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China Law: Don’t Blame It On The Gray.

Posted in Legal News

For years I have been fighting against those who claim Chinese laws are gray. China’s business laws are generally as well written or as clear as any other country’s. My contention has always been that those who claim China’s laws are grey are usually just saying that to excuse their own failure to abide by them.

I wrote on this way back in 2007, in the post, “China Company Formation Law Is Clear — WFOEs Are Easy,” where I talked of how the so-called lack of clarity in China’s laws on forming companies arises from those who have not actually read them or from those who benefit from propagating this idea:

We recently took on three new WFOE formation matters for U.S. lawyers. Two of these matters are for lawyers working on behalf of their clients and one is for a lawyer who owns the (non-law related) business. All three of these lawyers told me they had spoken with company formation firms and had grown frustrated with the information they were being given. They relayed that these firms were not giving clear answers to many of their questions, but were instead responding by saying China’s WFOE laws were “vague” and/or “ever changing.”

What these company formation firms are saying is just not true.

Chinese law on WFOE formations is actually quite clear and I suspect these company formation firms were claiming otherwise only because the laws are vague to them. Near as I can tell, these company formation firms typically consist of a foreign voice or two (oftentimes in Hong Kong) who takes in the work and then farms it out to a Chinese lawyer in a low cost city to do the work. The people on the phone or at the other end of the e-mail at these firms have never read China’s laws on WFOE formation and so, not unexpectedly, those laws are vague to them.

As for “ever changing,” on January 1, 2006, there was a sea change in China company formation laws for foreign companies, but they have remained static since then.

By far the biggest source of confusion/frustration for these lawyers seeking information on forming a China WFOE is the minimum registered capital requirement.

The law on minimum registered capital is clear, but the amount of capital that will be required does vary, depending mostly on the nature of the business of the company to be formed and on the city in which it is going to be registered.

I wrote on this again in 2009, in a post entitled, “China’s Business Laws. Ignore Them At Your Peril.” In that post, I reiterated that China’s business laws are just fine:

But what about the grey areas in China’s laws? China’s laws are simply not that grey. They were grey five years ago, but their business laws are now, for the most part, pretty clear, particularly as they apply to issues important to foreigners.

I really do not see much more gray in China’s business laws than in those in the US.

In the post, “Rationalizing Risk: Phantom Gray Areas in Chinese Law,” China lawyer Stan Abrams seems to concur. Stan’s post is on VIEs and he gets all nicely worked up by those who attribute the problems that arise from them to gray areas in China’s laws. Stan starts out by talking of how the media (and others) have been chalking up Yahoo’s problems with Alibaba to “gray areas in Chinese law” and Stan ain’t buying it:

It sounds comforting, but I think it’s a rationalization employed by those responsible for making risky moves in the first place. When the Board of Directors is staring you down and asking “How the f#@% did this happen?” you tend to shift the blame elsewhere.

Bloomberg ran an article on the Yahoo/Alibaba case, written by Debra Mao in Hong Kong, in which the dispute was explained away, for the most part, as the result of uncertainty due to legal gray areas. (The title of the piece was “Yahoo’s Alibaba Spinoff Losses Show Dangers of China’s Legal Gray Areas.”)

For my take on Yahoo/Alibaba/Alipay, check out “Yahoo/Alibaba/Alipay/Jack Ma/Carol Bratz: What Really Happened And What It All Means.

Stan goes on to extoll a quote from Pillsbury Winthrop’s Tom Shoesmith:

Western businesses come into China and they want to know what the rules are, Shoesmith said. There’s the technically correct answer, there’s the practical answer, and then the third one is, “Who cares anyway?” Sometimes the answer is “Who cares anyway?” until you get busted.

Stan sees Shoesmith as saying “that his clients sometimes flaunt risk entirely, hoping that they won’t get caught. This isn’t about whether the system here is transparent, or unclear, or if gray areas exist. This is about understanding risk and plowing ahead anyway.”

I 100% agree. Just as my firm always makes very clear in writing the fact that VIE structures are inherently risky and are of questionable legality in China, I am quite certain that every other legitimate law firm does the exact same thing. That being the case, no company can claim that it had no idea of the potential problems with VIEs and no company that does a VIE structure in China can claim a “gray area” excuse. Or as Stan puts it, gray areas in Chinese law “does not explain Yahoo/Alibaba, and it doesn’t mesh with what Shoesmith was saying.”

