Chinese Law Prof Blog

Editor: Donald C. Clarke
George Washington University Law School

Thursday, January 19, 2017

China's Land Counterrevolution? Not Yet.

[NOTE: I just published a shorter version of this post (alternate link here) in Foreign Policy. Here's the longer and more academic version, with links to the original documents.]

[FURTHER NOTE: I have replaced the original blog post with this one, which incorporates some important points that were in the Foreign Policy piece but (I realized after posting) not in this one. My thanks to David Wertime at Foreign Policy for his very helpful editorial suggestions.]

China’s Land Counterrevolution? Not Yet.

Both Chinese and western press reports over the last week (Caixin; New York Times; Financial Times) announced startling news about China’s land regime: holders of 20-year residential leaseholds in the city of Wenzhou in Zhejiang province would see their leases renewed automatically and without charge.

If true, this news would be momentous: it would mean nothing less than the return of private land ownership in China. But in fact it looks like the leaseholders got nothing more than temporary squatters’ rights. What’s going on?

Since the early 1990s, urban land in China (all state-owned) has been available for sale in the form of long-term leaseholds called “land use rights” (LURs)—up to 70 years in the case of land designated for residential use. The original rule about what would happen when the leasehold expired was very clear: the land would go back to the landlord (in the case of China, the state). If leaseholders wanted to extend the lease, they would have to pay for it.

Although this rule was absolutely clear in legislation, leaseholders of course didn’t like it. Proving the truth of Upton Sinclair’s dictum that “it is difficult to get a man to understand something, when his salary depends upon his not understanding it,” a widespread belief grew up that the rules about renewal were either unclear or unfair. The picture was further muddied by the 2007 Property Law, which proclaimed that residential LURs would be renewed “automatically”—but without specifying what that meant, and particularly whether it meant “without charge.” A prominent member of the drafting team later admitted that they had simply punted on the issue because it was too controversial. And the reason it was controversial is simple: to specify that a fee would have to be paid would have angered current LUR-holders—a vast and politically important vested interest group (probably 80 to 90 percent of urban families). But to specify that no fee need be paid would have meant overturning a sacred tenet of Chinese socialism: that private land ownership is anathema.

Why? Because a 70-year LUR that renews itself automatically and without charge is no longer a 70-year LUR. It is a permanent right to the land, indistinguishable in practice from the title known in American law as “fee simple”—the kind of title homeowners expect to get when they buy a house. Of course, the Chinese government can take the land (for a public purpose, and upon payment of compensation), it can regulate its use, and it can tax it. But governments in capitalist societies can do the same thing, and nobody has ever supposed that this means capitalist societies can’t have private land ownership.

Whatever the ambiguity, it has not noticeably stifled China’s residential real estate market, and real estate now accounts for more than 70 percent of overall household wealth – 80 percent in large cities such as Beijing or Shanghai. At the time of purchase, 70 years is a long way off – likely beyond the typical purchaser’s lifetime, and almost certainly beyond the lifetime of the building in which the residence is located, given construction standards and the pace of urban change. So far rising prices have meant that even resales – which necessarily involve a shorter term than 70 years, since the term is not renewed at transfer – are often for more, sometimes much more, than the purchase price.

But although most Chinese residential leaseholds won’t expire for a few more decades, dark clouds of uncertainty are already visible on the horizon. With the clock ticking ever downward, Chinese homebuyers are already starting to think about whether they will ultimately have anything left to pass on. They fear that as the end of their leaseholds approaches, they will find it more and more difficult to get a good price if they try to sell. Uncertainty about whether a homebuyer has a 70-year leasehold or a permanent fee simple doesn’t much matter in year one, because the difference in value is tiny under any realistic set of economic assumptions. But if a Chinese leaseholder is trying to sell in year 40, the price buyers will pay for the 30 remaining years is a lot less than what they will pay if they are confident they are getting a permanent property interest. Even if buyers are foolish enough to be willing to pay a price that assumes they can keep the property permanently, they will have trouble getting mortgage lenders to be equally foolish – and that’s bad for sellers as well. Once these problems start cropping up in earnest, leaseholders will start clamoring for certainty (in their favor, of course) decades before the leases are scheduled to expire.

