Chinese Law Prof Blog

Editor: Donald C. Clarke
George Washington University Law School

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Saturday, September 8, 2012

Canadian employee of short seller detained in China on charge of criminal libel

Three unfortunate trends in China have converged on one unfortunate man, Huang Kun. The trends are: (1) fight what you feel is bad information not with good information but with punishing the person who publicized the bad information; (2) when you have a business dispute, get your local police on your side to turn it into a criminal matter; and (3) treat ethnic Chinese, especially former PRC citizens, worse than you do "legitimate" (HT: Todd Akin) foreigners - you know, the ones with the big noses and the pale skin.

Here's the story in the Globe and Mail. Huang apparently helped the web site alfredlittle.com in its research on a Vancouver-based mining company apparently controlled by Chinese nationals; the Globe report says it's listed on the Toronto Stock Exchange, but the alfredlittle.com web site reports on it show it as listed on the NYSE. Recently there has been a lot of news about short sellers badmouthing Chinese companies, and there has been official and unofficial pushback. On the official side, China recently made it much harder for people to get information about companies from the information in the records of local offices of the State Administration of Industry and Commerce. On the unofficial side, there's recently been a loud debate between Kaifu Lee and some Chinese companies on the one side and short-seller Andrew Left on the other.

This move - I don't know why it's being reported only now, since Huang was first detained last December - marks another tactic: intimidation. I don't imagine a lot of people are going to be willing to actually go on the ground and poke their noses into Chinese companies once this news gets out.

Let's step back a bit and think about what's going on here. Here's one question: the objects of these short sellers say the short sellers are making it all up just so they can make a buck, and therefore they are bad guys who deserve to be punished. Maybe some are making stuff up. But maybe some aren't. The question is, is criminal law the best way to distinguish between the two and punish the bad ones?

I think not. There's no reason to think capital markets can't handle this perfectly adequately. If it were easy to make a buck by selling a company short and then publishing bad stuff about it, we could all do it. Why can't we? Because I'm not going to dump my holdings in some company simply because some random person - who, by the way, openly states that he has a short position in the stock - tells me it's a dog. Why would I believe him any more than I believe someone who tells me that some other stock is a sure thing? The market is no doubt full of fools but a lot of money is controlled by people who aren't that naive. They're going to want to know who this person is, what his sources are, and what his track record is. If he has a record of successfully exposing frauds and dogs, well, by golly, what's the matter with him making money from it? Remember that the short seller takes risks himself. If he sells short and then issues a report that turns out to be nonsense, he's going to lose money. If Kaifu Lee really believes that Andrew Left doesn't understand the Chinese internet industry (this is what he has claimed), then why isn't he happily confident that Andrew Left will lose his shirt by selling it short? The market will eventually figure out that Left is not right (sorry!) and in the meantime, Kaifu Lee and his friends could be making a killing by buying its underpriced stock.

The second intesting question is: how will capital markets react to this news? The significance of this news for China-related companies is this: the information about them will be much less accurate in the future. As I suggested above, this action will have its intended effect: scaring the crap out of people who are thinking of investigating fraud in Chinese and China-based companies. We may still see short-seller reports, but they will be based on less solid information and more speculation. Disclosure is already iffy enough; now we can expect it to be even worse. Will markets understand this? Will they care? I sometimes wonder if the vast edifice of disclosure erected in the US under the 1933 and 1934 securities acts and associated SEC regulations is actually valued by investors. My suspicion is that people will keep buying stock in Chinese companies listed overseas, and that fraud will keep getting discovered.

I hasten to add that I have no information, and express no opinion, on the merits of this particular case. For all I know the mining company got a bum rap from alfredlittle.com. But I think the markets can handle downward hyping as well as they can handle upward hyping without heavy-handed criminal sanctions.

September 8, 2012 in Commentary | Permalink | Comments (0) | TrackBack (0)

Compensation for work-related injuries in China

Here's a report by the Hong Kong-based China Labour Bulletin. CLB is the vehicle for exiled June 4th labor activist Han Dongfang and does great work.

September 8, 2012 in Commentary, News - Chinese Law | Permalink | Comments (0) | TrackBack (0)

Possession of state secrets in the Chinese law on defection

In my last post I translated the part of the Criminal Law dealing with defection. It calls for enhanced punishment for state personnel who defect while possessing state secrets. The Chinese term used here for "possess" is 掌握 zhangwo. A colleague emailed me to note that this should be understood here to mean simply knowing state secrets, not necessarily physically possessing them. I completely agree. While zhangwo literally means "to grasp in the palm of the hand", when I think about it I don't think I've ever heard it used other than metaphorically.