And lest anyone out there think that the VIE structures are gray, Stan emphatically tells us that they are not; at minimum, they clearly go against the spirit of Chinese law:

Remember the fundamental problem with the so-called “Sina Structure” or “VIE” that I’ve talked so much about recently? If you recall, the government restricts foreign companies from investing in certain industries, yet some of those sectors are so attractive that foreign investors will pretty much do anything to get in anyway.

So what happens? An elaborate structure is cobbled together that includes offshore holding companies, onshore subsidiaries, and a series of exclusive commercial agreements. This is done to approximate, as much as possible, a direct investment.

Here’s the crux of the matter. Is this kind of structure an example of a legal gray area under Chinese law? News Flash: this isn’t a gray area at all; it’s obviously improper, designed to circumvent Chinese foreign investment law.

Yeah, I really said that. It’s rather obvious. All those folks out there, including many of the top Internet firms in China that received foreign money, who set things up to skirt legal restrictions, are violating the spirit of the law.

Stan then points out that the real issue with VIEs is not their legality, it is simply whether the Chinese government will continue to look the other way and allow them to continue:

To be clear, I’m not suggesting that legal uncertainty doesn’t exist. Indeed, when I counsel these guys, the discussion is not “Hey, you know you’re violating the spirit of the law?” They already know that. What they really want to know is the likelihood that: a) their structures will be enforceable, and b) will the government swoop down on them at some point and force them to restructure (e.g. Yahoo/Alibaba).

So yes, there is uncertainty here with respect to enforcement of these structures and their related commercial agreements. Moreover, the authorities here are aware of these “spirit of the law” violations and generally allow them to exist (at least until they decide otherwise).

That’s a far cry, however, from suggesting that the structures themselves occupy a gray area under Chinese law. They don’t. That’s wishful thinking and a rationalization.

But I understand what’s going on here, at least psychologically. If there is a gray area, then the investor and his lawyer are off the hook, at least to a certain extent. Instead of telling the Board of Directors “I knew it was illegal, but since everyone is doing it, we decided to go for it and hope for the best,” a more respectable “The legality of the structure is unclear, so we moved forward as carefully as possible” can be used instead.

So true.

In fact, I am going to go a step further and say that the Chinese government generally does not crack down on foreign companies unless their violations of Chinese law are clear. So the next time a foreign company claims its Chinese legal problems were due to “gray areas” at least make them explain the law being discussed.

I also like Law Professor Donald Clarke’s post, “Phantom gray areas in Chinese law.” Professor Clarke also notes how “gray areas” are used as an excuse for contravening what was actually quite clear:

I want to recommend this post from China Hearsay on what the author (Stan Abrams) calls “phantom gray areas” in Chinese law. These are areas where the law really isn’t uncertain at all, but people for various reasons like to pretend it is. Sometimes it’s just because they don’t like the rule; sometimes it’s so that they can blame unpredictable government policy instead of themselves when things go wrong. Stan’s example is that of the use of contractually-based Variable Interest Entities to attempt to get around Chinese restrictions on foreign ownership in various industries.

One favorite area of mine is the uncertainty I often heard alleged about what would happen to long-term land-use rights under the Urban Real Estate Administration Law when their term expired. (This is before the Property Law injected real uncertainty into the process.) Well, the answer was always quite clear: everything goes back to the state, including all buildings on the land, without any further compensation. But holders of LURs didn’t like this result – they would conjure up pictures of granny being thrown out onto the street as year 70 expired. (As if the LUR holder hadn’t had a full 70 years’ advance notice that this was going to happen!)

Where’s the gray?

What do you think? 

  • Hua Qiao

    Love your blog, Dan. But I disagree with you, sort of. I deal in the financial industry in Beijing and I would say that while the laws may be clear, the regulatory clarity is not. In China, since many industries are regulated, the interpretation of regulators is just as important as laws. More important perhaps. It’s not unusual for regulator constraints to be based on verbal announcements of the chief regulator (often in a speech). These become concrete before anything is written down.
    And then, there is inconsistent application or interpretation by differing regulatory branches of the same agency. I know this to be a fact. Our firm, in Beijing, is treated much differently than similar firms in Shanghai, a more friendly business climate.
    So, while I won’t argue with you about laws, I will argue with you about the inconsistent enforcement of rules and regulations.
    Indeed, the VIE structure at Alibaba was used in response to lack of clarity about how Regulatory officials would respond to the Alipay application.

