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Monday, October 29, 2012

The Wen family fortune and Party disciplinary rules

Here’s an interesting twist to the recent New York Times story on the family fortune of Wen Jiabao. (I blogged about it here.) The story at no point accuses Wen or his family members of doing anything illegal. But what about Party disciplinary rules? Here there may be a problem, even though (as I’ll explain) it’s because the rules as written are arguably tighter than is reasonable.

The bottom line is that Wen appears to be in violation of a Party rule requiring senior officials to prevent their close relatives from engaging in business in areas (geographical or subject-matter) under their jurisdiction or, failing that, to resign. Since Wen is the premier, all of China falls within his geographical jurisdiction, and pretty much all areas of business would be within his subject-matter jurisdiction as well. This, of course, means that his close relatives can’t engage in any business in or even relating to China at all. I don’t claim that this is a reasonable or practical result, or that it was intended by those who wrote the rule, but that’s how I read it. My reasoning is below.

In 1997, the Party promulgated a set of disciplinary rules called the “Chinese Communist Party Several Principles on Clean Administration of Government by Party Member Leading Cadres (for Trial Implementation)” (中国共产党党员领导干部廉洁从政若干准则(试行)) (the “1997 Principles”). Article 5 of the 1997 Principles states:

The spouse, children, and spouses of children of leading cadres at or above the level of province (ministry) may not personally engage in business, set up enterprises or work in a wholly foreign-owned enterprise within the region and the subject-matter scope of that leading cadre’s jurisdiction. 省(部)级以上领导干部的配偶、子女及其配偶,不准在该领导干部管辖的地区及管辖的业务范围个人经商办企业和在外商独资企业任职。

Obviously, there are many questions here.

  • In terms of substance, what does it mean to “engage in business” or “set up enterprises”? The term I’ve translated as “set up” is particularly vague; it just means “do” in a general sense, so it’s overly restrictive to interpret it as just meaning “to establish” in some formal way. Perhaps “to be involved in” is better.
  • Does the term “personally” qualify the forbidden activity in any important way? Is it OK to do it through proxies?
  • In terms of logical structure, are “engage in business”, “set up enterprises”, and “work in a wholly foreign-owned enterprise” three distinct activities, each of which is prohibited? Or does the lack of a serial comma between “engage in business” and “set up enterprises” suggest that the meaning is ““engage in business by setting up enterprises”? I believe three distinct activities are covered here. In other places – indeed, in Art. 2 of this very regulation – we see a serial comma between “engage in business” and “set up enterprises”, making it likely that they are intended to be distinct activities and that the absence of a serial comma here is just a mistake or is otherwise insignificant. On the other hand, we could also read them as a single activity that essentially captures the idea of investing and getting profits as opposed to simply being a company employee.
  • Is the prohibition only against activities that satisfy both criteria of being in the leading cadre’s geographic and subject-matter jurisdiction? I believe this would be a silly interpretation; I translated the relevant conjunction as “and” instead of “or” only to avoid hiding the possible problem, but the correct English translation would be “or”. The grammar of Chinese Party rules is just not so strictly logical as the grammar of English legislation. Clearly what is intended is that where the leading cadre jurisdiction is defined by region, the relatives can’t do business there, and when it’s defined by subject-matter, the relatives can’t do business in that field.
  • What’s the enforcement mechanism?

Later the same year, the Party issued a set of implementing measures (《中国共产党党员领导干部廉洁从政若干准则试行》实施办法) (the “1997 Measures”). These explain some of the concepts of Article 5 of the 1997 Principles.

