political reform. Arguably the most important issue for legitimacy – direct confirmation of support for its governance from the Chinese people – has not as yet been touched. On various occasions, President Hu Jintao and Premier Wen Jiabao have talked about democracy. According to Wen, the development of a democratic polity through political reform is one of the two important reforms for China to undertake in addition to economic reform.45 Professor Yu Keping was recently allowed to have his article arguing that ‘democracy is a good thing’ published in China.46 But what should be noted is that the nature of democracy Professor Yu describes is different from democracy as commonly understood in the West, for instance, US-style competitive democracy. Yu advocates a democracy which seeks to absorb the good aspects of Western democratic systems while, at the same time, catering for China’s practical needs. In other words, a ‘democratic system with Chinese characteristics’!

Conclusion So, where do China’s economic and legal reforms lead? Will China eventually have democracy? If so, what form might it take? What would be encompassed by ‘democracy with Chinese characteristics’? This chapter has argued, first, that the past three decades of rapid economic development have not led to significant democratic development in China – as yet. The success of economic reform has, however, fundamentally changed both the CPC and China. Second, there is substantial evidence that the CPC has decided on a road-map towards democracy; commencing with internal democracy for the CPC and eventually moving to the people’s democracy. To date, the development of internal democracy remains rudimentary. There is no clear evidence that the CPC is ready to move from internal democracy to people’s democracy. The practice of direct election at township and county levels has made little progress towards a more expanded democracy. As the CPC occupies

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such a powerful position in China – with no real political opposition – the commencement point of internal democratization may well be the most feasible route towards democracy. Third, the CPC’s intention to develop democracy in China is the determining factor as to how soon China may have democracy and what form it may take. Fourth, various circumstances (economic, social and legal) which favour a democratic political system already exist in China and this fact may contribute to faster democratic development. Fifth, the form of democracy advocated by Chinese scholars such as Professor Yu Keping differs from the competitive style of democracy as commonly understood in Western countries. What the Chinese appear to have in mind may be more of a ‘consultative’ form of democracy. Sixth, it can be reasonably argued that China will eventually have democracy (with Chinese characteristics) and this will only be a matter of time as most people will be tempted by the power to determine who actually governs their country. The route to democracy may be different from the current long-term roadmap for reform. On the evidence available, it appears likely that China will move from internal democracy to consultative democracy and then, perhaps, to a more competitive democracy. But it will be China’s ‘own brand’ and progress is likely to be incremental rather than sudden or dramatic.

Notes 1 See http://www.voltairenet.org/article161279.html. 2 ‘A new strategic and economic dialogue with China: few global problems can be solved by either country alone’. Available at: http://online.wsj.com/article/SB1000 1424052970204886304574308753825396372.html. 3 Joanna Lewis, a professor of science, technology, and international affairs at Georgetown University (US) is quoted in Dizikes (2009). 4 See Gosset (n.d.) for more details. 5 See Hu Jingbai (n.d.) for further discussion. 6 See Dong (1998: 6) for further discussion. 7 Ibid., at p. 90. 8 See the event transcript of the debate on ‘Is Communist Party rule sustainable in China?’ at p. 20, available at: http://www.carnegieendowment.org/files/Carnegie_ Debate%20Event%20Transcript.pdf. 9 See Dong (1998: 90) for further discussion. 10 In the past three decades since the adoption of economic reform, China has achieved average annual GDP growth rate of 9.8 per cent – see ‘Fagaiwei: Xin Zhongguo Chengli 60 Nianlai Zhongguo Jingji Shili Xianzhu Zengqiang’ [The Committee of Development and Reform: China’s economic power has increased enormously 60 years after the founding of the PRC]. Available at: http://news. xinhuanet.com/fortune/2009–10/02/content_12171958.htm. Also from 2002 to 2006, China’s GDP achieved annual GDP growth of over 10 per cent. Its GDP reached RMB2,100 billion in 2006, which doubled the 2002 GDP. China became the fourth largest economy in the world by 2006. Its per capita income increased from US$1,100 in 2002 to US$2,010 in 2006, again almost doubled. But the per capita income of peasants were relatively low and was only RMB3587 (about US$500) see Dong (2008: 10–20). 11 See ‘China is now the world’s second largest economy’ at: http://247wallst. com/2009/12/27/china-is-almost-certainly-worlds-second-largest-economy/.

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12 See, for example, ‘Four little dragons’, at: http://www.encyclopedia.com/doc/1P2– 1217404.html. 13 See Tian-yong (2004: 1) for more details. 14 See Minxin Pei, paper presented at the Conference on Democracy, Market Economy, and Development, sponsored by the World Bank and the government of the Republic of Korea, 26–27 February 1999. 15 Ibid. 16 See Renske Doorenspleet (n.d.) for further discussion. 17 See ‘Minzhu yu Jingji Fazhan’ [Democracy and economic development], at: http:// www.xschina.org/show.php?id = 8450. 18 See Xu Yaotong, ‘Dang de Ba Da he Dangne Minzhu’ [The 8th National Party Congress and internal democracy within the CPC]. 19 See ‘Guanyu Jianguo Yilai Dangde Ruogan Lishi Wenti de Jueyi’ [The resolution on several historical issues of the CPC after the founding of the PRC], para. 15, adopted by the 6th Plenary Session of the 11th Central Committee of the CPC on 27 June 1981, in Resolution on CPC History, 1949–81 (1981), at pp. 23–4. 20 See Wang Yongbin (n.d.) for more details. 21 See ‘The Fourth Plenum of the 14th Central Committee’ at: http://news.cqnews. net/cqnews_chat/200909/t20090915_3595119.htm. 22 This article is available at: http://ganzhi.china.com.cn/chinese/OP-c/348331.htm. 23 See Li Junru (n.d.) for further discussion. 24 See Articles 4 and 7 of the Regulations. 25 See Art. 27 of the Charter of the CPC. 26 See ‘Jihuo Dangnei Gaige Shidian, Sichuan Cheng Zhongguo Zhengzhi Gaige Shiyantian’ [To activate reform within the CPC, Sichuan has become the experimental field for China’s political reform], 9 June 2005, 11:05, from Fenghuangwang (Pheonix Net): at: http://news.memail.net/050609/120,2,1525872,00.shtml. 27 See ‘Dangdaibiao Dahui Changrenzhi, Ya An Shishui Chengxiao lingren guanzhu’ [Permanent Deputies to Party Congress, experiment in Ya An and its effect catches attention], originally from Ban Yue Tan (Bi-weekly Commentary) at: http://news. xinhuanetcom/newscenter/2003–9/05/content_1064336.htm. 28 See Li Zhi-hong (2003) for more details. 29 See ‘Zhongzubu Shidian Dangnei Minzhu Gaige: Hubei Luotian Xianwei Bushe Changwei’ [The Organization Department of the Central Committee of the CPC tries reform of internal democracy within the CPC: there will be no standing committee of County Party Committee in Luotian, Hubei Province], available at: http://politics.people.com.cn/GB/10273438031.html. 30 See ‘Taizhou Quanmian Shixing Dangdaihui Changrenzhi’ [Taizhou implements comprehensively the fixed term system for All Deputies of Party’s Congress], at: http://www.chinaelections.org/newsinfo.asp?newsid = 9964. 31 See Wang Changjiang (n.d.) ‘No Elections, No Democracy’. 32 Professor Zheng Xiao-yin in the Journal of Finance (Caijin) available at: engine. cqvip.com/content/I/81160x/2003/000/010/jy23_14_9095942.pdf. 33 See Xu Yaotong (n.d.) for details. 34 See Ji Fang at: http://www.bjpopss.gov.cn/bjpopss/xzit/xzit/20050427b.htm.zh. 35 See Wang Yicheng, 2005, ‘Dui Fazhan Dangnei Minzhu Wenti de Ruogan Sikao’ [Several thoughts on the issue of developing internal democracy within the CPC], originally from Zheng Zhixue Yanjiu (Research on Politics), vol. 2, available at: http://chinaps.cass.cn/readcontent.asp?id = 4834. 36 At the end of 2008, China’s population was 1.328 billion, at: http://news. xinhuanet.com/ziliao/2003–01/18/content_695553.htm. 37 See 1982 Constitution Arts. 2, 57 and 96. 38 See 1982 Constitution Arts. 59 and 97.

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39 See Selected Works of Mao Zedong (combined version), Renmin Press, 1968 version, at pp. 969–70, quoted in Dingjian (2002: 2–3). 40 See Part V of the Working Report entitled ‘Yanzhe You Zhongguo Tese de Shehui Zhuyi Daolu Qianjin’ [March along the socialist road with Chinese characteristics]. 41 See the Report of Hu Jintao at the 17th Central Committee of the CPC, available at: http://news.xinhuanet.com/newscenter/2007–10/24/content_6938568.htm. 42 See Tang Juan (2004: 39–41) for details. 43 See Zou Shubin et al. (2004) for more discussion. 44 See Joseph Cheng (in press) ‘Whither China’s Democracy? In Commemoration of the Twentieth Anniversary of the Tiananmen Incident’. 45 See ‘Hu Jintao: Gaodu Zhongzhi Jiji Tuijin Dangnei Minzhu Jianshe’ [Hu Jintao: high attention should be paid to active promotion of internal democracy within the CPC], at: http://cpc.people.com.cn/BIG5/64093/640571441.html; also ‘Hu Jintao Qiangdiao: Jianding Buyi Fazhan Shehuizhuyi Minzhu Zhengzhi’ [Hu Jintao: to insist on the development of socialist democratic politics], at: http:// xcb.gzhu.edu.cn/Article/ShowArticle.asp’ArticleID = 442; also ‘Wen Jiabao: Shehuizhuyi Minzhu Guigeng Jiedi shi rang Renmin Dangjia Zuozhu’ [Wen Jiabao: the essence of socialist democracy is to let people be the master], at http:// news.xinhuanet.com/misc/2007–03/16/content_5855588.htm. 46 It is commonly understood from China’s media that Yu has close associations with senior officials in China including Premier Wen Jiabao. (See, for instance, Yu Keping, ‘Minzhu shi ge Hao Dongxi’ [Democracy is a good thing] at: http://news. xinhuanet.com/comments/2007–01/08/content_5578110.htm.)

14 Conclusion Law, wealth and power in China Randall Peerenboom

Introduction The chapters in this book cover a wide range of topics, adopt various perspectives and methodological approaches, and reach sometimes similar, sometimes differing, conclusions on a host of key issues. Rather than attempting a general summary, I will address two central sets of issues regarding law, wealth and power in China. The first set concerns the relationship between law and wealth, or law and development, as the field is more commonly known. What light do the chapters shed on the hotly contested chicken-and-egg question of whether proper laws and institutions cause growth or growth strengthens institutions and leads to better laws? Assuming laws and institutions are important for growth, which laws and institutions? What factors have shaped or influenced the development process so far? Longer term, can we expect more convergence or divergence – will market reforms and efforts aimed at more fully implementing rule of law continue, or will the reform process be reversed or stall? Will China ultimately produce a reasonably stable, unique variety of capitalism and indigenous variant of rule of law? The second set of issues focuses on the law–wealth–power nexus. That such a nexus exists is hardly news, or unique to China. Nevertheless, the accumulation of wealth has been extremely rapid in China, and occurred in a context of significant state ownership and regulation of the market. Moreover, while opportunities for participation in the policy-making process have increased, the political system as a whole remains authoritarian and dominated by the Communist Party of China (CPC). Who then has benefited from reforms and who has suffered? More specifically, how has the accumulation of wealth affected the policy-making process and the operation of the legal and political systems? To what extent has China suffered from problems of crony capitalism? Are we witnessing the emergence of an authoritarian version of political capitalism similar to the type that has undermined political and legal reforms in the newly established Eastern European democracies?