Now let’s go back to the Wenzhou LURs. Back in the mid-1990s, Wenzhou offered residential LURs on a number of land parcels for sale for varying terms—some for as many as seventy years, which has become the standard term, but some (about 600 parcels) for as few as twenty. These 20-year LURs, apparently the only ones in China sold in that era, are now coming due, and the leaseholders have been clamoring for a solution to their dilemma (their dilemma being the need to pay, and a solution being a free renewal of their lease).

On December 23rd, the Chinese government offered its response in the form of remarks by a Wang Guanghua, a vice minister of the Ministry of Land and Resources (MLR), at a press conference dedicated to an entirely different matter. If, as widely reported, Wang had said that the Wenzhou leaseholders would be allowed to renew their LURs indefinitely and at no charge, that would have been momentous news indeed, since it would have set an important precedent. After all, the Wenzhou leaseholders had the opportunity to pay for 70-year LURs and opted to buy only 20-year LURs at a lower cost. If they were to be given the windfall of perpetual free renewals, having paid for only twenty years, the case for giving perpetual free renewals to those who paid for seventy years would be much stronger. And perpetual free renewals are indistinguishable from full private ownership as understood around the world. Truly, one could have said that the urban land regime of the People’s Republic of China had come full circle. (Rural land ownership in China is a subject to a completely different set of rules.)

But that is not exactly what Wang said. Instead, he referred to an official document issued by the MLR on December 8th in response to an inquiry from the Zhejiang provincial government about how to handle the Wenzhou LURs. Critically, that document does not grant a renewal of the LURs. A renewal or extension, to be meaningful, must specify either (a) a future date on which the new term ends, or (b) that the term continues indefinitely. The MLR document does not do this. Instead, it says: (a) that leaseholders need not apply for a renewal upon expiration of the LUR; (b) that local land administration bureaus shall not collect a fee, and (c) that when the LUR is transferred, normal procedures for titling and registration should be followed. This means that the transfer will not be disallowed, as it otherwise would have been, on the grounds that the LUR to be transferred no longer exists.

Most importantly, the document states that the specified term for the transferred LUR should be the original starting and ending dates, with a note added saying that “relevant procedures have been undertaken in accordance with” the MLR document.

In other words, what the current leaseholders have received is an assurance that for the time being they can stay in their homes without having to pay anything. What they did not get, however, is significant. They did not get a renewal: new LUR with a new expiration date twenty years or more from now. They had something saleable before, but do not have something saleable—something that a transferee would confidently pay money for—now. All they have to offer a transferee is an LUR with an expired term and a vague and cryptic annotation. Will anyone pay good money for that?

What happened in Wenzhou will, in time, become a full-blown national issue. In some 50 years, the first batch of 70-year residential leaseholds will start coming due. Well before that, however, leaseholders will start having problems with buyers who are unwilling to pay large amounts of money for a leasehold with only a few years left on it and no guarantee of renewal. The state will have to choose: enrage about 90 percent of China’s urban population or admit that the 70-year residential leasehold is a mirage, an admission that would violate a core tenet of socialist rule.

Incredibly, 68 years after the founding of the People’s Republic of China and 38 years into the era of post-Mao economic reform, the Chinese government is still unable to state clearly what kind of residential real estate ownership system it wants to have. The system remains shrouded in uncertainty, and buyers cannot know for certain what they are getting. It’s likely that when the time comes, the government will blink – if there are any arch-conservative defenders of old-school socialism left, they will almost certainly be LUR holders themselves. But it has not blinked yet; for the time being, uncertainty still reigns.

January 19, 2017 in Commentary | Permalink | Comments (0)

Wednesday, November 2, 2016

Ministry of Justice releases list of approved legal research projects

Here’s a list of approved (which I assume means, “received state funding”) legal research projects from the MOJ that just came out:

My impression (possibly wrong) is that in past years, a number (still a minority) of such projects have been pretty non-academic, with topics such as “The Significance of Xi Jinping’s Speeches on National Rejuvenation for the Legal System”. This year, in a quick review I didn’t spot a single such project. This is not to say that none have political implications – there’s one, for example, on legal responses to radical separatists in Hong Kong – but they all seem to be the type of thing about which one could do serious research and thinking. They’ve even included some legal history projects – even on one Roman legal history.