  • http://www.sbr.net.cn Stanley

    Dan you’ve never had to deal with a WFOE set up and then another Gvt. dept tells you they own the land, its not zoned for commerce and you’re occupying illegally? If you don’t blame the gray, you’re too black and white about it.

  • http://docs.law.gwu.edu/facweb/dclarke/ Don Clarke

    Hi, Dan – your post and Stan’s stimulated a lot of thought for me and I’ve made some comments (disagreeing in some respects) on my blog here: http://bit.ly/l10sCC.
    Would welcome your further comments.
    Best wishes,
    Don Clarke

  • FongLong

    I think that US based lawyers are much better at understanding our own legal problems in China than China ones. That is the jist of it.

  • Andeli

    There is no grey areas with regards to foreign capital enterprises as they only exists through decree. It is clear that their rights to conduct business can be revoked at any point of time no matter if they are VIE, WOFE or any other form of enterprise (not saying it will happen, but the possiblity always exists).
    It that sense it is somewhat meningless to talk of allowed, restricted or grey as everything exists by decree. Since the 1980s there has been a standing decree that foreign private capital enterprise is allowed in some areas of business to be determined case by case. Areas of business not directly mentioned by decree or case are all illegal.
    So sometimes business is allowed, sometimes restriced and sometimes somewhere in between. This is not determined by law but by those who at the time hold the right to enforce the decree (a business license is a proof of this decree). This often changes back and forth over time.
    What is not decree is article 6 in the PRC constitution “The basis of the socialist economic system of the People’s Republic of China is socialist public ownership of the means of production, namely, ownership by the whole people and collective ownership by the working people”. This is a real law that cannot be changed by decree.

  • Tim

    A gray area in a legal context suggest that no relevant law exists. China’s laws and regulations may have loopholes be poorly enforce and lack transparency but the country has fewer and fewer gray areas.
    Uneven enforcement of regulations or poor due diligence are not examples of gray areas.

  • Twofish

    Andeli: There is no grey areas with regards to foreign capital enterprises as they only exists through decree.
    This is factually incorrect. Much of the Chinese law regarding foreign enterprises is set up by a law passed by the National People’s Congress (see the Wholely Foreign-Owned Enterprise Law). Also, the Legislation Law states that any expropriation of non-state enterprises has to be authorized by a specific law passed by the NPC, so the State Council and the Politburo can’t simply seize foreign enterprises. The Politburo could get the NPC to pass a law to seize foreign enterprises, but getting the NPC to pass anything takes months if not years.
    There are areas of Chinese law that could change overnight. For example, the Catalog on Guidelines for Foreign Investment is issued by the NDRC and MOFCOMM and that can change overnight.
    There are things that can change overnight and things that can’t. It’s not obvious which is which, that that’s why you need someone that has studied the situation to tell you what will happen in a particular situation. These people are called lawyers.

  • Twofish

    I don’t think that legal/illegal is a good way of thinking about VIE’s or much of Chinese law.
    There is “if you do this, a court may rule this structure invalid and you will end up losing your investment” versus “if you do this, you risk going to jail for eight years.”
    You could classify either as “illegal”, but it makes a *huge* difference. For example, in the situation with VIE’s, a court might or might not invalidate the contracts, but no one is going to jail. Things would be very different if you were violating currency restrictions or doing insider trading.
    There are also ethical considerations. For example, if you are a business person that is finding clever ways of circumventing restrictions on foreign investment so that you can make money in Chinese telecom, I’ll laugh at you if your scheme falls apart, but I’ll still invite you to parties and do business with you. However, if you are a business person that is finding clever ways of circumventing pure food laws so that you can sell tainted milk to kids, then I’ll have nothing to do with you.
    Also the problem with Chinese law is often not vagueness, but conflicting rules. This happens in the case of VIE’s. For example, the document that says that foreign investment in Chinese telecoms is prohibited is the “Catalogue for the Guidance of Foreign Investment Industries” is a decree by MOFCOMM and the NDRC. Now if the Chinese government were a bunch of robots then everyone else would look at the Catalogue and say “fine, we don’t issue licenses to companies that try to circumvent these rules.” What happens in practice is that the people that issue the licenses (namely the Ministry of Information Industry) looks at the catalog, and shrugs.
    Now you might think that someone higher up would resolve the conflict, and someday they might, but the Politburo, NPC, and State Council really has more important things to do right now, and who knows, when they do make a decision, it might be to tell NDRC to go jump in the lake.