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Law and development The relationship between law and economic development has been much contested, globally, within Asia and in China (Peerenboom 2002; Clarke 2003; Clarke et al. 2006; Dam 2006; Trebilcock and Leng 2006; Rodrik 2007; Trebilcock and Daniels 2008). There is widespread agreement, and ample empirical evidence, that rule of law and economic growth are highly correlated (North 1990; Barro 1997; Knack and Keefer 1997; Chang and Calderon 2000; Kaufmann 2009). However, there continues to be considerable disagreement about the causal relationships, with some arguing that wealth leads to stronger institutions, while others argue that strong institutions lead to higher growth (Chang and Calderon 2000; Rigobon and Rodrik 2005; Kaufmann 2009). There also continues to be disagreement about which institutions are necessary, at which stage of development, and how to prioritize or sequence economic, legal and political reforms, including whether rule of law should precede democratization (Barro 1996; Carothers 2007; Rodrik 2007; Peerenboom 2010b). The interplay of wealth and institutions Contrary to popular opinion, neither China nor Asian countries more generally are an exception to the general pattern of a high correlation between law and development. On the whole, China’s rankings are consistent with its level of development: China scores slightly above the average in its lower-middle income class on most indices of rule of law and good governance, as well as on most measures of human rights and well-being, with the notable exception of civil and political rights (Peerenboom 2007a). Moreover, and in some ways more revealing, provincial-level comparisons demonstrate the same general relationship between wealth and institutional development as shown globally. There is a strong correlation between provincial GDP per capita and legal education measured by the number of law schools and law graduates per capita (.90), lawyers per capita (.98), and litigation (.92) (Zhu 2007). Wealthier areas produce more laws and regulations. There are more, and more highly trained, judges in wealthier areas. And public attitudes reflect differences consistent with general growth patterns: urban residents are much more likely to litigate (even though rural residents have a higher incidence of grievances) and are more likely to be satisfied with their experiences in court than rural residents (Michelson 2008). Yet even these broad correlations conceal as much as they reveal. They conceal wide regional and rural–urban differences, as well as wide variation in terms of areas of law, different levels of courts, and the level of professionalism of legal institutions and key legal actors such as the police, procuracy, government officials and lawyers. As is true for any country, it is more accurate to talk about legal systems in China than about ‘the Chinese legal system’. Accordingly, legal scholars have long called for more calibrated analyses, and

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sought to disaggregate the legal system in many different ways along many different dimensions.1 Fortunately, the chapters in this volume shed light on several more specific issues. Take the issue of causation. The detailed narrative of many chapters shows that causation works in both directions: wealth leads to better laws and stronger institutions, and better laws and stronger institutions lead to higher growth. Legislation may prohibit, permit, discourage or encourage some forms of economic activity. Similarly, some forms of economic activity by their nature require formal state legal institutions, such as registration of security, exchange of stocks or enforcement of court judgments. There may be informal non-state mechanisms capable of performing similar functions, but they will not be perfect substitutes. While laws and institutions are necessary for sustained growth, they are of course hardly sufficient. In many developing countries, laws are passed, institutions are created, and nothing happens – or rather economic activity continues to the same extent and in the same manner as before. Conversely, in some countries, including China, there are rapid increases in economic activity, including foreign investment, without significant change in laws and legal institutions. There were undoubtedly more laws to guide foreign investors in 1993 than in 1978, and institutions had demonstrably improved. But the sharp spike in foreign investment beginning in 1993 cannot be attributed to any sudden, major changes in the legal system. Rather, they owe more to Deng Xiaoping’s famous southern sojourn in 1992, where he threw his hefty political weight behind further market opening, ending concerns after the Tiananmen event that China would slow or even reverse the transition to the market. At the same time, global factors led multinational corporations to look to emerging markets for new sources of growth. Moreover, as the contributors to this volume indicate, a comprehensive set of laws and institutions for a market economy cannot and should not be produced all at once. China has only recently passed such key laws as the Property Law, the Antimonopoly Law and a reasonably comprehensive Bankruptcy Law. For the most part, laws have followed and reflected economic developments, or been passed in response to market demands. In some cases, however, laws have been passed ‘prematurely’ in the sense that once promulgated, they were largely ignored. The 1986 state-owned enterprise Bankruptcy Law is a good example. The law failed to function as intended. There were relatively few bankruptcies during the 20-year interlude to the passing of the new Bankruptcy Law, and the process was more of a bureaucrat-driven politicaladministrative process than the legal proceeding contemplated by the law (see Bath and Ip in Chapter 12). Similarly, although it has long been possible for foreign investors to establish foreign investment enterprises limited by shares, they have rarely chosen to do so for a variety of practical, commercial and regulatory reasons, not the least of which has been the difficulty of obtaining the necessary approvals to list the company. More recently, the Antimonopoly Law included (somewhat watered-down) provisions to limit

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administrative monopolies, but these provisions have not, as yet, played a significant role in practice. On the whole, however, China has managed to avoid the fate of many developing countries where the passage of numerous laws that are not implemented, or that fail to have their intended effect, creates a legal ‘Potemkin village’.2 China has largely managed to avoid this fate by adopting a non-ideological, pragmatic, gradual approach to reforms, rather than the neoliberal big-bang approach of Eastern Europe and other developing countries. In competing in the ‘regatta’ to see which country would be the first to join the European Union, Eastern European countries copied EU member laws ‘by the yard’ (Pistor 2004) in a frenzied attempt to comply with more than 80,000 pages of highly specific technical requirements (Prˇibán 2009). Although Chinese legislators have borrowed freely from foreign laws, institutions and practices (both common and civil law), they have adapted them to local circumstances, often based on local experiments that were only ramped up to national scale if they proved successful in the light of circumstances in China at the time. As the chapters further demonstrate, the relationship between institutions and development is a rolling one. Take the issue of enforcement of judgments and local protectionism. Although enforcement of judicial decisions is often portrayed as difficult in China, recent studies have found significant improvements in wealthier urban areas, with continued problems in poorer rural areas (Gechlik 2006; He 2007). The main reasons for the improvement in enforcement are changes in the nature of the economy; general judicial reforms aimed at institution building and increasing the professionalism of the judiciary; and specific measures to strengthen enforcement. The economy in many urban areas is now more diversified, with the private sector playing a dominant role. The fate of a single company is less important to the local government, which has a broader interest in protecting its reputation as an attractive investment environment. As a result, the incentive for governments to engage in local protectionism has diminished. Similarly, the development of the stock market has given rise to demands for institutional changes to protect minority shareholders. As Nicholas Howson (2010) notes, amendments to the Company Law in 2006 represent a radical shift from a self-enforcement to a litigation-centred model for resolving corporate disputes. Based on a study of over 1,000 corporate law cases, he found that Shanghai courts are now more competent, autonomous and independent, and have ruled against government entities, SOEs and other politically and economically powerful, well-connected commercial actors and investors. On the other hand, the courts continue to defer to national economic and social policies in contravention of the Company Law, and are reluctant to hear cases involving companies limited by shares. There are a number of reasons for these limitations. Some reflect the limited experience of the courts with new types of claims; others reflect plaintiff and judicial deference to the China Securities Regulatory Commission and public prosecutor; still others reflect concerns for market and social stability. Whatever the reasons,

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Howson argues that the failure to apply the new provisions to public companies is ‘tragic’ because the Company Law was amended in part precisely to address corporate governance in such firms. He suggests that the current approach of Shanghai courts may not be sustainable in the long run, given the rapid rise of group plaintiff cases and popular anger against politically and economically privileged insiders. If history is any guide, the courts will begin, cautiously and on a limited basis, to accept such cases. As they accumulate experience, adjustments will be made, and at some point, the Supreme People’s Court will issue one or more interpretations to clarify the rules and provide further guidance to investors and judges alike. Which institutions are necessary for growth? The overstated role of the courts As the securities example suggests, China’s experiences call into question one of the fundamental tenets of the law and development movement, and a central focus of the rule of law promotion industry’s approach of advocating ‘international best practices’, namely the importance for economic growth of protection of private property rights by independent courts.3 The transition to a market economy has created many new property rights, including private ownership of land use rights, new forms of intellectual property and contractual rights, labour rights, and rights for creditors in the bankruptcy process. Yet in many cases, these rights were not initially clearly defined and even now are still subject to debate and interpretation. They have been, and often still are, subject to overriding public interests including social stability and national economic goals, whether higher aggregate growth under Deng and Jiang, or concerns for a harmonious society, sustainable development and green growth under Hu and Wen. Thus, as in most countries during the early stage of economic take-off, there has been a great transfer of land use rights from less productive to more productive users. While contributing significantly to higher growth rates, the land-taking process has been marred by social protests and allegations of corruption and inadequate compensation. Similarly, China has passed intellectual property laws that are TRIPS-compliant. Again, however, as is typical for other countries (including Euro-America) at a similar stage of development, implementation of IP rights of both foreign and domestic companies remains a problem (AmCham 2009; Chang 2007; Reinert 2007).4 Perhaps most notably, notwithstanding a dramatic increase in commercial litigation, courts have not been the sole, or in many areas primary, means of enforcing property rights. The courts still refuse to hear certain types of securities cases. As Bath and Ip show in Chapter 12, the bankruptcy process continues to be driven by government officials, notwithstanding the increased role for courts under the new law. Moreover, consumer protection problems continue to be dealt with primarily through administrative and political mechanisms, combined with criminal law prosecutions in extreme cases.

