China Legal: Do NOT Try This At Home (Or From Hong Kong)
Excellent cover story just out at the China Economic Review, entitled, "A legal legacy: China is putting the policy and personnel in place to meet the needs of a market economy." Mostly through interviews with leading China lawyers (including CLB's own Steve Dickinson), the article analyzes whether China's recent rash of new business laws means it is becoming a nation bound by rule of law. Overall conclusion seems to be it is not, though we disagree.
The article starts out noting how within the last 18 months, China has "placed a large body of commercial legislation on to the statute books," including new antitrust, bankruptcy, company, property, labor, and securities laws. The article notes that all of these laws "have an international flavor, a reflection of the time lawmakers spent researching the experiences of other countries." These laws reflect China's effort to move into "a more globalized and market-driven era, one in which corporate ethics and individual rights have much greater weight." Graeme Johnston, a Shanghai lawyer with London based Herbert Smith, rightly remarks that China now has "pretty much the full set of commercial and private property laws,” but the "challenge of the next 10 years will be getting these laws neutrally administered, interpreted and enforced.”
The article then notes how the new "front-runners to form the 'fifth generation' of Chinese leaders, as well as those ascending the ranks beneath them" are no longer mostly technocrats; "these cadres have qualifications in law, economics, politics and philosophy." According to the article, about half those appointed party secretary, governor, or mayor since 2002 majored in one of these subjects. Jonathan Anderson, chief Asia economist at investment bank UBS, sees this as a result of China's rapid economic growth spawning a demand for people who know how to manage it. "In an increasingly corporate society, a premium has been placed on an understanding of the function of law and how it fits into business." Anderson also states that China's "central government’s ability to inflict damage on the economy is much smaller than before.” I concur.
It is this shift from public to private ownership that is driving much of the new laws:
In this way, the introduction of new commercial legislation can be tied to the shift from public to private ownership that has taken place in China over the last 15 years. Indeed, the principal reason China’s property rights law attracted so much attention was because it was seen to offer a clear-cut recognition of the rights of private property owners.Chinese people have become shareholders and built up their own assets; they are enjoying previously unseen levels of autonomy by virtue of the market economy freedoms that increasingly govern their lives. Strong laws are seen as a means of protecting these freedoms and Beijing has recognized that it must accommodate this.
“People want a political structure that is line with business reality and can maximize economic potential,” said Li Xiaoming, a partner at White & Case in Beijing.
The article then discusses how so many of the new laws are ambiguous. Stuart Valentine, a Hong Kong-based attorney with Mallesons Stephen Jaques has this to say on the ambiguity of China's new law:
“The antitrust law did not repeal at least six existing sets of legislation that refer to unfair competition. It was hoped that this law would unify other parts but it just sets up yet another layer of demarcation battles between the Ministry of Commerce, the NDRC and different levels of provincial legislature.”Looking for guidance, Valentine researched China’s original unfair competition law, which was enacted in 1993. Although the law is expressed so broadly that finding grounds for enforcement would have been relatively straightforward, he couldn’t find any record of an enforcement decision being made.
He sees the empty case file as an indication of just how murky the law can be in China.
CLB's own Steve Dickinson had this to say about China's new property laws:
“When they wrote the property law, they said in an accompanying commentary that a certain area had been left open deliberately,” said Steven Dickinson, a Shanghai-based partner at boutique law firm Harris & Moure and one of the authors of the China Law Blog.“They said that it isn’t until cases are tried and people work out the issues over time that they will know the answers.”
It is, in a sense, typical of the civil law system. The lawmakers start with a big-picture articulation of the legal principles involved and this is used as the basis for analysis of the law as well as regulations that are published alongside it.
Valentine then weighs in again, saying that China's new laws do nothing to equip "the private individual with any new protection at all:"
Valentine’s answer is an unequivocal no. People may have more freedoms, he argues, but these are still state-prescribed. The major purpose of these new laws, he says is merely to entrench the current system and “give the government a concrete basis for continuing to do what it has done in the past.”
Steve (of CLB) took strong issue both with Mr. Valentine's views regarding the dearth of China law and the idea that China law is not evolving, which views he expressed in an email to China Economic Review:
"However, Valentine says he cannot find one example of enforcement of the Unfair Competition Law. I have, just in my apartment here in Shanghai, at least 40 published opinions on the Unfair Competition Law with full legal commentary. It is not my area, so I have never intentionally collected cases on this law. However, it is one of the most commonly invoked laws in IP and related matters in China and I run into it every day in researching trademark law decisions.Of course, it requires knowledge of the law and the Chinese language to find these opinions. But to say no decisions exist is pure lunacy.
