Monday, September 19, 2005
The OECD has just come out with "Economic Survey of China 2005", its assessment and recommendations regarding the main economic challenges faced by China. Following is a summary of the report's assessment of legal issues:
Prospects could be enhanced by further modernisation of the business framework,
The growing importance of the private sector in supporting the economy makes it all the more important to further modernise the legal framework for business. The government is preparing legislation in three important areas: bankruptcy law, company law and the implementation of the constitutional amendment on property rights. The second draft of the bankruptcy law has now passed the legislature and is generally acknowledged to follow international best practice. The law should clearly establish the precise claims that employees have on assets, limiting payments to wages owed to employees and leaving other costs, such as redundancy and resettlement expenses, to social funds. Secured creditors would be more likely to lend to private companies under such circumstances. A new company law is under consideration. A reduction in the barriers to the formation of both limited and joint stock companies should be a priority. The upper limits on the number of shareholders in a limited company should be abolished, while at the lower end companies with one shareholder should be allowed. For both sorts of companies the minimum capital requirements needed for incorporation should be lowered. Such changes would facilitate the expansion of privately-owned companies. The revised company law should aim to improve corporate governance, notably offering better protection to minority shareholders in both quoted and unquoted public companies and defining the role of corporate bodies such as the supervisory board and the duties of directors. In addition, the proposed anti-monopoly law should cover a much wider range of anti-competitive activities than do current laws. Finally, rapid introduction of the laws to implement the constitutional amendment on private property rights should be envisaged.
with better enforcement of laws in the economic sphere
Beyond the content of the law, though, there is a more substantial problem of giving force to economic laws. A relatively complete set of laws and regulations covering intellectual property rights is in force, having been updated in 2001. The focus of government policy in this area has now switched to the enforcement of these laws. Adequate protection of intellectual property is also of increasing importance to Chinese entrepreneurs. Weaknesses here may hold back the degree of innovation and product development of local companies. At present, in this and other areas, it can be very difficult to obtain judgements in court and even more difficult to obtain enforcement of the judgement. Such difficulties are not just felt by foreign enterprises. Chinese entrepreneurs feel that expansion across provincial borders is made difficult by the lack of objectivity of local judiciaries when it comes to trying cases involving the infringement of trade secrets, intellectual property rights and contract enforcement more generally. The solution would appear to require a series of steps. One might be to transfer some of the financing of courts to the central government; another would be increase the extent of specialisation of the courts (notably in the area of bankruptcy and intellectual property).
To the list of imminent legislation should be added a substantially revised Securities Law, which could be passed as early as the end of this year, and in any case probably next year.