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The courts have refused or been reluctant to accept mass tort cases, such as those arising in the wake of the Sichuan earthquake (where victims blamed faulty construction for injuries and deaths) and the poisoned milk scandal. Meanwhile, foreign investors have generally relied on arbitration, often abroad, for dispute resolution (although in most cases they still need to turn to the domestic court system if compulsory enforcement of the arbitral award is required). China’s growth demonstrates that the emphasis on judicial enforcement of property rights is too narrow. Much more important to economic growth and investors are solid macroeconomic policies and the quality of the business environment. China’s macroeconomic policies have generally been sound, if somewhat mercantilist in terms of an undervalued RMB. Despite occasional spikes in prices, there have been no bouts of hyperinflation. The government has responded reasonably effectively to various periods of overheating. Limitations on capital account convertibility prevented the Asian Financial Crisis from spreading to China. There has also been significant progress in improving the business environment. In 2009, China ranked 29th out of 133 countries on the 2009 World Economic Forum’s Global Competitiveness Index, 20th out of 57 countries on the Institute for Management Development World Competitiveness Index and 26th out of 55 countries on the World Economic Forum’s Financial Development Index (leading all BRICs on both indices), and 83rd out of 208 countries on the KOF Swiss Economic Institute Globalization Index. According to the World Bank, in 2008 China ranked 63rd out of 125 countries for trade policy, 30th out of 151 for trade facilitation, 83rd out of 181 for institutional environment, and 46th out of 134 for network readiness (Teng et al. 2010). In 2008, the World Bank ranked China 92nd out of 178 countries for doing business overall. To be sure, there are still many weaknesses in institutions and the regulatory framework. 25 to 28 per cent of investors cite as major challenges inconsistent regulatory interpretation, excessive bureaucracy, unclear regulations and lack of transparency, although their single biggest challenge (32 per cent) is ‘management-level human resource constraints’. Notable for their absence are the lack of judicial independence, the inability to enforce property rights and corruption, judicial or otherwise (AmCham 2009). Lest there be any doubt about what drives business decisions, investors cited as the major risks: a slowdown of the Chinese (58 per cent) and global (44 per cent) economies, followed by labour costs, global financial market instability, increased protectionism, RMB appreciation and Chinese financial market instability. Only after listing all of these economic/business risks did they mention ‘increased bureaucracy’ (ibid.). Moreover, for all their complaints, over 80 per cent of respondents have been profitable since the surveys began in 2003, with two-thirds enjoying profitability rates that meet or exceed their company’s global rate. In most years, over 90 per cent of respondents have been bullish about their companies’

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future in China, with more than 80 per cent bullish about their five-year outlook even in 2009 despite the global economic crisis (ibid.).

Whither China: the prospects for the economy? Where then is China headed? Are we likely to see convergence toward a more market-oriented economy or divergence, a continuation of open-door policies or increased protectionism? Contributors to this volume are divided on these issues. All agree that state control of the market has decreased, although it remains significant. They disagree, however, over the long-term trends. Jonathan Anderson argues that the best way to view China is ‘as a predominantly market economy with a few state-induced distortions, rather than a traditional socialist system with a mere market veneer’ (Chapter 1). In his view, the clear trend is for a smaller state sector, a larger private sector, and less state intervention. Hui Huang (Chapter 6) foresees further convergence in the regulatory regimes for foreign and domestic investors, with the process being driven by the WTO, the demands of domestic companies (and foreign companies) for a level playing field, and concerns for efficiency, including the desire to reduce regulatory costs and rationalize governance. However, he cautions that for a variety of practical and political economy reasons, the convergence process will be piecemeal and take some time to complete. On the other hand, Xianchu Zhang (Chapter 7) notes that the global economic crisis slowed the growth of the private sector. Many small and mediumsized private enterprises went bankrupt, while much of the stimulus package went to SOEs or to traditional manufacturing or infrastructure projects dominated by SOEs. Longer term, he sees SOE reform leading to a repositioning of the state sector, with fewer but larger companies, and the promotion of national champions able to compete with foreign multi-national companies. Yingjie Guo (Chapter 2) suggests that the global economic crisis has led to: the unequivocal dismissal . . . of American-style division of power and further privatization, and [reinforced] its emphasis on the importance of maintaining the primacy of public ownership, effective state intervention in the market, and the leading role of state-owned enterprises in China’s global economic expansion. He also suggests that the long-term result may be a hybrid or Chinese variant of market capitalism, with a relatively greater degree of state control than in other countries. Still others see different paths emerging within China. Yasheng Huang (2008) contrasts the ‘entrepreneurial, market-driven rural China’ of the 1980s with the state-led urban-centred model of the 1990s, arguing that the former is more conducive to growth, more politically independent and more vibrantly competitive. The latter exacerbates income inequality and is prone to

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corruption. He also sees in Zhejiang and the Wenzhou model the kind of virtuous ‘entrepreneurial capitalism’ advocated by Baumol et al. (2007), with a heavy reliance on private initiatives, a noninterventionist governmental style and supportive credit policies for private firms, as opposed to the less virtuous state-led capitalism of Shanghai and Jiangsu. Intriguingly, however, given his preference for the more neoliberal Wenzhou model and entrepreneurial capitalism, he also praises the Hu-Wen administration for charting a new course that avoids the Deng-Jiang emphasis on aggregate growth for more sustainable and equitable growth, as reflected in national policies promoting a harmonious society, scientific development and energy efficiency.5 In fact, China’s growth would seem to be at odds with virtually all the principles enunciated by Baumol et al. for a successful entrepreneurial economy. It has not been easy to form businesses, and formal bankruptcies have been limited. The financial system by all accounts has been inefficient in channelling funds of savers to entrepreneurs while continuing to prop up loss-making SOEs. Labour markets have become more flexible, but SOEs continue to have too many employees, and recent laws have sought to protect labourers (see Kay-wah Chan’s Chapter 8). The legal system has often fallen short in protecting property and contract rights. R&D has until recently been limited. And competition and antimonopoly laws have not played a significant role (see Zhang’s Chapter 7). Nevertheless, China has enjoyed, and continues to enjoy, high growth rates, even with the global economy mired in recession. If, as Huang contends, Zhejiang outperformed Jiangsu because it more closely adhered to some of these principles, then perhaps China’s overall growth rate could have been even higher. However, there are reasons for doubt: these are not the principles followed by Euro-America to get rich; developing countries in Latin America and elsewhere that have followed such policies have not grown as fast as China and Asian countries, which have followed a different development path; and these principles, even if on the whole they are growth-promoting, are idealized abstractions consistent with wide institutional variation and thus provide policy-makers in developing countries insufficient guidance on how they are to be prioritized and operationalized in light of local circumstances, including, for example, a weak judiciary, the lack of bankruptcy specialists, and not least of all competing factions out to promote their own interests.6 It bears noting that while Baumol et al. favour entrepreneurial capitalism, or rather some combination of entrepreneurial and big-firm capitalism, over state-led and oligarchic capitalism, they also acknowledge that developing countries may be best served by state-led capitalism. Moreover, China’s investment in large, albeit less efficient, SOEs is intended to ensure social stability, and is an investment in the long-term health of the economy by creating the fixed capital stock to support national champions.7 Similarly, the current heavy investment in infrastructure rather than consumption facilitates long-term growth for both the public and private sectors.

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Explaining development patterns and future trends In explaining developments to date and possible future trends, contributors draw on four broad categories: ideology, culture/history (including institutional culture and path dependencies), wealth, and political economy. Guo, Zhang and Chen emphasize socialist ideology, most notably in the wariness of a robust private sector and the treatment of land use rights and property rights. However, like most commentators, they also accept that socialism as an ideology is less significant and more malleable today, and in any event incapable of providing policy-makers useful guidance on the pressing specific issues. Others attribute the differences to inertia and path dependency. Chen and Zhang cite such examples as references to the plan in the contract law even though the contract law applied to private firms as well and China was already growing beyond the plan. Zhang also suggests that the limits on SOEs, for example, in forming partnerships, were motivated by the fear of loss of state assets. Su Lin Han in Chapter 9 notes that opposition to taking securities over movable assets was in part a reflection of China’s civil law heritage. Wealth factors have also played a role. As in many developing countries, the focus has been on aggregate growth and social stability, not consumer rights, labour rights, environmental rights or social welfare claims. Moreover, as in all lower-middle income countries, institutions are relatively weak, and resources too scarce to satisfy all legitimate claims. Rather than spending scarce public resources, the state has relied on private funding, often from families, for education and health. China may be able to overcome institutional inertia and path dependencies, and outgrow the resource constraints that plague middle income countries. More significant in terms of long-term development are political economy issues, which as in other countries have intensified in China as China reached the middle-income stage. As the chapters amply demonstrate, China is a much more pluralistic society nowadays. The policy-making arena is increasingly populated by a myriad of competing interest groups, with economically powerful groups competing with – and generally outcompeting – socially disadvantaged groups of labourers, migrant workers, pensioners, urban and rural poor. Meanwhile, the national and local governments press their own agendas, administrative agencies compete for turf, and the courts struggle for greater independence and authority vis-à-vis people’s congresses, administrative agencies, the police and the procuracy. Most fundamentally, the CPC wants to remain in power. Zhang and others suggest that the Party’s desire to remain in power compels them to seek control of the commanding heights of the economy, including a large public sector. However, political parties in other countries have been able to remain in power for long periods without the state actually owning companies; conversely, extensive state ownership has not been enough to ensure

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prevent regime change in many countries. The two main planks of CPC legitimacy are widely held to be sustained economic growth and nationalism. The government’s need for sustainable growth may require further liberalization of the economy, including further SOE reforms that would address the imbalance between SOEs and the private sector in accessing financing, technology and other resources, as well as further reforms of the financial and securities sectors, including allowing more competition from foreign banks and securities companies. Some commentators have suggested that the political survival of the CPC rests not on growth but a pervasive patronage network that fosters elite corruption (Pei 2006; cf. Guo Chapter 2). In this view, there is a trade-off between economic efficiency and political stability. Liberalizing the market would deprive government officials and insiders of opportunities to engage in predatory rent-seeking, asset-stripping, insider trading and crony capitalism. The elite would then defect, leaving their posts and exiting the Party. There may be some truth to this view. The CPC has not been able to eradicate corruption. But it has eliminated or mitigated various forms of rentseeking, asset-stripping, insider trading and other self-interested behaviour on the part of elites and insiders. It has broken down many administrative monopolies, and subjected central SOEs to market competition (Chapter 1). Indeed, Naughton (2007) contends that Pei’s analysis of the economic situation ‘gets the reality exactly backwards’. Whereas policy-makers were indecisive through the mid-1990s and unable to push through reforms in the face of opposition from powerful entrenched interests, since then the government has tackled many of the most difficult problems. These include downsizing SOEs, forcing the military to sell off its interests in commercial enterprises, abolishing allocation of foreign exchange and the dual-tier foreign exchange system, and most importantly regaining central control over the fiscal system though tax reforms (see Garrick forthcoming). In sum, whether China’s market reforms will continue remains to be seen. There appears to be growing recognition that the mercantilist export-led growth model is no longer viable, and that there must be a transition to a more consumption-based model. But the basic principles that have guided reforms are likely to continue to operate. As a result, the reform process is likely to be gradual, pragmatic and driven by results rather than ideology.