November 2, 2016 in Commentary | Permalink | Comments (2)

Friday, September 23, 2016

Vote-buying scandal and expulsion of Liaoning delegates from the NPC: legal aspects

The big story from China in the last week has been a massive vote-buying scandal in Liaoning, resulting in the expulsion from the National People's Congress of 45 Liaoning deputies. An interesting twist on this story is that the whole expulsion process seems to have been done in brazen violation of established legal procedures.

The Organic Law of the National People’s Congress (OLNPC) provides for two ways for delegates to be unseated. First, they can be disqualified by the NPCSC’s Credentials Committee after their election but before the first NPC session following their election (Art. 3; see below). That didn’t happen here; the delegates were elected in 2013, so we are way past the deadline for disqualification by the credentials committee. The second way is for them to be unseated by the body that elected them, i.e., the relevant provincial people’s congress or its standing committee (Art. 45; see below). Obviously, that didn’t happen here, either.

The news reports say that the NPCSC’s action also disqualified the delegates from serving in the Liaoning provincial people’s congress and its standing committee. That’s very weird; there is no law giving the NPCSC the power to do this. (At least not that I know of.)

Now of course this is said to be an unusual situation. (Whether it’s actually unusual for so many members of a provincial people’s congress to be involved in corruption is an issue for another day.) And given that the OLNPC didn’t contemplate so many members of a provincial PC being corrupt, it of course did not contemplate that a provincial PC would be incapable of throwing out a few bad apples and would require external intervention. Thus, perhaps it was necessary to take this legally invalid action. (There is no place the delegates can go to challenge it, anyway.)

But this argument doesn’t really wash. The NPCSC can legislate about anything it wants. It can amend existing legislation. Thus, if it could get its act together sufficiently to pass a resolution expelling these delegates, it could have gotten its act together sufficiently to amend the relevant legislation to make its expulsion resolution legally valid. The failure to do so can’t be chalked up to urgency or the difficulty of getting legislation through a grid-locked and unfriendly legislature. I think it’s more likely attributable to a sense that getting your legal ducks in a row (even when it would be easy to do so) is just not important; people are not putting a lot of thought into that angle. There’s bad stuff going on and we have to put a stop to it.

The Chinese government would not be the first to side-step legal procedures when it wanted something done, of course. Here in the United States, Republicans and Democrats both have plausible complaints about stuff done when the other held the White House. I think there is an important difference, however. The executive branch takes these shortcuts (if we concede them to be shortcuts) because it can't get the legislature to go along, and it argues vehemently that the shortcuts are lawful anyway. The leadership of the Chinese party/state controls the NPC and its Standing Committee, and can get any law passed that it wants. And it is just not thinking about whether what it wants is lawful or not. There is no cadre of lawyers charged with writing memos that will provide the legal justification for what the leadership wants to do. Within the Chinese system, it just doesn't matter. No person or institution of consequence cares.

This is not to say that the American way of doing things is the only way or the best way. It is to say that there is a lot of evidence suggesting that caring about what the statutory law says is not the Chinese way (at least for the top leadership), and we shouldn't pretend otherwise.

September 23, 2016 in Commentary | Permalink | Comments (0)

Monday, September 19, 2016

GWU Law School panel discussion on South China Sea arbitration

Wednesday, Sept. 21, at 12:15 pm, in Lerner 402 at George Washington University Law School, 2000 H St. NW, Washington, DC.

Here are the details:



September 19, 2016 in Commentary, People and Institutions | Permalink | Comments (1)

Sunday, September 11, 2016

More on defamation law in China

The other day I posted about the concept of group defamation in China, noting that Chinese courts have upheld complaints in which members of a particular group sought damages or other legal remedies against those they believed had insulted their group.

The two interesting legal issues in cases like this are (1) under what circumstances can any group member sue for an insult to the entire group, and (2) what sort of commentary counts as an actionable insult (i.e., does the insult have to be an allegation of a particular fact that could be verified as true or not true (such as Donald Trump's allegation that Mexican illegal immigrants are rapists), or can it be just an offensive expression of opinion ("so-and-so is a jerk")?