  • Neils Rostrom

    “Dont blame it on the gray.” In China. Come on, what are you talking about?

  • Twofish

    I have big problems with the term “spirit of the law”. It’s not a term you find in Chinese law anywhere, and if you go to a Chinese court arguing that something is against the spirit of the law they won’t have any idea what you are talking about.
    The way that Chinese law works is that there is a list of General Principles that are stated at the beginning of each law. If you want to make a legal argument in China, then you have to use some principle that is stated in the law. For example,
    Article 6 The parties shall observe the principle of honesty and good faith in exercising their
    rights and performing their obligations.
    To a non-lawyer, this looks silly. *Of course* parties should be honest and act in good faith when doing a contract. *Of course*?
    However, it’s not silly. In the Chinese system, unless you can find a principle in some law, then you can’t invoke it in court. You can argue that the court should invalidate a contract because someone was dishonest, but that’s only because there is a law that says that people must be honest when they exercise their rights.
    A non-lawyer might think, but this is *common sense*. It might be common sense, but it’s not law, and coming up with law that incorporates “common sense” can take years. I know of someone that worked on one article of the bankruptcy law, and it took her a year to write one sentence.
    Now at this point, what ends up happening is that people write entire books on what “good faith” means, and you have tons of court decisions on what is and is not “good faith.” Because this is something that is well litigated, if you were to try to argue something is not in “good faith” in China you’d not only have to talk about that one article, but probably reference lots of decisions and texts saying “this is what people have decided what good faith means.”
    Now this matters in the case of foreign investment because there could theoretically be a law saying “contracts that violate state policies on foreign investment are invalid”. There could be but there isn’t. So there isn’t a general abstract principle that I know of that would automatically invalidate those contracts. You can get really abstract and try to argue that the contracts are invalid because they violate “social order” or violate “socialist ethics” (seriously look at Article 7). But there is a long series of decisions regarding what “social order” and “socialist ethics” mean.
    Since there isn’t a general abstract principle, it all boils down to looking at the detailed regulations, and at that point you have differences between agencies and a mess.
    So you might answer, is there an easy rule to tell me whether I should use abstract principles to determine what happens or whether I can’t and I have to use detailed regulations. In other words, when does the “spirit” or the law matter and when does the “letter” of the law matter?
    I don’t know of an easy rule, and “common sense” tends to be a bad guide. This means that if you a decision that depends critically on what the rules are and how they are applied, you can’t use common sense, but you have to pay money to someone that has studied the situation and can give you advice on what is likely to happen in a particular situation.

  • http://laowaiblog.com Laowaiblog

    It seems that the laws in China are not very transparent and understandable, even to many Chinese lawyers themselves. This requires a shift in thought – to allow people to understand what is allowed and what is forbidden and to enforce such distinctions fiercely.

  • Twofish

    Just a note on Prof. Clarke’s note on the formalist school of legal interpretation. I’m not sure that this applies here because if you take formalist arguments, you can argue illegality.
    For example with VIE’s. The document that says that these is prohibited is a decree by NRDC or MOFCOMM. MII licenses are not formally covered by a decree by NRDC/MOFCOMM. So if NRDC/MOFCOMM says no, and MII says yes, then in practice MII wins.
    Similarly with individual EJV’s. The law says that EJV shall consist of a LLC. The law does not say that EJV’s that do not consist of an LLC are prohibited. This is implied, but the problem with things that are implied is that different people could draw different implications.
    This is one of the problems with formalist arguments. Language can be inherently ambigious and you can use that ambiguity to make different arguments. For example, if you wanted to argue that individual EJV’s were illegal, you’d argue that by saying X, the law implies not-X is prohibited. Of course, the trouble with that is that if you wanted to argue the converse you could. You could argue that *of course* people agree that ….
    However, when people stand to gain or lose large sums of money or power, then saying *of course* doesn’t work. Also logical consistency also gets thrown out the window when money is involved. Yesterday, you said that this meant X, when today you are saying that this means not-X. Well, yesterday, I was going to make a ton of money if it meant X. Today, I’ll make a ton of money if it means not-X.
    You could try to deal with the problem by making everything hyper-literal. However, the problem with this is that you then will end up with situations in which the law *clearly* says X and also *clearly* says not-X.