  • “Personally” “engage in business” and “set up enterprises”: Art. 31 of the 1997 Measures refers you back to Art. 10, which defines what it means for the leaders themselves to “personally” “engage in business” and “set up enterprises” (also forbidden under Art. 2 of the 1997 Principles). Art. 10 states that this means “to engage in business and set up enterprises with one’s sole investment, to engage in business and set up enterprises in joint venture, joint stock, cooperative, or partnership form, or to engage in business and set up enterprises oneself through subcontracting, leasing, being hired, or other forms.” (个人独资经商办企业,与他人合资、合股、合作、合伙经商办企业,私自以承包、租赁、受聘等方式经商办企业。) It seems clear here that “engage in business” and “set up enterprises” are just general terms that should not be read too strictly. Very possibly, however, the idea of “setting up enterprises” is there as a way of implying that equity ownership is the key to what’s forbidden, and that merely being the employee of an enterprise without a significant interest in its profits is not forbidden.
  • The enforcement mechanism is spelled out in Art. 31 of the 1997 Measures: if you can’t get your relatives to stop doing the forbidden things, then resign or ask for a re-assignment. (拒不纠正的,领导干部应当辞去现任职务或者由组织上调整其职务.) Moreover, the matter should be handled in accordance with Art. 88 of Party’s Regulations on Disciplinary Punishments (纪律处分条例). In the linked version of these regulations, Art. 88 is about retired cadres, so perhaps there has been a subsequent renumbering; I’m not positive the cross-reference is still correct.

In subsequent years, the Party issued further clarification of the forbidden activities of the spouse, children, and spouses of children of leading cadres at or above the level of province or ministry (hereinafter, “Covered Relatives”):

  • In 1998, a “Supplementary Rule” provided that Covered Relatives could not work for the foreign side in joint ventures.
  • In 2000, an “Interpretation” of a different rule defined “personally engage in business and set up enterprises” as ”engaging by oneself or together with others in a private economic organization; personally serving in a senior management position in a private economic organization; personally engaging in compensated social middleman services; personally registering companies outside of mainland China and then returning to the mainland to engage in economic activities; etc.” (个人经办或与他人合办私营经济组织;个人受聘担任私营经济组织的高级职务;个人进行有偿社会中介活动;个人在国(境)外注册公司后回国(境)从事经营活动等。) This Interpretation is worth looking at because it also spells out in detail a number of substantive prohibitions applicable to the close relatives of senior leaders. Interestingly, the Interpretation does not by its terms apply to officials such as Wen who are above the ministry level.

In 2010, a new version of the 1997 Principles (the “2010 Principles”) was issued and the old version superseded. The nepotism provision in the 2010 Principles, also in Art. 5, makes a key change: the senior official is no longer presumed to control, and made responsible for, the activities of his relatives. Instead, he is required not to help them out in their business activities. But he is not required to resign simply because they are engaging in business in areas that might be within his jurisdiction. It’s not clear whether the 2000 Interpretation noted above survives; it’s about the activities of relatives of senior officials that conflict with the public interest and significantly overlaps the 1997 Principles. Thus, the following conclusions apply only to things that happened before 2010.

Here are a few conclusions we can draw from all this – and remember the qualification I just made about timing.

  • The 1997 Principles cover no activities by Wen’s mother or siblings.
  • The 1997 Principles cover only activities by Wen himself, his spouse, his son, and his son’s spouse.
  • These statements from the NYT story describe activities by Winston Wen that, if they occurred before 2010, would be covered by the 1997 Principles:
    • “The couple’s only son sold a technology company he started to the family of Hong Kong’s richest man, Li Ka-shing, for $10 million, and used another investment vehicle to establish New Horizon Capital, now one of China’s biggest private equity firms, with partners like the government of Singapore, according to records and interviews with bankers.”
    • “Winston Wen and his wife, moreover, have stakes in the technology industry and an electric company, as well as an indirect stake in Union Mobile Pay, the government-backed online payment platform.”
    • “Winston Wen’s earliest venture, an Internet data services provider called Unihub Global, was founded in 2000 with $2 million in start-up capital, according to Hong Kong and Beijing corporate filings.”
    • “[Winston Wen] made an even bolder move in 2005, by pushing into private equity when he formed New Horizon Capital with a group of Chinese-born classmates from Northwestern.”
  • I can’t find in the article a statement about Wen’s wife that unambiguously indicates a violation of the 1997 Principles. Many of the investments attributed to her seem in fact to have been made by entities of which she was an executive, not necessarily an owner. Of course, she may have been in a position to extract benefits by means of her position just like any other official in a government agency or state-owned enterprise, but that’s not a per se violation of the rule I’m discussing here.

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