* * * *The real question is: what is the trend? What is the direction in which China is moving? I thought your article did a very good job in showing the trend. Economic development and development of a strong legal system go together. You cannot have one without the other. If China develops a modern market economy then the legal system will follow. This development of the economy is by no means certain. But if it happens, the legal system will follow along. It will be a system that every British and U.S. trained lawyer will dislike. But it will be a fully workable, modern legal system that will do its job. The task of us international lawyers is to figure out the technical differences in the system so that our clients can use it effectively. This pretence that in China there is no legal system and that there are no decisions in areas where thousands of decisions abound is just doing disservice to our clients.
When you come to Shanghai next I will take you to a bookstore and show you shelf after shelf of annotated case law on every area of law you can imagine. It is just fantasy that these resources do not exist."
Readers, what do you think?
Comments
I think China is putting laws on the books to claim to be a nation of rule by law but in actuality these laws are nothing more than the wishes of senior cadres at various levels. Instead of saying "make it so", you write it down as law, until you leave/are removed from office and someone else comes in and changes the laws you wrote down to suit their personal needs.
Posted by: nanheyangrouchuan | October 9, 2007 12:07 AM
Agree with Steve substantively, although I would definitely comment on the tone with the following: "Dude, that's harsh."
I'm not surprised with the comments from other lawyers in that article. Common Law lawyers have always had trouble here. When you're used to a rigid system of stare decisis, it can be scary dealing without that safety net.
Posted by: Stan Abrams | October 9, 2007 3:26 AM
It is this shift from public to private ownership that is driving much of the new laws.
Sort of. Most large industries are still owned by the state, and part of the purpose of the flurry of laws has been to clarify what state ownership means as well as what private ownership means. There aren't many provisions of the property law that specifically covered private property while large sections of the property involved provides geared toward state property.
Part of the confusion is confusing the concepts of private property with market economics, when they turn out to be separable. China has a system of market economics, but in exists in a context in which large parts are still state owned.
Posted by: Twofish | October 9, 2007 6:15 AM
Right On! Hong Kong lawyers have been spreading stuff like this ever since it became clear Sanghai/Beijing had become the legal centers for China. They just want the world to believe there are no laws in China so they can keep up the myth that companies need to set up in China for their protection. It's about time someone really took it to them for this.
Posted by: Jerome | October 9, 2007 8:30 AM
Good post, Dan.
Most 'rule of law' measures that I have come across over the years address the extent to which people have confidence in and abide by the rules of society, how fair and predictable those rules are, and how well property rights are protected.
But in my view, these categories are so broad and difficult to measure that they are often not terribly helpful.
I have thought for some time that a more accurate indicator of a meaningful rule of law test would be along the lines of, "Do everyday people in a given country have a sense that the law and legal system exist and are out there and either consciously or even subconsciously take that into account in many of the decisions they make during a given day?"
If they do, it seems to me that's a healthy sign that the rule of law exists in a country or at least that said country is one it's way toward the meaningful rule of law.
What is your and Steve's take on this, as applied to China? And, to what extent do you think China/everyday Chinese meet the test I note above?
No doubt that China is throwing massive laws and statutes on its books. But when I ask some of my friends in China the above, I often (still) get looks of "Huh? What are you talking about with this legal stuff?".
But my sample size in this regard is small, and may be an outlier that means little or nothing.
Posted by: Chris Carr | October 9, 2007 10:30 AM
Interesting post.
In regards to the vagueness of these new Chinese laws, I'm curious as to how much of this can be chalked up to ambiguous Chinese terminology rather than bad law. It's one thing to borrow conceptually from foreign legal systems but how do you reconcile that with a very different linguistic and cultural tradition to arrive at a concise native terminology? Perhaps I'm wrong and the Magna Carta sounds fine in literary Chinese.
Posted by: Glen Wilkins | October 9, 2007 11:48 AM
"China has a system of market economics, but in exists in a context in which large parts are still state owned"
Twofish, that is a completely contradictory statement, especially when the financial sector is one of the most heavily state owned and regulated.
When the people see developers having their empty apartment and office complexes auctioned by banks, you can start claiming "market forces are in effect". Until then, the gov't keeps the banks from seizing those properties.
Posted by: nanheyangrouchuan | October 9, 2007 1:14 PM
with respect to the new laws affording "the private individual with any new protection at all", I find the argument without any ground.
First, some of the new laws mentioned have not even become effective, thus there is no empricial evidence that they do not actually provide new protection.
Second, it is way too early to give the Property Law the "death sentence" because people are just waking up to a new day when their private property rights are statutorically protected. As I have read a few lawsuits just got filed in Beijing under the Property Law, it is really too early to say that there is nothing new to and to get cynical about these new laws.
Third, relatively speaking, people in China are probably less likely to seek redress in courts for reasons too complicated to discuss here. However, there is evidence that laws do provide some measure of protection to people's rights; otherwise, why do they go to courts at all?! A quick google search revealed that 28,758,112 cases were decided in China between 2001-2006 according to the statistics of China's Supreme Court. (I know that this is probably bad evidence, but I just wanted to show that people do actually try to seek some type of justice or protection through the legal system in China.)