In the United States, the answer to question 2 is that it must be an untrue allegation of a particular defamatory fact, not just something that is clearly the expression of an opinion that nobody would mistake for a factual allegation. The answer to question 1 is that if it's the group that has been insulted, an individual cannot sue unless the group is so small and identifiable that those who heard the defamatory statement would readily connect it to that individual. (This at least is my understanding; I'm not a libel law expert.) I note this only for comparative purposes and not to suggest that the U.S. rule is one that everyone else should follow.

As my post noted, in China neither of these is true. One can sue for a generally insulting expression of opinion, and group members have standing even when the group is huge (for example, all Henan residents).

That being said, there is an exception to these restrictive rules on free speech: we find courts sympathetic to expansive protection of speech when the insulter reflects government views. This is not the rationale courts provide, of course, which means that we can find different and quite irreconcilable principles cited by courts in these cases.

The latest example of this is two decisions handed down by the Beijing 1st Intermediate Court and the Beijing 2nd Intermediate People's Court on the same day last February in the cases of Hong Zhenkuai and Huang Zhong. (For a full account, from which the following borrows liberally, please see this post on the Fei Chang Dao blog.) They were the writer and editor respectively of an article in the liberal journal Yanhuang Chunqiu (炎黄春秋) that questioned the accuracy of historical accounts of some revolutionary heroes. 

After the publication of the article, Mei Xinyu (梅新育) posted this response on his Sina Weibo (Chinese twitter) account:

"What is motivating these editors and writers at 'Yanhuang Chunqiu'? . . . . Is it too polite to say this kind of writers and authors are sons of bitches?"
《炎黄春秋》的这些编辑和作者是些什么心肠啊?. . . . 说这样的作者和编辑属狗娘养的是不是太客气了?

The same day, Guo Songmin (郭松民) reposted Mei’s post and added the following comment on his Sina Weibo account:

Oppose historical nihilism; if nothing is done about this gang of sons of bitches it's a joke!

Hong and Huang sued both Mei and Guo and lost. The reasoning of the courts boiled down to the following propositions: (1) Neither Mei's nor Guo's posts identified the plaintiffs with sufficient specificity for the court to find that the remarks were directed at them; (2) in casting doubt on revolutionary heroes, their posts hurt the feelings of the defendants and therefore they had it coming to them.

September 11, 2016 in Commentary, News - Chinese Law | Permalink | Comments (0)

Thursday, September 8, 2016

Group defamation in Chinese law

Ten years ago (can it really have been that long?) I posted about defamation law in China, noting that one feature that differentiates it from defamation law in at least some other jurisdictions is that while on the one side there is a recognition of the harm that can be done by nasty speech, there is not on the other side any pushback from a countervailing value of free speech (in the case of the U.S., for example, a constitutionally-protected countervailing value). Thus, it has the potential to go very far in the direction of policing everyday speech quite stringently.

The latest development is a case where Hu Wei, a CCTV television personality, made a series of posts last month on Sina Weibo (Chinese twitter) insulting people from Henan province (a common target of popular prejudice, combining a Manhattanite's image of Appalachians with Donald Trump's image of Mexican immigrants). Apparently he really has it in for Henanese, having made another Weibo post in April saying that they were all good-for-nothings who knew only how to have babies, steal, and boast.

Jing Changshui, a resident of Henan [NOTE: corrected from "Hunan"] decided he had had enough and brought suit on August 31st against Hu and the operator of Sina Weibo in a local court in -- you guessed it -- Henan (in the city of Zhengzhou). He seeks removal of the offending posts and a commitment to post no more of them, an apology to the people of Henan in national and provincial media, and damages of 1000 yuan for emotion distress. For various reasons, he wishes to characterize his suit as a public interest suit, not an individual suit.

When a suit is brought, there's a preliminary gatekeeping stage in which court decides whether there's enough there to justify going further. This decision is called li'an (立案), often translated as "docketing". Courts have a week to make this decision. Just as the deadline was approaching, on Sept. 7th, the Zhengzhou court decided to docket the case. This means that it will now go forward: the plaintiff will have the opportunity to plead and prove his case, and the defendant will have to show up and defend.

Although docketing the case does not mean that the plaintiff wins, it does mean that the court is unwilling to say that as a matter of law, the facts as alleged by the plaintiff simply don't state a legal claim. Put another way, the court is saying that at least in some circumstances, making nasty generalizations about a group can lead to liability.