Whither the legal system: towards liberal democratic rule of law or consolidation of socialist rule of law – or both, or neither? Opinions about the fate of the legal system reflect the same type of diversity as about the future of the economy. Some commentators see legal reforms as stalled (Pei 2006), while most others see progress, albeit often of a twosteps forward, one-step backward nature (see deLisle 2007; Dowdle 2007; Peerenboom 2007b). More fundamentally, some people see (or hope to see) China evolving toward a liberal democratic rule of law, or at least a Chinese

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variant of democracy (Lin’s Chapter 13). Others see China mired in MarxistLeninist rule by law. Still others see a hybrid form of non-democratic socialist rule of law as the most likely outcome in the short term, and possibly even in the longer term (Guo’s Chapter 2). The factors influencing legal system developments fall into the same four broad categories as for market reforms. First is ideology. While most commentators portray socialism as increasingly incoherent, vacuous and insignificant, socialist ideology has played a role in recent debates over important laws, including the Property Law and labour laws. Ideology has also played a role in recent debates over judicial reforms. Taking note of the Colour Revolutions in the former Soviet republics where foreign governments supported international and domestic NGOs that used the courts to push for democratization and political reforms, Party leaders have expressed concern that foreign parties may use legal institutions to undermine party power. As a result, they have been adamant in insisting that Chinese courts will not simply mimic courts in Western liberal democracies. These announcements have been coupled with an ongoing effort to shore up loyalty in the courts, procuracy, and public security institutions, and are captured in Hu Jintao’s policy, enthusiastically endorsed by the new president of the Supreme Court, of the ‘three supremes’: [the supremacy of the interests of the Party, people, and of the constitution and laws.] Nevertheless, the politburo has reconfirmed its commitment to rule of law; Hu Jintao emphasized in a major speech to mark the thirtieth anniversary of opening and reforms that the only way forward is to deepen reforms, and senior leaders within and outside the judiciary have repeatedly called for changes that would increase the competence, independence and authority of the courts. The Supreme People’s Court Third Five-Year Agenda is perhaps the best indicator of where judicial reforms are heading in the short term. The new agenda reflects the seemingly inconsistent trends to ensure that the courts are under sufficient political control to prevent them from undermining the regime, while continuing efforts to enhance professionalism, efficiency and justice. Thus, on the one hand, the agenda repeatedly emphasizes that the courts must operate in a way consistent with China’s political structure, level of development and national conditions. On the other hand, the agenda also sets out an ambitious programme of technical reforms that target criminal, civil and administrative law, and enforcement issues. The second set of factors is historical or cultural. Guo and Andrew Chan (Chapters 2 and 4) in particular emphasize the importance of historical forces. But many other contributors also point out how China’s legal institutions reflect their socialist or civil law origins. Indeed, the force of history is evident in China’s cautious approach of allowing foreign investors access to the market, in its concern for sovereignty in human rights cases, and its reluctance to allow foreign pressure to influence the way courts handle controversial cases such as the recent trial and execution of a British citizen of Pakistani

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descent despite claims of mental illness. These issues are difficult to understand without reference to the 100 years of national humiliation, when foreign powers compelled China to sign a series of unequal treaties, forcing open trade ports and establishing foreign concessions in major cities; where under the principle of extraterritoriality, Chinese courts were denied jurisdiction over foreign citizens charged with crimes (Ruskola 2008); and foreign entities dominated the commanding heights of the economy, resulting in stagnant growth and deteriorating living conditions.8 While cultural and historical factors should not be dismissed, neither should they be uncritically accepted as determinative of future outcomes. There have been many changes in China over the past 30 years, not to mention the past 60 or 100 years. Moreover, other East Asian countries have been able to establish market economies and rule of law. In any event, cultural factors are likely to play a larger role in some areas than others. Family and criminal law are more culturally embedded, for example, than commercial law. Most of the commercial laws discussed in this volume are comparable to those found in Euro-America. To the extent they differ, it has more to do with differences in level of wealth and political-economy factors than history or culture. The influence of the third category – economic factors, including resource constraints – is still evident, though the degree of influence is declining or increasingly restricted to some regions or areas of law. In general, the lack of resources is particularly pressing in low income countries. In China, many of the poorer provinces are comparable to low-income countries, and, as we have seen, the strength of legal institutions on the whole tracks levels of wealth. Even in richer provinces, the lack of resources is still evident in how socioeconomic claims are handled. In many such cases, courts are not able to provide an adequate remedy, leading to disgruntled parties who then often take to the streets in protest. As a result, courts have tried to push such cases into political and administrative channels. In general, however, the central issue for most middle-income countries (MICs), including China, is not lack of resources but how the resources are allocated. Accordingly, the fourth category, political economy, is most crucial for determining whether MICs will continue to suffer the middle-income blues or graduate to the ranks of high-income countries governed by the rule of law.9 Political economy becomes more salient because there are more interest groups, more resources to fight over, and more venues to pursue one’s interests. In addition, the consensus over the need for very basic reforms gives way to different opinions about what is needed. Even when there is general agreement about basic principles, the wide variation in institutions, rules and practices leads to controversy, and provides stakeholders ample opportunity to pursue their own interests. As Rodrik (2007: 6) notes, ‘First-order economic principles – protection of property rights, market-based competition, appropriate incentives, sound money, and so on – do not map into unique policy packages.’ The same can be said for basic rule of law principles.

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Take, for example, the current debates over judicial reforms. Among the issues being debated are: What will the role of the judiciary be in policymaking? Over what types of cases will courts exercise jurisdiction? On what basis will judges decide them? What will the judiciary’s relations be with other political organs? Will the procuracy and People’s Congress continue to be able to review final court decisions? Will the court be able to determine its own budget? How much say will the judiciary have in promotions and appointments? What will the role of the court be vis-à-vis Party organs and the political-legal committee? There is widespread institutional variation on similar issues even in high income Euro-American countries known for rule of law. To be sure, there is no reason to expect that the courts in China should play the same role as in highincome countries, or even other MICs. For instance, there is considerable diversity in the allocation of decision-making powers among the legislature, executive branch and judiciary both globally and within Asia, notwithstanding a general trend toward juridification and the judicialization of disputes.10 The rule of law promotion industry and many human rights organizations tend to emphasize the US model of highly decentralized dispute resolution where a wide array of private and public actors have access to a wide range of courts with broad jurisdiction rules and great powers, with a prominent role for a huge and active legal profession highly mobilized to increase its importance and economic benefits by promoting rules supportive of class actions, punitive damages and contingency fees. Yet this model is an outlier globally.11 European and East Asian countries have generally adopted a more centralized coordinative approach, although they are now starting to shift toward a more decentralized system that emphasizes adversarial protection of rights rather than coordination of conflicting interests (Milhaupt and Pistor 2008; Ginsburg 2010). A more centralized coordinative approach in China would be neither surprising nor necessarily inappropriate, given the political system, level of economic and institutional development, nature and limits of civil society, and the traditional, civil and socialist origins of the legal system.

Law, wealth and power: the rise of political capitalism in China The chapters in this volume amply demonstrate that there is a relationship between law, wealth and power in China, as there is everywhere. For instance, Garrick cites in the Introduction a 2006 study that found that almost 90 per cent of the country’s top leaders in key sectors such as banking and finance, foreign trade, property development, construction and stock trading are princelings (i.e. children of high-ranking officials), and that princelings constitute 90 per cent of China’s billionaires. Anderson notes in Chapter 1 that SOE reforms in the mid-1990s resulted in massive closures and sales, often to insiders, leading to charges of assetstripping and unfair enrichment. The populist pundit Lang Xianping caused

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a public uproar with his exposés of management buyouts, which led to staggering wealth for managers while workers were laid off and paid only minimum benefits. Chan (Chapter 8) documents the rising income inequality and the travails of both SOE and migrant workers, with different regions experiencing different problems (see also Gallagher 2005; Lee 2007; Hurst 2009). The main concerns of workers in the SOE-dominated northeastern rust-belt are job security, poor working conditions, and the failure to pay wages, unemployment, medical and pension benefits. The main concerns for migrant workers are back wages and labour law violations including excessive overtime and unsafe work conditions. As a result, labour mediation, arbitration and litigation have increased dramatically. However, the failure of these institutional mechanisms to adequately address labour concerns has resulted in a sharp rise of mass protests. Richard Hu points out in Chapter 10 that real estate developers have gotten incredibly wealthy while even relatively well-off middle-class citizens struggle under the weight of the three mountains: housing, education and health. Bath and Ip (Chapter 12) observe with respect to food and safety issues that the government ‘responded more quickly and effectively to the loss in valuable export trade than to the human toll resulting from food safety incidents at home’. They also note in their discussion of the winners and losers in the revision of the Bankruptcy Law: There is a major and continuing conflict between the efforts made by some divisions and departments of the Chinese government to draft and effectively implement laws which meet international standards in providing for protection and equality of treatment for consumers, creditors and debtors, on the one hand, and the attempts of powerful political and business sectors of the Chinese economy to orient and utilize the system in a way which is most advantageous for their own economic and political interests. This conflict not only affects the content of new legislation which is principally designed to change the traditional balance and to benefit such parties as small creditors and consumers; it also affects the implementation of the laws by courts and regulators and limits the ability of the beneficiaries of the legislation to enjoy the rights and protections provided by it. More generally, Kennedy (2005) found that the influence of lobbyists and business associations is closely related to their percentage of GDP: money talks. Finally, the rise of the mafia and criminal organizations, often operating under the protective wing of corrupt government officials, has exploded into popular consciousness in recent years, propelled by the emergence of the crime-fighting, media-savvy Bo Xilai.

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None of this is particularly surprising, or, save the details, specific to China. The transition to a market economy in former communist states also led to asset-stripping and more flexible labour markets, and in many cases the rise of criminal gangs. More generally, labour has generally lost out in the face of globalization over the past two decades, although certain segments of the labour market have benefited tremendously. Developing and developed countries alike have experienced rising income inequality, and pressure to maintain social welfare systems at previous levels (Gilbert 2008; Neubeck 2006). The influence of big business is particularly pronounced in technical areas of commercial law. Remarkably, Wall Street and City investment banks have been able to mitigate popular pressures for greater regulation notwithstanding the worst financial crisis in a century and a massive bailout by Main Street taxpayers. In general, the main protagonists in bankruptcy law reforms are the national legislators, market actors brokered by the ministry of commerce and finance, including banks and representatives of big business, and insolvency specialists including lawyers, economists and legal academics. As expected, given collection action problems and the technical nature of such reforms, trade creditors and small businesses, NGOs and individual citizens generally play, at most, a minor role in the policy-making process (Halliday and Oh 2009). But what do all of these developments mean for China’s future? Do they demonstrate the rise of the kind of crony capitalism that eventually led to the downfall of the Suharto regime in Indonesia or the kind of political capitalism that has undermined legal and political reforms in many Eastern European countries? Here, hard and fast conclusions are hard to come by for various reasons: the lack of more precise standards to measure vague concepts such as crony capitalism and political capitalism; the difficulty obtaining accurate, systemic (as opposed to anecdotal) evidence; and the complicating factor that developments in China have not always benefited the rich over the poor or favoured entrenched (corrupt) interests over public interests. For instance, as Chan (in Chapter 8) notes, despite the general trend toward flexible labour markets, a host of laws and regulations have been passed in recent years that strengthen the position of labour. Moreover, while many companies vowed to leave China if such laws were passed, few have, and those that did depart were mainly small, low-tech companies that left because of rising energy and raw material costs. As the AmCham (2009) survey noted, most foreign companies remain bullish on China. And while a number of small and medium enterprises did go bankrupt in recent years, the main reason was the global economic crisis, not rising labour costs. In any event, the relocation or exit of smaller, low-end companies from the market is consistent with China’s overall development strategy to upgrade to higherend technology and a more value-added economy. Earlier drafts of the Labour Contract Law and Bankruptcy Law were more favourable to labour than the final version, which on the whole represented victories for the forces of global capitalism. For instance, while