  • Chris

    @Twofish
    Thankfully someone had sensible things to say on this issue.

  • Twofish

    Laowaiblog: It seems that the laws in China are not very transparent and understandable, even to many Chinese lawyers themselves
    I don’t really think it’s that much worse than most other legal systems. If law was transparent and understandable, why would people hire lawyers?
    Also, the fact that people are testing the limits of Chinese law is hardly unique to China. If you look at the development of securities law or corporate law, it turns out that there was a ton of legal experimentation. The difference is that in the US, a lot of that happened decades or sometimes centuries ago, whereas in China, it’s happening now.

  • http://www.yourfirm.de/jobs Jobs Kirsten

    Recently I had a discussion with my husband about exactly this issue. He argued that Chinese laws would be grey and answered in the same tone, you’re using. I think the reason for this misunderstanding might be the political and economic situation China is in since a few years.

  • Andeli

    Twofish “This is factually incorrect. Much of the Chinese law regarding foreign enterprises is set up by a law passed by the National People’s Congress”
    Well in law there is no factually incorrect. Correct or incorrect is for empirical science not for social science, thus we have lawers and judges.
    Most laws have to be subject to judicial review, if it is not then they are decrees. Or in some cases a law can be law, like the Chinese constitution law, through it being a self sufficient subject. As artical 5 in the constitution states there is no one above this constitutional law and thus no one can ever change it only amend to it. It is a self sufficient subject. In metaphysis it would be omnipotent and omniscient.
    I don’t see foreign owned anywhere in the Chinese constitution and thus they exists by decree, which can be removed or revoked at any point in time. One needs to be a citizen to be protected by the law. “The lawful private property of CITIZENS may not be encroached upon”. A WOFE is not a citizen and thus it exist by decree.

  • Andeli

    Twofish “Since there isn’t a general abstract principle, it all boils down to looking at the detailed regulations, and at that point you have differences between agencies and a mess”
    I would disagree on the general principle as “The basis of the socialist economic system of the People’s Republic of China is socialist public ownership of the means of production, namely, ownership by the whole people and collective ownership by the working people”.
    The goal is the above mentioned socialistic system. This is the general abstract principle that can apply at some point in time. As long as China is in a primary phase it is possible to create decrees that go aganist this general principle, but these decree for prohibiting ownership of land and WOFEs are decrees and not laws as they go against the general principle of the Chinese constitution, but are by decree allowed in this early stage of socialism. These decrees can at any point in the future be revoked.
    The sui generis of the Chinese law is “ownership by the whole people and collective ownership by the working people”. It is ” people’s democratic dictatorship ” that create the base for the Chinese state as in some European countries it is the monarchy or in the US self-evident truths.
    So the principle of the law is ownership by the whole people and collective ownership by the working people in which each work according to his ability and each receive according to his need. Whatever deviates from this are temporary decrees and not a laws.

  • Twofish

    Andeli: Well in law there is no factually incorrect. Correct or incorrect is for empirical science not for social science, thus we have lawers and judges.
    If you say that article one section three of the US constitution says “worship the great God zuzu” that’s factually incorrect. We can argue what the US constitution means.
    In Chinese law, there are laws, regulations, and decrees. Calling something a law a decree, is like calling a dog a cat. WFOE’s are created from a law. The Catalog of Foreign investment is a decree. The two are very different since in China, law overrides decrees.
    Now if you are inventing your own definition so that law means decree, that’s your business, but it’s going to be extremely confusing discussing anything.
    Andeli: The goal is the above mentioned socialistic system. This is the general abstract principle that can apply at some point in time.
    No they can’t. One important rule of Chinese law is that constitutional principles are not directly applicable. This can work against you if you try to invoke freedom of speech rules, but this will work for you when it comes to things like the meaning of socialism. The rule is that the legislature decides what the constitution means, and how to apply constitutional principles.
    One other Chinese legal rule is that Party organs must act indirectly through state organs. In other words, the Politburo can’t scrap WFOE’s by themselves. The Politburo can order the NPCSC to scrap WFOE’s, but that means going through the legislative mechanism which takes time.
    In the case of foreign enterprise, the NPC has decided that socialist system involves foreign direct investment. The NPC or its Standing Committee can change it’s mind and revoke the WFOE law. However the important thing is that it can’t do it *quickly*. It typically takes months or years for the NPCSC to amend a law, so if the WFOE law was about to change, we’d know about it.
    Within the framework of Chinese law, there are rules for how quickly things can change, and who can change it. Yes the NPCSC can change the WFOE law, but they can’t do it tomorrow. This is different from decrees that *can* change very quickly.
    Now, it’s possible for something to happen that would cause things to go outside the legal framework (for example a military coup), but I don’t think that’s likely. Also there is the issue of time scale. I can imagine a political crisis that would cause the Communist Party scrapping the legal system. I don’t think it’s going to happen after lunch, and I also don’t think it’s going to happen next week or next month and probably not next year.
    Andeli: Most laws have to be subject to judicial review, if it is not then they are decrees.
    That’s a bizarre definition. Laws passed by the UK Parliament are not generally subject to judicial review by the UK courts (yes I know EU law complicates things), but are you seriously trying to argue that England has no laws? The US has a good system of judicial review, but there are countries with different systems that also work well, in which courts cannot override legislative acts. France for example. In Germany, regular courts cannot declare a law unconstitutional, only the Constitutional Court can.
    You can make up whatever rules and definitions you want, but I think you are seriously detached from reality.