This is not at all surprising, given what we already know about the operation of defamation law in China. Nevertheless, it does clarify (and a decision in favor of the plaintiff might clarify even further) the scope of defamation law: that it extends to groups. At the same time, I'm not sure why this is being presented in the press as some kind of breakthrough or difficult case: a similar case on similar grounds was brought in 20o5 and accepted by a Henan court; it ended in a settlement. 

I found this case especially interesting when I ran across it today because it was only yesterday that I ran across an instance of what is arguably group defamation committed by Air China against Indian, Pakistani, and black residents of London (and possibly worldwide). The photograph below is from an article in Air China's inflight magazine about London:


I confess I can't remember (or perhaps never knew) the precise rules on suing a defendant inside China under Chinese law for a tort when the victim is outside China. Presumably the effect of the tort is felt both within China (when the magazine is read on a domestic flight) and outside. I'd welcome comments on whether a lawsuit in China against Air China by offended residents of London would be at least theoretically possible, given the endorsement of group defamation theories by the Zhengzhou court.

September 8, 2016 in Commentary, News - Chinese Law | Permalink | Comments (0)

Wednesday, July 20, 2016

"Patriotic" Chinese companies warns that workers who buy iPhone 7 will be fired

Iphone firing

Here's the story from the South China Morning Post. What the company seems to have forgotten in its patriotic indignation is that China actually has some employment laws that forbid employers from firing employees simply on a whim - especially if they have long-term contracts, which after a certain period of time all of them will have.

July 20, 2016 in Commentary, News - Chinese Law | Permalink | Comments (2)

Wednesday, July 13, 2016

Thoughts on the South China Sea China-Philippines arbitration

[Note: This post has endnotes.]

The long-awaited decision of the UNCLOS arbitration tribunal (the “Tribunal”) in the South China Sea case between China and the Philippines case (the “Decision”) was released today. (Click here for links to a detailed press release and the text of the Decision itself.) I am not a specialist in the law of the sea or even international law generally, but since everyone else is commenting on the decision I think I’ll add my own voice as well. What follows are some unsystematic thoughts on particular aspects of the Decision that I think are more difficult to understand or haven’t been commented on much. (For an excellent quick overview of the whole thing (which this post definitely is not), check out this great Lawfare blog post by Robert Williams. For a more detailed look and assessment, check out Jacques deLisle's excellent piece here. Julian Ku has also been following this for some time and has written several pieces on it, and will no doubt continue to do so.)

In brief:

  1. The Decision does not decide any territorial claims. The Tribunal did not have jurisdiction to do so and never so pretended. It specifically disclaimed its jurisdiction and intention to decide any such claims.
  2. The Tribunal did decide what types of rights to surrounding waters were generated by particular geographical features such as rocks and islands. It decided that the features in questions were rocks, not islands, and therefore not capable of generating 200-mile exclusive economic zones (“EEZs”) around them. (Decision, pp. 204 et seq.) This matter falls squarely within the purview of the Law of the Sea Convention (the “Convention”). As noted above, however, it did not decide who had the rights to those features (appropriately, because that is a matter that does not fall within the purview of the Convention), whether or not they were capable of generating rights.
  3. The Decision does not say that China’s Nine-Dash Line (the “NDL”) is “illegal” or anything like that. Nor could it: China has never clarified what exactly it is claiming with the NDL. The Tribunal said that if it represents a claim of type X (of which more later), then that claim is unfounded. It is the claim that is unsound, not the particular method China uses to signal its claim.
  4. The main significance of the Decision is not what it says about the NDL and China’s claim of “historic rights”. It is in what it says about what kinds of rights are generated by various geographical features. As the Decision notes, much of the area within the NDL “would also fall within a claim to an exclusive economic zone or continental shelf drawn from the various features of the Spratly Islands.” (Decision, Para. 207) Since the Tribunal did not decide the question of sovereignty over those features, the key feature of its decision was whether China, if it had sovereignty, was entitled to a 200-mile EEZ as a result. If it had decided in China’s favor on that question, its decision against China on the NDL issue would have been of little practical significance.

It’s the third point that I want to address here, because there are lots of interesting wrinkles in the argument.