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employees were originally placed ahead of secured creditors in early drafts of the Bankruptcy Law, in the end they ended up in their usual position further down the queue. Nevertheless, employees have clawed back some of the ground lost during the law-making phase in the implementation phase. Worried about mass protests from disgruntled employees, local government officials have limited the number of companies liquidated, promoted reorganization, rushed to prevent owners from abandoning their companies and fleeing China, and in some cases used government funds to pay off workers (see Su and He 2009). Similarly, consumers have not gone wholly unprotected. Laws and regulations have been passed to strengthen their claims, and the government has set up funds to compensate victims of the Sichuan earthquakes and the poisoned milk scandals. Moreover, the government has attempted substantial institutional reforms. As Dali Yang (2009) notes, China attempted to model the State Food and Drug Administration (SFDA) after the US Food and Drug Administration (FDA). The SFDA was created with noble goals in mind: to rationalize and improve administration in an area plagued by overlapping responsibilities and turf-struggles among administrative agencies. Major reform initiatives included the establishment of national drug standards, an overhaul of the approval and registration system, and the promotion of best practices for manufacturing, research, and sales. These reforms all failed to one degree or another due to various factors: lack of resources, including adequate professional staff able to complete in a timely way the demanding task of testing and certifying the safety of new and existing drugs, which led to the delegation of authority to lower-level government agencies; the need to produce cheap and affordable drugs; corruption and rent-seeking; lack of respect for intellectual property and the confidentiality of trade secrets; the need for local government officials to ensure high growth rates, which prevented them from shutting down companies that violated laws but played an important role in the local economy; and the limited effectiveness of Party and government discipline and oversight mechanisms. The crisis in the SFDA led to the execution of the head of the agency and the arrest of many other senior officials, as well as to a shake-up of the industry and wide-ranging institutional reforms that affect all agencies and industries. The SFDA’s budget has been increased; high risk areas have been identified for enhanced supervision; inspectors are rotated and carry out random checks; and there have been calls for greater monitoring by NGOs, civil society and the media.

Political capitalism in China and Eastern Europe A comparison of China and Eastern Europe, although inexact, is nevertheless illuminating.12 China and Eastern Europe are often contrasted as representative of two different development models, the pragmatic gradual approach versus the neoliberal big bang approach. Moreover, both are former centrally

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planned economies, and whereas Eastern Europe has democratized, China remains authoritarian. Nevertheless, both are sometimes portrayed as examples of political capitalism. The pessimistic view of Eastern Europe is that the original sin of privatization in the absence of rule of law led to massive asset-stripping, the accumulation and concentration of wealth, and the rise of oligarchs that have undermined the democratic political process and rule of law reforms. For instance, according to Ska˛pska (2009): The sheer amount of property to be privatized, and the strong interests involved, make the rule of law toothless, especially if the state is weak. Thus, instead of law-controlled privatization, one observes growing corruption, nepotism and clientelism as important mechanisms of transformation of the state-owned into private property . . . In this initial period of conquest, the rule of law could have only a purely symbolic meaning, far from reality . . . [I]n . . . postcommunist states, the object of a quasi-colonial conquest . . . was – and still is – state-owned, or national, property, and the tools of conquest often became the law, perceived as an instrument for the protection of strong interests. In this context, the principle of a democratic state ruled by law – an opening norm of all postcommunist constitutions – could acquire a quite dubious content. The regular courts are seen as chronically dysfunctional and strikingly inefficient (Ganev 2009, footnotes omitted): The evidence is undisputable – and the picture is abysmal. Survey after survey, opinion poll after opinion poll confirm that in Eastern Europe judges (as opposed to Justices) have a reputation as self-interested actors whose moral and professional integrity has been compromised, and courts are perceived as under-performing institutions that basically fail to deliver what is expected of them. In 2005 – i.e. after the first round of EU’s eastward expansion as a result of which most former Soviet satellites gained full membership – Estonia was the only country where more than 50% of firm managers assessed the courts as ‘honest and uncorrupted’. Since the late 1990s, the number of East Europeans who believed that their courts are “honest” has been declining, and only one in four businessmen expressed the view that judges can be trusted. Levels of dissatisfaction with the way ordinary judiciaries operate are astonishingly high in the EU’s newest members. A stunning 100% of those polled in countries like Bulgaria, Romania and Slovakia complained that they find it difficult to ensure a reliable access to transcripts of court proceedings; 90% reported problems with obtaining judicial decisions, on both trial and appellate level. Less than half of firm managers believe that courts are ‘able to enforce their decisions’ in countries like Hungary, Slovenia,

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Estonia, Czech Republic; the percentage is less than a third in Lithuania and Poland. The dominant view attributes the disappointing performance of regular courts to political economy factors. Privatization created a powerful class that saw rule of law and strong independent regular courts as either unhelpful for, or a threat to, their economic activities and interests. Former communist apparatchiks turned entrepreneurchiks as a result of privatization ‘stood to benefit if courts were marginalized, legal norms were not implemented, and the reach of law-enforcement agencies is curtailed’ (ibid.). Set against these perhaps overly bleak portraits of the reform process and status quo in Eastern Europe, China’s results to date and its prospects seem less discouraging. China’s gradual process of privatization and state-owned enterprise reform, the more diversified economy including a significant number of foreign invested enterprises, and the continuation of CPC rule have seemingly limited to some extent the type of political capitalism that has threatened to undermine the rule of law in Eastern Europe. The CPC has sought to maintain control over the commanding heights of the political system by ceding some control over the economy to private actors. At the same time, the CPC has co-opted private entrepreneurs by ‘inviting them to the party’, thus preventing the emergence of an independent capitalist class that could threaten the Party’s political rule. Rather than demanding greater political freedom and democracy, the new economic elite come to share the Party’s interest in maintaining economic growth and sociopolitical stability, even if at a cost of restrictions on civil and political rights and the postponement of democracy (Dickson 2008). Moreover, the imperative of sustaining economic growth for legitimacy purposes has placed some outer limits on corruption and political capitalism. While it is true that princelings have been granted oligopolistic franchises over key economic sectors, they have not been granted monopolies: there is some market competition in every major sector. Policy-making is also now much more contested. It is difficult for any particular group or industry to capture the process and maintain support for protectionist measures that harm other domestic constituencies for long. For instance, China’s steel industry is on the whole inefficient. Not surprisingly, large SOE producers have lobbied aggressively in favour of antidumping duties to slow imports from more efficient foreign producers (Kennedy 2005: 83–9). Between 1999 and 2002, they initiated three antidumping cases against eight countries, and also lobbied the government to initiate a WTO challenge to the US invocation of safeguard measures to protect the US steel industry. While in all three cases the government imposed duties of 50 per cent, the victory was, if not hollow, decidedly less than complete as many products were exempted. Foreign companies, joining forces with the Chinese companies that bought their products, lobbied hard. They argued successfully that the foreign products were necessary for sustained growth and domestic

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companies either could not produce them or could not produce them as cheaply and with the same high quality. Nor have private interests been allowed to treat the court system as their own private playground. Undoubtedly, large, well-resourced repeat players such as real estate developers enjoy an advantage in litigation. Nor should the possibility of judicial corruption be dismissed. Nevertheless, as Howson (2010) points out, Shanghai courts decided against politically powerful parties in all of the more than 200 securities cases where there was a discernible political interest. Similarly, Minxin Pei et al. (2010) found in a survey of corporate litigation that corporate parties are more likely than private parties to seek to influence judges, usually through gift-giving and dinners. The importance of banquets and gift-giving in Chinese culture presents many opportunities for direct or indirect contact between company managers, lawyers and judges. Much of the dining and gift-giving is part of longstanding social practices that occur among friends even when they have no cases pending rather than the explicit quid-pro-quo type where parties meet with a judge hearing a pending case in order to influence the outcome by offering gifts or other incentives. However, the impact of such behaviour is difficult to measure: the winning parties, whether corporate or private, generally believed that they won based on the merits of their case – the law and the facts – rather than because of corruption. On the other hand, a significant number of losing parties believe they lost because of ‘outside influence’. Minglu Chen in Chapter 11 on successful women entrepreneurs also suggests that: It is reasonable to expect that political titles from the People’s Congress, the PPCC or the FIC would provide obvious benefits for the entrepreneurs and their companies, as belonging to these organizations might give delegates regular and recurring access to decision-makers and the opportunity to influence laws and regulations, apart from protection from government seizures of their land and properties, preferential access to loans and licences and discretionary treatment in the implementation of policies. Yet she found no conclusive evidence of such direct benefits and favour in her survey and research. In short, just as political imperatives have shaped reforms and set the outer limits for the independence, authority and role of the judiciary and other state organs, political imperatives have imposed a certain amount of market discipline on the economy, the courts and government officials. As Guo observes in Chapter 2: It is in [the CPC’s] interest to prevent private wealth from translating into economic, social or political power that challenges its rule and to maintain sufficient control of, and leverage over, the market so that the

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latter does not result in dramatic reduction of state revenue, decapitate the mechanisms of state power and cause massive shocks to social stability.

Conclusion The jury is still very much out on where China is headed, and whether it will continue the impressive march toward superpower status. The global economic crisis may signal an acceleration of a tectonic shift of power to Asia in general and China in particular (Mahbubani 2008; Zakaria 2008; Jacques 2009). As China’s stature rises in the new world order, it is both natural and inevitable that China will exert greater influence over international systems. Many pundits already accuse China of adopting more aggressive policies, and seeking to undermine the current international infrastructure. Yet China remains fragile. It is still a lower-middle income country, facing many of the challenges that have prevented other middle-income countries from graduating to the ranks of high income countries that enjoy rule of law, democracy and reasonably robust protection of human rights. Chinese leaders would do well to focus on the many institutional shortcomings identified in these chapters, and to find ways to limit the negative consequences of economic reforms, including rising income inequality and the unfair advantages that accrue to the rich and powerful. As they gradually shift away from an export-led model of growth to a more consumption-based model, they would also do well to work with other countries to resolve currency and trade issues, and to address the need for new international institutions, rules and practices that meet the challenges of a new era. This is hardly the time for self-congratulatory celebration of the rise of the East and decline of the West.