  • Twofish

    Something else to point out here is that changing the PRC Constitution isn’t that much harder than changing an NPC law. To amend the constitution takes a 2/3 vote of the NPC, whereas to change a law takes a majority vote of the NPC or the NPCSC.
    Also the vote threshold doesn’t matter that much. What happens in practice is that laws and constitutional amendments are voted in under near unanimous votes, after there has been consensus reached on the content of the amendments.
    One reason that the NPC and NPCSC takes so long to do anything is that there is an informal but very strong rule that things are not approved by “bare majority” votes, which gives interest groups within the Party-State veto power over the content of legislation. If some group within the Party-State feels strongly enough about the content of a law that they are unwilling to vote for it, that means that people just sit down until that groups issues are resolved.
    This is why it’s important to get the difference between “law” and “decrees”. The politics behind creating a “law” in China is very different than creating a “decree.” Decrees are issued by individual ministries. They can be quick because you don’t have to get everyone to agree, but they can also be useless if it’s issued by a Ministry that no one cares about (i.e. Ministry of Culture). Also if the Ministry of Culture issues a decree and the Ministry of Public Security issues an decree that says the opposite (which *does* happen), then I’ll give you two guesses who is going to win.
    Now you can invent a language in which a dog is a cat, and a frog is a fly, but you’ll just confuse everyone. So if you want to argue that Chinese laws are really “decrees” you are doing something like that, and these sorts of “word games” are pretty useless for someone that is actually trying to make money in China.

  • Andeli

    Twofish: “If you say that article one section three of the US constitution says “worship the great God zuzu” that’s factually incorrect. We can argue what the US constitution means.”
    Correct and I never stated that there is no decree about WOFEs. I stated that it is not a law but a decree. I never said anything about the existence of the wording. Talk about a red herring argument. If the words in the US constitution exists or not is a more philosophical discussion, where I personally hold the hermeneutic view that being is based on a physical being that is immer schon vorausgehned, but it is a little off topic.
    TwoFish: ” One important rule of Chinese law is that constitutional principles are not directly applicable”
    Are we are both inventing things now? Article 5 looks pretty clear. Please point me to where you have the information that the constitutional principles are not directly applicable.
    “No laws or administrative or local rules and regulations may contravene the Constitution. All state organs, the armed forces, all political parties and public organizations and all enterprises and institutions must abide by the Constitution and the law. All acts in violation of the Constitution or the law must be INVESTIGATED.”
    What does investigated mean in this case than? Make note that this article has been one of the key elements in the debate of the fairness of the hukou system.
    I don’t play word games I look for definitions or reflect over them. You and I know that there are forms of judicial review in England, and that individuals have ways to challenge the laws in courts both in species and genus, but true mostly in species in the Administrative Court.
    Twofish: “In Germany, regular courts cannot declare a law unconstitutional, only the Constitutional Court can”.
    Ok this one is funny. I claim that A: a system needs judicial review to create laws if this does not exist, then it creates decree unless the laws claim sui generis. If this does not exist than I claim it a society to be a ruled by decree.
    You say that Germany has A (Constitutional Courts that do judicial review). I claimed that A is a necessary but not a sufficient ground to be defined as B (a law), and you claim that Germany has A as an argument against my statement? Remember I only need to have my premise of “judical review” upheld in any form as to my argumentation being vallidated. Please explain I don’t understand other red herring maybe?
    TwoFish: “One other Chinese legal rule is that Party organs must act indirectly through state organs. In other words, the Politburo can’t scrap WFOE’s by themselves. The Politburo can order the NPCSC to scrap WFOE’s, but that means going through the legislative mechanism which takes time”
    That a decree takes time to make does not make it a law. I would agree that it could be a necessary ground for being defined as a law, but is by no means a sufficient ground to be defined as such.
    I cannot quite guess what constitutes a law for you, so I would like your definition of a law, what is necessary and sufficient for you to call something a law?