A. Did the tribunal have to address the NDL issue?

First, did the Decision have to address the NDL issue at all? I ask this question because some analysts have asserted that the tribunal could (and should) have avoided this sensitive question entirely. This kind of objection really makes sense only if one is saying that the tribunal could have resolved the issues before it without getting into the thicket of the NDL. Anglo-American lawyers are used to making arguments like this, because they see courts and similar tribunals as designed to resolve cases, not to make abstract, grandiose, and quite possibly controversial statements about the law. If you can resolve a case by using low-level, uncontroversial principles, you should do it that way instead of relying on high-level, highly-disputed principles. That means that you invoke the latter only when you really have to, thus minimizing controversies and maximizing the court’s legitimacy. So far, so good: in principle, this is a reasonable objection.

But if one is simply saying that the tribunal could have avoided a controversial issue by simply not addressing it, well, duh. But then it would not have resolved an issue that it was supposed to resolve. It’s like saying that the Supreme Court could have avoided ruling on the constitutionality of segregation by simply declining to hear Brown v. Board of Education. Well, yes, but …

So this criticism is legitimate only if the tribunal could have resolved the issues before it without talking about the NDL and what it stands for. Could it have done so? I don’t see how.

The Philippines specifically requested the tribunal to do the following:

[T]he Philippines seeks a declaration from the Tribunal that China’s rights and entitlements in the South China Sea must be based on the Convention and not on any claim to historic rights. In this respect, the Philippines seeks a declaration that China’s claim to rights within the ‘nine-dash line’ marked on Chinese maps are without lawful effect to the extent that they exceed the entitlements that China would be permitted by the Convention. (Decision, Para. 7)

Now, it is certainly not the case that tribunals are obliged to resolve every issue put to them. If the Philippines had asked the tribunal to resolve an abstract issue of law with no real-world consequences for the parties, the tribunal could, and should, have avoided the question. The standard justification for avoiding such questions is that with nothing at stake, neither the parties nor the tribunal have an incentive to think the issues through sufficiently and consider all the angles and consequences of a ruling one way or the other, and also that the tribunal’s legitimacy is diminished when it purports to pronounce on matters that are beyond its proper jurisdiction: the resolution of an actual dispute between the parties. And that line of thinking makes sense to me.

But in this case, the issue that the tribunal was asked to resolve was a genuine issue between the parties that had real-world consequences. China was claiming certain rights over waters on a theory (that of “historical rights”) that had no basis in the Law of the Sea Convention, it was defining those waters via the NDL, and it was taking specific actions on the basis of those claims.[1]

The Tribunal listed three specific instances where China appears to have asserted rights arising independently of the Convention. First, in June 2012, the China National Offshore Oil Corporation issued a notice of open blocks for petroleum exploration adjacent to the western edge of the NDL. At least one of those blocks included an area situated more than 200 miles from any feature in the South China Sea claimed by China and beyond any extended continental shelf. (Decision, Para. 208) Although the area in question does not apparently overlap with any waters claimed by the Philippines, other areas claimed under the same theory do, and given that the area is, in the view of the Philippines, international waters not subject to any country’s EEZ and therefore open to exploitation by any country including the Philippines, it has a legitimate interest in challenging a claim contrary to that view.

Second, China has objected to the Philippines’ award of petroleum blocks within the NDL. But what was the source of the claimed rights that formed the basis of China’s objection? As the Tribunal noted, “The area of the Philippines’ petroleum blocks could be almost covered by entitlements claimed by China under the Convention, if China were understood to claim an exclusive economic zone from all high-tide features in the Spratly Islands, no matter how small, and from Scarborough Shoal. The fact of China’s objection is thus not necessarily indicative of the source of China’s claimed rights.” (Decision, Para. 208 (emphasis added)) But China itself stated that its claims derived from its “indisputable sovereignty” “since ancient times” “over the Nansha islands and its adjacent waters”, and in a different objection noted that various blocks were located “deep within China’s nine-dash line.” (Decision, Para. 209)

Third, China has declared a partial ban on fishing in areas of the South China Sea that, like the Philippines’ petroleum blocks, could be almost entirely covered by entitlements under the Convention “if China were understood to claim a 200-mile EEZ from the very small rocks of the Scarborough Shoal.” But for the reasons stated above, it seems more likely that China’s claim is based on its theory of “historic rights”, and in any case since the Tribunal decided that the rocks of the Scarborough Shoal did not generate an EEZ, it became necessary to rule on whether China had a claim to the seas in question on the basis of any other theory.