Notes 1 In addition to Hurst’s functional approach in Chapter 3 (ensure social control, promote economic growth/efficiency, monitor principle–agent relations, which is in then mapped onto areas of law: family and criminal, commercial, administrative, respectively), see also Peerenboom (2002) for an institutional approach; Fu (2003) distinguishing between commercial/civil, criminal and administrative law; Chen (2008) for a comprehensive treatment organized by area of law; Zhu (2007) disaggregating by levels of wealth, province, and institutions; He (2007) comparing enforcement in rural and urban areas. Disaggregation is required for even more specific topics, such as ‘judicial corruption’ (Li 2010, differentiating by types of cases, levels of and divisions within courts and stages of proceeding), and ‘judicial independence’ (Fu and Peerenboom 2010, distinguishing types of cases and nature, source and impact for each type. 2 Different areas of law present different challenges; even within a specific area such as commercial law, not all laws have been implemented to the same degree (see Svensson and Burrel, forthcoming). 3 The independence of the courts in China is a much too complicated subject to address here. Suffice it to say that general statements about the lack of judicial

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independence fail to capture the complex reality of China, particularly with respect to commercial cases (Peerenboom 2010a). As is now widely recognized, enforcement problems are largely due to differences in the political economy typical of developing countries; the inability of the central government to control local governments given an incentive structure that emphasizes economic growth and stability as key criteria for promotion; and various administrative obstacles, including organizational politics, institutional structures, administrative hierarchies, overlapping jurisdictions, and competing agency interests. For a discussion of the administrative obstacles to enforcement, see Mertha (2005). Baumol et al. (2007: 7) oppose policies that aim to divide up the economic pie rather than increasing its size. Yet the Hu-Wen policy of a harmonious society is precisely a shift from obsession with aggregate growth to redistributive issues, including attempts to address growing income inequality, strengthen the taxation and welfare systems and protect the interests of future generations by sacrificing current growth for a cleaner environment. For alternative theories as to how countries, including China and its Asian neighbours, have become rich, or why they failed to, see Rodrik (2007), Reinert (2007), Chang (2007), Easterly (2006), Sachs (2005). For broader historical accounts, see Diamond (1997), Landes (1999), Pomeranz (2000), and Findlay and O’Rourke (2007). Suffice it to say that economists and economic historians differ widely on what causes development and what to do about it. They even disagree sharply about key methodological issues, such as the nature or form of advice to give policy-makers, with some favouring top-down comprehensive plans (Sachs 2005), others a more anarchic bottom-up approach (Easterly 2006), and still others a middle ground based on a growth diagnostics framework that identifies the most pressing binding constraints in a particular country at the time (Rodrik 2007). I am indebted to Arthur Kroeber for this point in an email dated 8 March 2010. Foreigners controlled the salt tax, postal service, customs, railways, shipping, and the manufacturing and distribution sectors. GDP per capita was $600 in 1829, compared to $530 in 1870, $552 in 1913 and $439 in 1950 (Jacques 2009: 98). See Trebilcock and Daniels (2008), further classifying political economy issues as: (1) opposition from ruling elite to reforms that could endanger their grip on power; (2) interest-based conflicts among state organs, between state organs and special interest groups, and within civil society among various interest groups; and (3) corruption and rent-seeking by individuals or groups of individuals, which cause them to resist welfare-enhancing reforms and to distort the rules. Juridification refers to an expansion of legal discourse and modes of analysis into other spheres (e.g. economics, politics), whereas judicialization refers to an expanded role for the courts in deciding a wider range of social, political and economic issues. Summarizing the results of a recent study, Albert Chen (2009) finds that juridification and judicialization have increased in general within Asia. Nevertheless, the degree varies among countries, with, for example, Japan at the lower end of judicialization, and Indonesia and Vietnam at the lower end of both judicialization and juridification. European countries have been much more restrictive than the USA with respect to class actions on the grounds, among others, that the US system creates entrepreneurial lawyers who generate litigation in the hopes of reaching settlement, most of which goes to the lawyers, some lawyers are corrupt, and class action suits exacerbate social and economic instability. See Issacharoff and Miller (2008). But even in the USA, there can be more centralized, government-led responses to problems. The Enron scandal and the current financial crisis have resulted in increased regulation that recentralizes government control over the economy. After September 11, the federal government established a Victim Compensation

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Fund to process more than 7,300 claims for death and personal injury. The victims could accept compensation and release their claims against the airlines (with the Special Master’s determination of the amount of compensation being final and not subject to judicial review), or sue for damages. Over 97 per cent opted to accept compensation through the fund. Final Report of the Special Master for the September 11th Victim Compensation Fund of 2001. 12 For a more detailed comparison, see Peerenboom (forthcoming).

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Index

acquisitions, 130, 154–56 Administration of Industry and Commerce, 139, 144, 184 administration of justice, 78 administrative law, 74, 110, 122, 282 administrative units, 27 advanced grass roots Party branch, 222 agency, 287, 292 China Consumer Association, 241 reform process, 185 Xinhua news agency, 257 Agricultural Bank of China, 47 All-China Women’s Federation, 226, 228 alternate dispute resolution, 15 Anderson, Jonathan, 25–52, 164, 278 Anti Campaigns, 80–81 Antimonopoly Law (AML), 150–52, 274, 279 abuse of dominant market position, 152 effect on business organisations, 142–61 implementation institutional challenges, 153–59 foreign mergers and acquisition, 154–56 independence of AML regime, 158–59 initial test cases, 159 limited legal remedies, 156–57 state sector monopolised position, 153–54 unequal market access and lack of consumer choice, 157–58 WTO implications, 156 monopolistic conduct, 151–52 Anti-Rightist Campaign, 80–81 Anti-Unfair Competition Law, 241

appointment and remuneration of administrators, 235 arbitration, 277, 285 see also mediation labour disputes, 168, 173, 175–77 service fee, 175 Asset Management Companies, 233 assets, 183–84, 238, 280 Association of Women Entrepreneurs (AWE), 226 banking system, 46–48, 147–48 bankruptcy, 209, 276, 279 Bankruptcy Law, 231–34 China Consumer Association, 241 consumer law, 239–41 Enterprise Bankruptcy Law implementation, 237–39 Food Safety Law of People’s Republic of China (2009), 243–46 law of the PRC on Protection of the Rights and Interests of Consumers (1993), 241–43 reforms and consumer protection laws, 231–49 rights of debtor and investors, 237 role and powers of creditors, 236–37 role of administrator, 235 role of court, 234–35 Sanlu case, 246–49 Bankruptcy Law, 45–46, 231–34, 232–34, 274, 285, 286–87 Barzel’s political economy model, 66–67 Bath, Vivienne, 45, 231–49, 285 Bei Guancheng Incident, 102–104 Beijing, 137, 149, 177, 179 district elections, 264–65 electoral reforms, 258

326

Index

enactment of consumer protection legislation, 241 initial AML test cases, 159 new policy, 178 social insurance payment, 179 urban growth, 201–2, 206 big-firm capitalism, 279 Black Seven, 97 boom–bust economy, 50–52 bourgeois liberalisation, 262 bureaucrats, 42, 274–75 business organisation Antimonopoly Law of PRC, 150–52 abuse of dominant market position, 152 implementation institutional challenges, 153–59 monopolistic conduct, 151–52 constitutional principles and dual track legal framework, 143–46 initial Company Law reform, 145–46 public vs private ownership, 144–45 return of socialist legality, 143–44 dual track legislation and Antimonopoly Law, 142–61 level playing field creation, 142–43 market reform policy and practice, 147–50 banking, 147–48 false foreign investment phenomenon, 150 market regulation, 148–49 red hat phenomenon, 149–50 shareholdings, 147 cadres, 84, 221, 223, 226, 258 see also entrepreneurs Campaign to Suppress CounterRevolutionaries, 80 Canada, 156, 184, 189, 192 capitalism, 111–12, 146, 272, 278–79, 281 see also rule of law capture theory of public regulation, 137 Chan, Andrew, 89–106 Chan, Kay-Wah, 163–80, 285 Chen, Jianfu, 109–28, 143–44, 174 Chen, Minglu, 218–29, 290 Chengdu City, 84–86 China Association of Promoting Democracy, 222 China Consumer Association (CCA), 241, 242, 247

China Democratic League, 222 China National Democratic Construction Association, 222 China’s People’s Political Consultative Conference (CPPCC), 209 Chinese agricultural economy, 227 Chinese contract law, 121, 124–25 Chinese Law, 87, 192 bribery, 137 broad context and gradual transformation, 109–16 internationalisation, 113 open door policy effects, 114–16 planned economy to socialist market economy, 111–13 politico-economic context, 110–11 rights/duties debate, 113 Soviet model early influence, 113–14 civil and commercial law reforms, 109–28 counter-revolutionary crimes in Maoist China, 76–81 basic level criminal courts, 77 disaggregation by substantive area, 73–76 procedures and objectives, 74 foundational development, 116–25 equality of parties, 122–25 freedom of contract, 119–21 legal personality, 117–19 from status to contract, 128 private property protection, 125–27 rights in rem, 127–28 transforming China, 109 Chinese Peasants’ and Workers’ Democratic Party, 222 civil law-style legal system, 113 Civil Procedure Law, 174, 232, 247 codified commercial law system, 189 Cohen, Jerome, 77 collateral, 183–84 collective housing purchase groups, 206 command-economy, 265 commercial law, 109–28, 164, 185, 189, 283, 286 commodity relations theory, 118, 125 common law principle, 121 Communism, 267 Communist Party of China (CCP), 59, 95, 142, 143, 204, 239, 251, 272, 280 evolution of CPC attitudes towards elections, 261–63

1 2 3 4 5 6 7 8 9 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4

1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5

Index internal democracy, 256–57, 259–60 membership, 220–22 reform era, 61–62 Company Law, 118, 135, 144, 241, 275–76 application to FIE, 136, 138–39 complementary role, 131–32 initial reform, 145–46 relationship with Foreign Investment Enterprises Law, 131–34 compensation, 170 competition, 43–45 foreign access after WTO, 46 foreign access before WTO, 45 import tariffs, 44 competitive elections, 259 Confucianism, 55–56 Constitution, 68, 90, 112, 116, 125, 126–27, 146, 212, 215, 253, 254, 256, 260, 265 consumer law, 239–41 Consumer Protection Law, 231–49 contract law, 115, 194, 280 equality of parties, 122–25 freedom of contract, 119–21 three pillars of contract law, 120–21 Contract Law (1999), 119, 121, 122, 124, 125, 241 contracts, 119–20, 121, 128 contracts to complete a prescribed work, 171 fixed-term, 171 land-leasing contracts, 214 open-ended, 170–71 open-ended contracts, 167 short-term, 171–73 types, 191 contractual/co-operative joint venture (CJV), 130, 138 corruption, 117, 137, 154, 210, 214–15, 244, 266, 276, 279, 281, 287, 289 counter-revolutionary crimes, 76–81 proper handling, 81–87 Chengdu City, 84–86 Chinese criminal court analysis, 86–87 Yunnan County, 81–84 Courts, 76–81 see also Supreme People’s Court establishment after 1949, 79 function and role of campaigns, 80–81 overstated role in law and development, 276–78 role in bankruptcy, 234–35