Posted by: Brad Luo | October 9, 2007 5:34 PM
Perhaps one possible measure for rule-of-law in China is the relative power/status of Chinese lawyers in the society?
Here, I've read complaints from Chinese lawyers that the status of Chinese lawyers in China is akin to that of a trademark agent, or a real estate agent. (Here, I realize that this is a broad generalization.)
One article that I read by a Chinese lawyer suggested that one possible solution to the relatively low status of Chinese lawyers is to allow Chinese lawyers to move up the Party hierarchy. But, in my view, this idea seems to miss the point of what we mean by "rule-of-law".
Finally, I suspect that many of those laws/regulations/interpretations, etc. on the bookshelves in the legal sections of Chinese bookstores might perhaps be there anyway (perhaps called something else?) even if one didn't have lawyers in China. I mean to say that a large, expanding bureaucracy would inevitably generate its own rules, right?
Thank you.
Posted by: Steven Blayney | October 10, 2007 3:39 AM
nh: Twofish, that is a completely contradictory statement, especially when the financial sector is one of the most heavily state owned and regulated.
It's contradictory but true. Also financial sector institutions are heavily regulated in pretty much all countries, and there is less difference between how a big bank in the US operates and how one in the PRC operates than one might think.
nh: When the people see developers having their empty apartment and office complexes auctioned by banks, you can start claiming "market forces are in effect". Until then, the gov't keeps the banks from seizing those properties.
No. I talked to something who actually studies real estate development in China, and they explained what is going on. Banks give short term construction loans to property developers who sell the properties and then repay those loans. What loans are outstanding are residental mortgages. As long as the person holding the mortgage keeps making payments, the bank has no reason to seize the property and legally can't anyhow, and people have been making their mortgage payments. Once the mortgage is paid, the bank is out of the picture.
Also in general, banks *HATE* foreclosures and a bank anywhere in the world will do anything they can to avoid foreclosure.
Posted by: Twofish | October 10, 2007 7:31 AM
"and there is less difference between how a big bank in the US operates and how one in the PRC operates than one might think."
Uh-huh, because the US and China are basically the same. More CCTV-9 rubbish. The only time that any level of gov't in the US was able to halt or slow foreclosures and rental evictions was during the US Great Depression. It is just bad business and communism to do under any other circumstances.
"Banks give short term construction loans to property developers who sell the properties and then repay those loans. What loans are outstanding are residental mortgages. As long as the person holding the mortgage keeps making payments, the bank has no reason to seize the property and legally can't anyhow, and people have been making their mortgage payments. Once the mortgage is paid, the bank is out of the picture."
And I actually have friends and acquaintances who develop property in the US (where banks will and do foreclose). Who buys up these properties? Either the banks are floating the loans on orders from the Chinese gov't or unseen people with access to unseen capital are swooping in to buy up these properties in cash.
And I can tell you that foreign investors from land owning countries aren't so stupid as to not read the fine print that says that "you don't actually own the land, just the building or unit. The land itself is leased from the gov't for a period of time".
What you are talking about is a shell game with no accountability in the end. And while banks in countries with genuine real estate markets don't like to foreclose, they won't hesitate to foreclose on someone who isn't making full and regular payments.
Posted by: nanheyangrouchuan | October 10, 2007 10:44 AM
nanheyangrouchuan: Uh-huh, because the US and China are basically the same.
No because the problems that banks face are pretty much the same, and similar solutions get reinvented.
nanheyangrouchuan: unseen people with access to unseen capital are swooping in to buy up these properties in cash.
Something like that. Most urban people already have a paid off house and are making more money than they can spend. Your investment options are limited, so if you don't want put your money in a zero-interest checking account or gamble with stocks, what's left is real estate.
This is from looking at people at the other end, and if you have first hand information that this isn't going on, feel free to post it. You do have first hand information that is useful, but a lot of times you are basically assuming what is going on based on the premise that the Chinese government is evil and incompetent. That's why in talking with you, I try to figure out what you are seeing first hand and what you are assuming.
nanheyangrouchuan: And while banks in countries with genuine real estate markets don't like to foreclose, they won't hesitate to foreclose on someone who isn't making full and regular payments.
Yes they will as long as there is any chance that they will be able to get their payments. The trouble is that once the payments stop, then the amount of debt goes quickly out of control, and if you are dealing with commercial property developers, if they are not making payments now, it's highly unlikely that they ever will.
With non-commercial people, its different because people that don't do commercial property for a living have access to capital and outside income that could be used to pay off the loan if it gets rolled over. In that case, the first instinct of the bank is to refinance.
Posted by: Twofish | October 13, 2007 3:21 AM