On the other hand, that poses a problem: since only state personnel can commit this crime, and the definition of state secrets is so broad that it is impossible to imagine any state employee who does not know at least some state secrets, what is intended by the language about enhanced punishment? Who would not be eligible?

September 8, 2012 in Commentary | Permalink | Comments (0) | TrackBack (0)

Thursday, September 6, 2012

Can Wang Lijun get off on a technicality?

Sure—when pigs fly. That was just to get your attention. But there is indeed an interesting technical flaw in one of the charges against him. (If you can’t wait, see my third point below.)

Xinhua has reported [Chinese | English] that Wang Lijun, the ex-Chongqing police chief and former ally of Bo Xilai until their spectacular split led to Wang’s flight to the US consulate in Chengdu, will be charged with perversion of the law for private purposes (徇私枉法), defection (叛逃), abuse of power (滥用职权) (presumably Article 391 of the Criminal Law, although there are other possibilities), and taking bribes (受贿).

The crime of defection is set forth in Article 109 of the Criminal Law:

国家机关工作人员在履行公务期间,擅离岗位,叛逃境外或者在境外叛逃的,危害中华人民共和国国家安全的,处五年以下有期徒刑、拘役、管制或者剥夺政治权利;情节严重的,处五年以上十年以下有期徒刑。When personnel of state organs, during the period when they are performing public duties, leave their post without permission and defect to beyond the border or defect while beyond the border, thereby endangering the state security of the People’s Republic of China, they shall be punished by fixed-term imprisonment, detention, control, or the deprivation of political rights. Where the circumstances are serious, the punishment shall be from five to ten years of fixed-term imprisonment.

掌握国家秘密的国家工作人员叛逃境外或者在境外叛逃的,依照前款的规定从重处罚。When personnel of state organs who are in possession of state secrets defect to beyond the border or defect while beyond the border, they shall be given a relatively heavy punishment under the terms of the preceding paragraph.

There are a number of interesting points to make about this rule. First, remarkably enough, defection is not defined either here or, as far as a quick bit of research reveals, anywhere else in the Chinese legal system. It apparently involves going abroad or staying abroad without permission, and is a crime that can be committed only by state personnel while they are performing public duties. I’m not sure how the latter restrictive condition works – does it mean simply during the period of their employment? What if it happens while they are on vacation? What the actual prohibited act is, though, remains unclear. Is it simply going or staying abroad without permission? We can’t bring our understanding of the word “defect” to bear here, because of course that’s just a handy translation people use for the Chinese term pantao 叛逃. Whether it’s a correct translation should be the conclusion of an analysis, not its starting point.

Second, the prescribed punishment for defection is surprisingly (to me, anyway) light: up to five years in most cases, and not more than ten years even in serious cases where you possess state secrets. Note, however, that revealing state secrets is separately punishable by up to fifteen years’ imprisonment in especially serious cases (Article 111). On the other hand—and this is very interesting—Wang has not been charged with revealing state secrets. In a more transparent system, you might chalk this up to the government’s reluctance to produce evidence about those secrets, but I’m not sure that’s the answer in China. There can hardly be any question that if Wang opened his mouth in the US consulate, he probably is guilty of this crime. After all, the ambit of “state secrets” in China is extremely broad; Zheng Enchong was found guilty of transmitting state secrets abroad when the item in question was a publicly available Chinese newspaper article.

The crimes of perversion of the law, abuse of power, and bribe-taking are respectively punishable by a maximum of 15 years in especially serious cases, 7 years in especially serious cases, and death in especially serious cases. In each case, however, substantially lower punishments of at most a few years’ imprisonment are also possible. What will be interesting to see is whether fleeing to a foreign consulate and revealing at best highly embarrassing and at worst highly damaging secrets is deemed to be less threatening to the state than, say, drafting a political manifesto, for which Liu Xiaobo received an 11-year sentence.

Third—and here’s the interesting technicality—Wang Lijun did not violate the statute on defection as written. Whatever “defection” might mean, there’s no question that it must involve the element of “beyond the border”. (The particular term used, 境外 jingwai, refers to areas beyond the borders of mainland China, that is, all foreign countries plus Hong Kong, Macao, and Taiwan.) Wang Lijun never went beyond the borders of mainland China; contrary to what is commonly supposed, the area occupied by foreign diplomatic missions is not foreign soil but remains Chinese territory. I have no doubt that this is simply a legislative oversight, and that the legislators would have included foreign diplomatic missions had they thought about it. And I would not label as unreasonable an intent-oriented interpretation of the statute as including foreign diplomatic missions. But it’s important to note that this problem exists, even if it’s by no means insoluble. I wonder whether the prosecuting authorities will notice it and, if so, how they will deal with it.

September 6, 2012 in Commentary, News - Chinese Law | Permalink | Comments (0) | TrackBack (0)