327

Criminal Law, 73, 243 crony capitalism, 286 Cultural Revolution, 59, 61, 79, 111, 253, 256, 261, 263 power narratives and lessons, 89–106 anti-Mao suspects, 99–101 Bei Guancheng Incident, 102–104 beliefs about reform and opening, 93–96 labeling people, 97 lessons, 91–93 MZD thought, 97–8 Zaofan, 98 currency, 291 see also renminbi; yuan Davis, Kingsley, 199–200 debt-equity, 237 debt-equity swap, 47 Decision on Certain Issues Concerning Improvement of the Socialist Market Economy, 145 Decision on the Economic System Reform (1984), 143 Decree of the State Council of the People’s Republic of China (No 516) – Decision of the State Council on Annulling Part of Administrative Regulations (State Council Decree No 516), 132 democracy, 251–69 China’s development since 1949, 252–54 China’s undertaking on political reform, 254–55 current election law and practice, 263–65 economic development, 255–56 legal reform, 252–54 election practice, 257–59 election rules, 257–59 future development, 265–68 internal democracy of CPC, 256–57, 259–60 local electoral reform, 260–63 democratic electoral system for people’s congresses, 263 evolution of CPC attitudes towards elections, 261–63 Deng, Xiaoping, 9, 62, 91, 110, 111, 144, 204–5, 239, 240, 251, 252, 256, 267 Dengism, 62

328

Index

dictatorship, 66–70 dispute resolution, 163, 174–75, 179, 277, 284 see also arbitration; mediation dominant market position, 152 double salary, 170 dual track legislation and Antimonopoly Law on business organisation, 142–61 Economic Contract Law (ECL), 120, 123 economic development, 61, 110, 218, 227, 231, 239, 243 see also WTO agreement and democracy, 255–56 and legal reform, 252–54 economic growth, 199, 202, 205, 214, 289 economic reform, 219 Economic Reforms and Openness policies, 2 Election Law of the PRC (1979), 261, 262, 263 Employment Promotion Law of the PRC (Employment Promotion Law), 163 enforcement of law, 109–10, 123, 177, 185, 254 Enterprise Bankruptcy Law of the People’s Republic of China, 232, 235, 237–39, 244 Enterprise Income Tax Law, 160 Enterprise Income Tax Law (2008), 136 enterprise taxation system, 160, 218 entrepreneurial capitalism, 279 entrepreneurs, 218, 219, 221, 225 equity joint venture (EJV), 130, 138 European Union, 244, 251, 275 export trade, 285 false foreign investment phenomenon, 150 Family Law, 73 Federation of Industry and Commerce (FIC), 225, 226, 290 FIE Law–Company Law Relationship Principle, 131, 133, 134, 139 First-order economic principles, 283 Five-Year Plan, 39 Food Safety Law, 240, 243–46 foreign companies, 136, 137, 278, 286, 289 Foreign Contract Law, 115

foreign direct investment (FDI), 130 Foreign Economic Contract Law (FECL), 120, 123 foreign exchange reserve, 251 foreign-invested enterprises (FIE), 131 foreign investment, 126, 130–40, 231, 232 Foreign Investment Enterprises Law and Company law relationship, 131–34 complementary role of Company Law, 131–32 conflict, 132–34 future developments, 134–39 Chinese government concerns, 137–39 foreign investors vested interests, 136–37 path dependence, 134–35 regulation in China, 130–40 foreign ownership, 150 formal ownership, 29–37 state and the economy, 29–34 comparative context, 34 over time, 35–37 Four Clean-ups, 85 fraud, 188 free market economy, 70–71 free trade agreements, 10–11 fundamentalist communism ideology, 204 gaige kaifang see opening up and reform policy Gao, Mobo, 91, 93–94 Garrick, John, 1–21 GDP see gross domestic product General Agreement on Trade in Services (GATS), 156 general company law, 131, 140 General Principles of Civil Law, 115, 118, 120, 123, 128, 246, 247 German Civil Code, 115, 121, 189 Gini coefficient, 164, 207 global capitalism, 286 global financial crisis, 183, 266, 278, 286 globalisation, 286 Goodman, David, 62–63, 219 governance, 42–43, 55, 159, 216, 256, 258, 260, 265, 268, 273, 276, 278 government liens, 192 greenfield investment, 130 gross domestic product, 29, 31–32, 65 state ownership, 30

1 2 3 4 5 6 7 8 9 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4

1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5

Index Guangdong International Trust and Investment Corporation (GITIC), 233 guanxi, 6, 136 Guarantee Law (1995), 234, 241 Guo, Yingjie, 53–71, 278 Han, Su Lin, 182–94, 280 Hong Kong, 209 Hong Kong Special Administrative Region, 267 housing reform, 211–12 Hu, Richard, 199–216, 285 Hu Jintao, 202, 268, 282 Huang, Hui (Robin), 130–40, 278 Hurst, William J., 72–88 ideology, 204, 240, 280, 282 ideology vacuum, 267 Implementing Opinion on Several Issues Concerning the Application of the Law in the Administration of the Examination, Approval and Registration of Foreign Investment Enterprises (FIE Law Application Opinion), 131, 133–34, 138, 139 income, 125, 126, 164, 183, 186, 206, 207, 218, 219, 224, 240, 267, 273, 278, 285, 286, 291 India, 51 Individual Industrial and Commercial Households and Rural Contracting Households (Two Households), 125 industrial production, 32–33 see also state-owned enterprises (SOEs) state industrial ownership by region, 33 state ownership by industry, 32 inheritance, 126 interpretation of laws, 134 see also Judicial Interpretation Interpretations of the Supreme People’s Court on Some Issues Concerning the Application of Laws for the Trial of Labour Dispute Cases (II) (Judicial Interpretation II), 173–74 investment approvals, 39 Ip, Mary, 45, 231–49, 285 Japan, 244, 253

329

Japanese Civil Code, 115, 121 Jiang, Zemin, 59, 62, 75, 112, 221, 262 Three Represents, 267 Jingyi, Guo, 137 Jiu San Society, 222 joint-stock commercial banks, 48 joint-stock companies, 131 joint venture contract, 123 judges, 186, 235, 237, 273, 276, 288, 290 judicial independence, 277 Judicial Interpretation, 173–74 judiciary, 254, 275, 279, 282, 284, 290 KMT Civil Code, 115, 121 Korea, 244, 256 Kornai, Janos, 37 Labour Contract Law of the PRC (Labour Contract Law), 163, 168, 170, 174, 286 labour dispatch, 167–68 labour disputes, 168–69 labour law, 93, 282 China’s socio-economic development and labour system, 164–65 curbing labour abuses, 169–74 non-conclusion of labour contracts, 169–71 short-term labour contracts, 171–73 underpayment or non-payment of wages, 173–74 facilitating labour dispute resolution, 174–75 further challenges, 175–78 labour dispatch, 167–68 labour disputes, 168–69 migrant workers, 165–66 transition, 163–80 urban workers, 166–67 Labour Law of the PRC (Labour Law), 163 labour remuneration, 168 Labour Union, 226 land reform, 212, 214–15 land use right market, 212 Lang Storm, 209–10 Law of Enterprises Owned by the Whole People of 1988 (SOE Law), 144 Law of Real Property Rights, 149 Law of the People’s Republic of China on Enterprise Bankruptcy (for trial implementation) (Old Law), 232–35, 237, 238

330

Index

Law of the People’s Republic of China on the Protection of the Rights and Interests of Consumers (1993) (Consumer Protection Law), 241–43 Law of the PRC on Chinese-foreign Contractual Joint Ventures (CJV Law), 135 Law of the PRC on Chinese-foreign Equity Joint Ventures (EJV Law), 135 Law of the PRC on Wholly Foreignowned Enterprises (WFOE Law), 135 Law of Township Enterprises of 1996, 144 Law of Wholly Foreign Owned Enterprises of 1986 (WFOE Law), 144 Law on Labour Dispute Mediation and Arbitration of the PRC (Labour Dispute Law), 163, 175 Law on Rights in rem (2007), 125–28, 127 Law on Technology Contracts (LTC), 120 Law to Promote Small and Mid-Sized Enterprises, 149 law–wealth–power, 272–91 development patterns and future trends, 280–81 economy prospects, 278–79 law and development, 273–78 institutions for growth and role of courts, 276–78 wealth and institutions interplay, 273–76 legal system, 281–84 political capitalism China and Eastern Europe, 287–91 rise in China, 284–87 lawyers, 137, 176, 179, 186, 235, 247, 273, 286, 290 Lawyers Law (2007), 179 LCL Implementation Regulations, 170–71, 173 legal education, 16, 169, 273 legal interpretation, 192 see also judicial interpretation legal reforms, 1–3 challenges, 13–16 legal system, 110, 139, 146, 279, 281–84 see also rule of law affecting factors, 282–84

politics and society in contemporary China, 72–88 counter-revolutionary crimes in Maoist China, 76–81 disaggregating of law, 73–76 handling of counter-revolutionary crimes, 81–87 legalism, 56 legislation, 114, 147 legitimacy, 111, 160, 187–88, 208, 220, 256, 268, 281, 289 Liang, Huixin, 116–17 liberal democratic rule of law, 281–84 limited liability companies, 131, 132, 135 Lin, Feng, 251–69 liquidation, 232, 234, 235, 238, 239, 248 litigation, 176, 285 Liu, Shaoqi, 103 living standards, 268 local government, 214, 218, 232, 234, 238, 239 Sanlu case, 248 local officials, 148, 156, 219, 247, 249 Lubman, Stanley, 77 Mao Tse-tung see Mao, Zedong Mao Zedong, 61, 97–98, 143, 253, 267 see also Cultural Revolution market capitalism, 278 market efficiency, 151 market power, 63 market reform, 25–52 banks, 46–49 banking system, 46–48 financial resource allocation, 48–49 SOE dividends, 49 boom–bust economy, 50–52 conclusions, 50 economic influence, 37–46 bankruptcy laws, 45–46 company structure and governance, 42–43 competition, 43–45 investment approvals, 39 price controls, 40 role of plan, 38–39 subsidies, 40–42 formal ownership, 29–37 state industrial enterprises, 35 state output and employment, 36 state ownership by GDP, 30 state ownership by industry, 32 state ownership by region, 33 state ownership by sector, 30

1 2 3 4 5 6 7 8 9 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4

1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5

Index state ownership in comparative context, 34 state share of employment, 31 state share of fixed assets, 31 future implications, 52 state vs market system, 25–27 terminology, 27–29 unified framework of economy, 49–50 market regulation, 148–49 marketisation, 240 Marxism, 91, 114, 148 Marxism-Leninism, 143, 253, 267, 282 mass politcal campaigns, 80–81 Measures for Compensations for Contravention of the Provisions in the Labour Law Concerning Labour Contracts (Compensation Measures), 170 Measures for Economic Compensation for Breach and Rescission of Labour Contracts, 173 Measures for Liquidation of Foreigninvested Enterprises (FIE Liquidation Measures), 132 Measures on Administrative Penalty for Contravention of the Labour Law of the People’s Republic of China (Administrative Penalty Measures), 170 media, 171, 210, 247, 251, 285, 287 mediation, 247, 285 initial AML test cases, 159 labour dispute, 175 mediators, 211 mergers, 130, 154–56 meta-narrative, 91 see also Marxism middle-income countries, 283 migrant worker phenomenon, 165 migrant workers, 165–66, 285 models of man, 56 modern movable collateral, 193 moral decay, 59, 288 National Development and Reform Commission (NDRC), 130 National People’s Congress, 133, 177, 182, 209, 215, 232, 260–61, 263 negotiation, 115 see also mediation neoliberal big bang approach, 287–88 new rich, 209