Finally, although the Tribunal did not make this point, it is worth noting that had the Philippines not challenged China’s “historic rights” theory symbolized by the NDL, it could justly have been faulted later on for acquiescence, a key factor in deciding rights under international law. If a state makes claims beyond its recognized rights and other states fail to object for a long enough period, then those claims will ultimately ripen into recognized rights.

In sum, the Philippines presented a genuine and not abstract issue to the Tribunal on which issues of real importance turned. China was claiming certain rights to the sea that did not originate in the Convention, and those claims were inimical to the Philippines. The geographical scope of those claims was defined not by land features (as is the case with EEZs and territorial waters) but by the NDL. It is impossible to see how the Tribunal could have resolved the issue before it without talking about the NDL and the “historic rights” claim it defines.

B. What does the Decision say about the NDL?

Second, what exactly does the Decision say about the NDL? Contrary to some commentary, the Decision does not say that the NDL is “illegal”. And indeed, it could not, since the NDL does not actually do anything. It’s a line on maps drawn by China. The important thing is to understand what underlying claims it symbolizes, and then to analyze those claims. This proved a bit difficult for the Tribunal, since China has been coy about what exactly it is claiming when it publishes maps showing the NDL.[2] The Tribunal tried to figure out what sort of claim was symbolized by the NDL and then ruled on the validity of that claim. This does not quite mean that China can simply change the theory underlying the claims symbolized by the NDL and force the Philippines (and other affected states) to start again from square one, because the Tribunal expressly ruled that rights not provided for under the Convention are trumped by rights provided for in the Convention; that the extinction of such rights was the price states paid to get the benefit of rights under the Convention such as EEZs.

On the basis of various statements made by the Chinese government, the Tribunal concluded that China was making a particular set of claims (call them “X claims”) over particular waters (call them “Y waters”).[3] The content of X claims is as follows: (1) exclusive rights to living and non-living resources, and (2) a commitment to respect freedom of navigation and overflight, indicating that Y waters are not considered territorial or internal waters.[4] The content of Y waters is all waters within the NDL that are not China’s territorial waters or EEZs under the Convention. Even if one acknowledges as valid all of China’s territorial claims in the SCS, and moreover grants a 200-mile EEZ to every rock within the NDL, it still encompasses areas that are outside of any conceivable EEZ, and the Tribunal found that China was asserting X claims over those areas.

The Tribunal then had to decide whether X claims had any validity under the Convention or beyond the Convention. On this issue, its reasoning was straightforward. If China (or any other state) had rights of any kind (historical or otherwise) to waters covered by the Convention prior to joining the Convention, those rights were extinguished as part of the deal states made when they joined. In exchange for the EEZ, they gave up other kinds of rights. Thus, even if China did have something called “historical rights” over certain waters, it gave up those rights when it signed on to the Convention.[5]

Ironically, as the Decision points out, exactly this position was strongly supported by none other than China itself during negotiations over the Convention in the mid-1970s: “In the course of these debates, China actively positioned itself as one of the foremost defenders of the rights of developing States and was resolutely opposed to any suggestion that coastal States could be obliged to share the resources of the exclusive economic zone with other powers that had historically fished in those waters.” (Decision, Para. 251)

In short, the Tribunal found that (1) China was claiming EEZ-type rights over waters to which the Convention did not grant it EEZ-type rights, waters defined by the NDL; (2) those claims were based on a theory of “historic rights”; and (3) even if China had had “historic rights” over those waters, such rights could not trump the EEZ rights of another state over the same waters.