  • Chris

    @ Andeli
    You are clearly not a lawyer and your arguments are spurious.
    Indeed most of the comments on this thread are off topic and do not address the thrust of the post, which was sensible and to the point. China’s laws on foreign investment are clear, the WOFE laws etc reasonably transparent and implementation relatively straightforward. When it comes to taking calculated legal risks through using “clever lawyering” that may result in a particular structure or contract being ruled invalid or indefensible, most of us are clear as well. Different foreign companies risk appetites are different and some willing to risk a loss of investment or a negative tax assessment.
    I have yet to see a negative Chinese court ruling regarding a WOFE’s property rights or a contract issue based on constitutional clauses. At that point we;ll enjoy a range of new freedoms related to speech, assembly and the great firewall will be shut down. Not holding my breath….

  • Andeli

    Chris: “You are clearly not a lawyer and your arguments are spurious”.
    Never claimed to be a lawer. The problem with most lawers is that they seek realism and don’t reflect over the basic premises of the laws. And whatever my arguments are you have to show they are wrong by logic, and I don’t take your ostensive definition as an argument.
    We can quickly agree that if an agent goes against the decrees of relevant departments as with the VIE structure, then there is risk of getting shut out. I don’t think anyone disagrees with that. A discussion to that end should take no more then 5 min. Yes there are risks when an agent ventures into an area besides those that have by decree been declared open.
    The question is by what legality or by what law is this determined? or is there no law but a decree that stands as a temporary solution as with the ownership of land until the constitution comes into play? These questions are important as they might point to what to do next time this issue arises. An important characteristic of a law is predictability something a decree often lacks.
    And thank you for telling what is and is not off off topic on the this thread. Hope you can start the next thread by telling us what is allowed within the scope of the thread.

  • Twofish

    Andeli: I cannot quite guess what constitutes a law for you, so I would like your definition of a law, what is necessary and sufficient for you to call something a law?
    Simple. I read the title
    A law is something that is called a law….
    For example the Law on Wholly-Foreign Owned Enterprises
    http://www.ccpitqd.org/law/?type=detail&id=29
    A decree is something that is called a decree….
    For example Decree #57 promulgating the Catalogue for the Guidance of Foreign Investment Industries.
    http://www.fdi.gov.cn/pub/FDI_EN/Laws/law_en_info.jsp?docid=87372
    In China, laws are passed by the National People’s Congress and are not subject to judicial review. Decrees are issued by local governments and ministries, and are subject to judicial review.

  • Twofish

    Andeli: Are we are both inventing things now? Article 5 looks pretty clear. Please point me to where you have the information that the constitutional principles are not directly applicable.
    There’s a famous decision that the Supreme People’s Court made in 1955 in replying to a query by the Xinjiang high court in which the Court stated that Constitutional provisions are not directly judiciable. Also there is the famous Qi Yuling case
    http://www.law.suffolk.edu/highlights/stuorgs/lawreview/documents/Tong_AdvancePrint.pdf
    Note that the issue in Qi Yuling was not whether or not the courts can override an NPC
    Andeli: We can quickly agree that if an agent goes against the decrees of relevant departments as with the VIE structure, then there is risk of getting shut out.
    That’s not necessary true. If the decree is contrary to an administration regulation by the State Council or a law passed by the NPC, then you can file a lawsuit under the Administrative Litigation Law to invalidate the action. The reason that VIE’s exist is that the prohibition against foreign investment in telecommunications is *not* a law or an administrative regulation.
    There’s stuff that the Chinese government thinks ought to be allowed. There’s stuff that the Chinese government thinks ought to be prohibited. Right now, the Chinese government hasn’t quite figured out what to do with VIE’s.
    Andeli: The question is by what legality or by what law is this determined?
    There’s a very elaborate and complex process by which these sorts of decisions are made in China. That’s why the difference between *law* and *decree* is important. You cannot challenge the legality of a law in a Chinese court. You can challenge the legality of a concrete administrative action that results from a decree.
    Chris: I have yet to see a negative Chinese court ruling regarding a WOFE’s property rights or a contract issue based on constitutional clauses.
    The reason for this is that in the Chinese legal system, constitutional interpretation is a legislative act and not a judicial one. You will have people invoke constitutional arguments while a law is being drafted, but once a law has been approved, the constitutionality cannot be challenged within the courts.