331

CPC membership, 220–22 interviewees’ CPC membership and family, 220 leadership and membership in political organisations, 224–27 other political awards and titles, 227–28 positions in Party-state system, 223–24 interviewees’ family and Party-state positions, 223 women, enterprises and the state, 218–29 New Zealand, 189 non-consensual liens, 192 non-possessory secured financing, 183 oligarchic capitalism, 279 one-child family plan, 201 Open Door policy, 114–16, 120, 240, 251 open trade, 283 opening up and reform policy, 13, 53, 112, 199, 201, 227 see also foreign investment popular beliefs, 93–96 opportunities for business, 150, 224, 228, 234, 281, 290 ownership, 126–27 Ownership Rights, 127 Pan, Wei, 6, 13 Partnership Enterprises Law, 144–45 Partnership Law, 118, 138 party branches, 222 Party Congress, 226 party-state, 59–66, 142, 149, 158–59, 160, 267 Chinese women entrepreneurs’ connection, 218–29 six whys, 65–66, 71 Patent Law, 90 peasants, 165, 221, 252, 261 Peerenboom, Randall, 78, 272–91 People’s Bank of China, 182, 186, 187, 190, 192 People’s Commune, 96 People’s Congress, 209, 222, 224–25, 226, 229, 290 People’s Court, 157 see also Supreme People’s Court People’s Liberation Army, 223 People’s Political Consultative Conference (PPCC), 222, 225, 226, 229, 290

332

Index

People’s Republic of China, 1–21, 130, 142, 163, 200 Food Safety Law, 243–46 legal reforms, 1–3 politics, society and legal system, 72–88 politics in command to rule by law, 5–10 wealth and power, 53–71 philosophy, 222 planned economy, 111–13 planning, 38–39 policy-making, 289 politburo, 2, 6, 112, 282 political capitalism, 284–91, 286, 289 China and Eastern Europe, 287–91 rise in China, 284–87 Political Consultative Conference, 209 political development, 118, 251, 256 see also Communist Party of China (CCP) political economy, 283 post-socialist, 109–10, 111, 116, 119, 120, 125, 240 Postal Service Law of PRC, 158 Potemkin village, 275 poverty, 207, 252 power, 119, 214, 234, 256 and wealth, 209 Chinese state and limits to change, 53–71 dictatorship and rule-of-law state, 66–70 party state nature, 59–66 state primacy, 54–59 consumer’s power of consumption, 240 powers of creditors, 236–37 power narratives, 89–106 anti-Mao suspects, 99–101 denouncement of Franciscan nuns, 100 labelling people, 97 MZD thought, 97–98 Zaofan, 98 cultural revolution and the Red Guards, 99 power persistence, 63 power transfer, 63 pragmatic gradual approach, 287–88 price controls, 40 market price formation, 40 private economy, 160 private enterprise, 125–26, 160

Private Enterprises Regulation, 144 private entrepreneurs, 149, 150 Chinese women entrepreneurs’ connections with Party-state, 218–29 private property, 109, 117, 119, 127, 215, 276, 288 protection, 125–28 privatisation, 289 probation, 172 –73 proceeds rule, 191 Product Liability Law, 246, 247 Product Quality Law, 241 property boom, 203–7 wealth machine, 208–9 Property Law, 182, 186, 187, 215–16, 282 security interest issues, 190–94 creation, 190–91 Provision on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (2006 Provisions), 154 Provisional Measures concerning the Making of Contracts among Governmental Institutions, Stateowned Enterprises and Co-operatives, 119–20 Provisional Regulation on Private Enterprises (1988), 144 Provisional Regulations of the PRC on Private Enterprises 1988, 125 Provisions on Employment Services and Employment Management (Employment Management Provisions), 163 Public Notary Offices, 184 public ownership, 144, 145 public relationship, 137 Public Security Bureau, 82, 184 Qiushi, 257 quota, 258 real estate, 186, 208, 212, 214, 285, 290 sold floor area in China (1987-2006), 203 Red Five, 97 red hat phenomenon, 149–50 regional autarky, 43 Regulations of the PRC on Settlement of Labour Disputes in Enterprises (Labour Dispute Regulations), 163, 174, 175

1 2 3 4 5 6 7 8 9 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4

1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5

Index Regulations on Election Work of Local Organisations of the CPC (1993), 257 Regulations on Employees’ Paid Annual Leaves (Annual Leaves Regulations), 163 Regulations on Labour Security Supervision (Supervision Regulations), 170, 173 renminbi, 277 rescue credit, 149 revolution, 199 Revolutionary Committee of the Chinese Kuomintang, 222 rights awareness, 169 consumer rights, 247 labour rights protection, 178–79 right to the use of land, 253 rights/duties debate, 113 rule of law, 7, 59, 66–70, 109, 112, 116, 117, 128, 146, 147, 161, 253, 254, 260, 272, 276, 288, 289, 291 Rules Regarding Registration of Pledges Receivables, 193 rural-urban migration, 200 Russia, 146 Sanlu case, 244, 246–49 secured financing, 182–94 discretion of registry officials, 184–85 key security interest issues under new Property Law, 190–94 market in instituting changes, 187–90 need for reform, 182–85 reform process, 185–90 security interests creation, 190–92 enforcement, 194 registration, 192–94 security interests creation, 190–92 enforcement, 194 issues under new Property Law, 190–94 ambiguous priority rules, 191 third party non-consensual claims, 191–92 registration, 192–94 Security Law, 182, 183–84, 186, 187, 188–89, 193, 241 Self-Employed Labourer’s Association (SELA), 226

333

Shanghai, 149, 159, 184, 201–2, 206, 241, 243, 275, 276, 279, 290 shareholdings, 147 single-owner WFOEs, 132 Sino-Foreign Contractual Joint Venture Law of 1988 (CJV Law), 144 Sino-Foreign Equity Joint Venture Law of 1979 (EJV Law), 144 small and medium enterprises (SMEs), 182 social economic order, 124 social inequality, 207–8 social insurance premiums, 167 social morality, 124 socialism, 111–12, 120, 142–43, 146, 188, 253, 267, 280, 282 Chinese characteristics, 254 socialist legal system, 128 socialist legality, 143–44 socialist market economy, 111–13, 125, 126, 144, 146, 151, 153, 158, 160, 240, 245, 267 Socialist Planned Commodity Economy theory, 111 socialist public economy, 126 socialist rule of law, 281–84 SOE dividends, 49 Sole Investment Enterprise Law, 118 Sole Proprietorship Law, 144, 179 Soviet model, 113–14 Soviet Union, 60, 114, 118, 120, 146, 254 specific FIE law, 131, 140 speech acts, 91 spiritual transformation, 56 State Administration of Products Quality Inspection, 157 State Assets Supervision and Administration Commission (SASAC), 35, 43, 153 State Commission of National Development and Reform (SCNDR), 152 State Council, 134, 148, 149, 152, 155, 157, 204, 211, 233, 257 State Development and Reform Commission, 39 State Enterprises Assets Law, 146 State Food and Drug Administration (SFDA), 244, 287 state-led capitalism, 279 state-owned enterprises (SOEs), 27–29, 142, 154, 156, 186, 221, 232, 267, 278, 279, 281, 285, 289 scope, 28

334

Index

statedriven marketisation programme, 146 statutory liens, 191–92 strategic sectors, 159 subsidies, 40–42 formal subsidies, 41 Supplementary Notice on Certain Issues Concerning Mergers and Bankruptcy and Re-employment of Workers in Certain Cities, 148 Supreme People’s Court, 83, 123, 157, 236, 237, 239, 276, 282 Supreme People’s Court Opinions (Opinion on Enforcement 2009; Opinion on Bankruptcy Cases 2009; Opinion on Trial of Bankruptcy Cases 2009), 235, 238, 239 Supreme People’s Court Regulations, 232 Taiwan, 256 Tariffs, 44 tax avoidance, 148, 150, 210 tax law see Chinese Law taxation system, 160, 218, 219 Three Represents Theory, 220–21 torts, 119, 277 township and village enterprises, 27–29 trade, 152, 202, 225, 231, 237, 238, 245, 291 export trade, 244 trade secrets, 287 trade unions, 169, 178 traditional law, 189 transaction safety, 187 transitional phenomena, 53 Trevaskes, Susan, 77–78 Two-Hands policy, 110 UN Convention on Contracts for the International Sale of Goods (1980), 121 UNIDROIT Principles of International Commercial Contracts, 115, 120, 124 Uniform Commercial Code, 189 United States of America (USA), 121, 156, 183, 184, 189, 192, 244, 251 urban area growth, 201 urban collectives, 27 urban workers, 166–67 urbanisation, 166, 199–216 China’s urban reform, 199–203

annual urban population growth rates, 200 continuous urban revolution, 202–3 urban growth, 201–2 urbanisation, 199–201 number of cities in China in 19782007, 202 property, wealth and law reforms, 199–216 property boom, 203–7 demand factors, 205–7 market-based boom, 203–4 supply factors, 204–5 strategic property law reforms, 210–16 benchmark land law reforms, 213 housing reform, 211–12 land reform, 212, 214–15 Property law, 215–16 wealth machine, 207–10 percentage of top 10 richest businessman from property development industry in China, 208 power and wealth nexus, 209–10 property boom as wealth machine, 208–9 social inequality, 207–8 Usufruct Rights, 127 voluntary resignation, 177 Washington Congressional Executive Commission on China annual report, 12 wealth, 240 see also wealth creation; wealth hatred; wealth regulation and loss in changing economic times, 231–49 and power nexus, 209–10 Chinese state and limits to change, 53–71 dictatorship and rule-of-law state, 66–70 party state nature, 59–66 state primacy, 54–59 wealth creation, 3–5 wealth hatred, 94–95, 210 wealth regulation, 10–13 Wen, Jiabao, 268 Wenzhou model, 279 WFOE Implementing Regulation, 133 wholly foreign-owned enterprise (WFOE), 131

1 2 3 4 5 6 7 8 9 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4

1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5

Index World Bank - People’s Bank of China Project (WB-PBOC Project), 182, 183, 186 World Trade Organization (WTO), 115, 142, 148, 156, 244, 278 WTO Agreement, 115 WTO’s non-discrimination principle, 156 Xianping, Lang, 284–85 Xinhua news agency, 257 Yan Fu, 56–58

Youth League Committee, 227–28 yuan, 222, 225, 226, 251 Yunnan County, 81–84 Zang, Xiaowei, 13 Zaofan, 98 Zhang, Xianchu, 142–61, 278 Zhao, Suisheng, 6 Zhao, Ziyang, 254 Zhaotong Prefecture Intermediate Court, 83 Zhenxiong Criminal Court, 82 Zhuhai Special Economic Zone, 233

335