  • Andeli

    Twofish “There’s a famous decision that the Supreme People’s Court made in 1955 in replying to a query by the Xinjiang high court in which the Court stated that Constitutional provisions are not directly judiciable. Also there is the famous Qi Yuling case”
    Thank you for the Qi Yuling case.
    p107.
    Tong argument 1: “First, both the report of Shandong Superior Court and the corresponding
    Reply of the Supreme Court were unnecessary “
    Well it did find it necessary and it is the right of the Supreme Court to hear any case. Article 123. I would say that a simple appeal to authority argument is enough to refute this.
    Tong argument 2: ” ….go beyond the judicial authority allowed in Article 126 of the Constitution and Article 4 of the Organic Law of the People’s Court, which require the judiciary to be subject to the law”
    I would argue that “to be subject to the law” means that it cannot violate any part of the Chinese Constitution law, and not mean that it cannot exercise its judicial functions based on the Constitution law.
    The constitution says in article 2 that the “The people administer state affairs and manage economic, cultural and social affairs through various channels and in various ways in accordance with the law.” In Chinese the article even states “人民依照法律规定…,管理社会事务” The People must in accordance with the principles of the law / laws……., manage state affairs. Now as the people must act in accordance with the law and the basic for NPC is the people. I would argue that the NPC is subject to the law and thus judicial review. They too must administer in accordance with the law. And as the Chinese constitution is a law 中华人民共和国宪法 it must fall under the jurisdiction of The Supreme People’s Court as the highest judicial organ to pass judgement on issues regarding the law. I would also argue that the Sui Generis of PRC is the people’s democratic dictatorship which is stronger than democratic centralism.
    Tong argument 3: “In Qi’s case, her right to receive an education was not infringed on by a public power. Qi asserted her right against an equal private party rather than against a public power. As a result, this was not a constitutional case at all. The Supreme Court regarded and propagated this case as a constitutional one only because of the court’s ignorance about constitutional law.”
    First of all to claim ignorance of others especially the Supreme Court of a country is in my view wrong. The funny thing is that Tong is guilty of the ignorance that he accuses others of. In Chinese society it is implied that it’s not only the individual that is on trial but the whole family. The court indirectly includes the schools head master and the head of the family by adding to the monetary compensation.
    Second why can a private individual’s misuse of Guanxi not infringe the constitutional right of an other private individual?
    Still the article believes that a constitutional court and thus judicial review is consistent with statutory law tradition of China. So I don’t see how it refutes my argument that the Chinese Constitution does have the possiblity of judical review imbedded within it or the possiblity that the constitutional principles are not directly applicable. The Peoples Supreme Court even passed a judgement based on the Constitution that stood for 7 years. Annulled for lack of use and not for being wrong.

  • Andeli

    TwoFish “A law is something that is called a law….”
    Andeli’s “law of flat worlds”.
    Article 1: The flat world, of which we shall here speak, is nothing but a
    simple substance, which enters into compounds. By ‘simple’ is meant
    ‘without parts.
    Article 2: And there must be simple substances, since there are compounds;
    for a compound is nothing but a collection or aggregatum of simple
    things.
    Article 3: Now where there are no parts, there can be neither extension
    nor form [figure] nor divisibility. These flat worlds are the real atoms of
    nature and, in a word, the elements of things.
    And so on……
    I don’t need anything to back up my articles with? force, system, tradition, divined right ? Did I just create a law? Talk about a cat being a dog and a dog being anything I declare it to be.
    The meaning of a word or concept in emperical science or social science is not derived by denomination. Try again. What constitutes the concept of law for you?