C. What did the Decision say about China’s historic rights?

Given that the Tribunal decided that historic rights, even if they existed, were invalid against rights under the Convention, it was not strictly speaking necessary for it to spend time on the issue of whether such rights did in fact exist in China’s case. Nevertheless, it did offer some interesting observations.[6]

The core of the Tribunal’s comment on historic rights lies in its (unstated) analogy to rights acquired by prescription (also known in real estate law as adverse possession) in domestic legal systems: if you do something wrongfully long enough and others don’t effectively object, then your wrong can ripen into a right. The Tribunal put it this way:

[T]he Tribunal notes that historic rights are, in most instances, exceptional rights. They accord a right that a State would not otherwise hold, were it not for the operation of the historical process giving rise to the right and the acquiescence of other States in the process. It follows from this, however, that the exercise of freedoms permitted under international law cannot give rise to a historic right; it involves nothing that would call for the acquiescence of other States and can only represent the use of what international law already freely permits. (Decision, Para. 268)

In other words, if you’re just doing what you already have a right to do, and what others have no right to object to you doing, it can never ripen into anything more than that.

The Tribunal then observed that engaging in navigation, trade, and fishing on high seas beyond territorial waters simply represents the exercise of high seas freedoms already permitted by international law. Nobody can object to it, and such activities therefore cannot form the basis for the emergence of a historic right. (Decision, Para. 270) What is needed for a historic right is evidence that you took more than you had a right to take, and that others acquiesced:

Evidence that merely points to even very intensive Chinese navigation and fishing in the South China Sea would be insufficient. Instead, in order to establish historic rights in the waters of the South China Sea, it would be necessary to show that China had engaged in activities that deviated from what was permitted under the freedom of the high seas and that other States acquiesced in such a right. In practice, to establish the exclusive historic right to living and non-living resources within the ‘nine-dash line’, which China now appears to claim, it would be necessary to show that China had historically sought to prohibit or restrict the exploitation of such resources by the nationals of other States and that those States had acquiesced in such restrictions. In the Tribunal’s view, such a claim cannot be supported. (Decision, Para. 270)

The Tribunal said it knew of no evidence that China had historically regulated or controlled fishing in the SCS beyond its territorial sea, and of course it could not even have attempted to regulate access to non-living resources of the seabed, since extraction of seabed resources is a very recent historical phenomenon.


[1] See Decision, Para. 190:

In the Philippines’ view, the nature of China’s claim as one of sovereign rights and jurisdiction is confirmed by China’s conduct in (a) seeking to ban fishing by other States within the ‘nine-dash line’; (b) interfering with the Philippines’ petroleum exploration activities; and (c) offering concessions to oil blocks in areas within the ‘nine-dash line’ but beyond the possible limits of China’s entitlements under the Convention. At the same time, the Philippines considers that China’s conduct makes clear that its claim is not to sovereignty over the entire area within the ‘nine-dash line’, insofar as China has repeatedly asserted that it respects freedom of navigation and overflight in the South China Sea.162 The Philippines also notes that this interpretation of China’s position has been adopted by numerous Chinese scholars, including those with significant links to the government. (Internal footnotes omitted.)

See also Decision, Para. 207:

Since 1956, China has proclaimed a series of maritime zones—a territorial sea, a contiguous zone, a continental shelf, and an exclusive economic zone—that are, at least in general terms, in line with those anticipated by the Convention. Nevertheless, China’s repeated invocation of rights “formed in the long historical course” and its linkage of this concept with the ‘nine-dash line’ indicates that China understands its rights to extend, in some form, beyond the maritime zones expressly described in the Convention. The Tribunal therefore turns to the rights that China has actually invoked in the South China Sea. Much of the area encompassed by the ‘nine-dash line’, however, would also fall within a claim to an exclusive economic zone or continental shelf drawn from the various features of the Spratly Islands. Whether or not the Tribunal would agree that the Convention or the features support such entitlements, a matter discussed in Chapter VI below, the mere fact that China asserts rights in the South China Sea does not indicate that China considers those rights to derive from the ‘nine-dash line’. Where, however, China has asserted rights in areas beyond the maximum entitlements that could be claimed under the Convention, the Tribunal considers that such assertions indicate a claim to rights arising independently of the Convention. There are at least three instances when China appears to have asserted such rights.

[2] See Decision, Para. 180: “[T]he resolution of the Parties’ dispute . . . is complicated by some ambiguity in China’s position. As far as the Tribunal is aware, China has never expressly clarified the nature or scope of its claimed historic rights. Nor has it ever clarified its understanding of the meaning of the ‘nine-dash line’.” (Internal footnotes omitted.)

[3] See Decision, Chapter V.

[4] See Decision, Para. 213.

[5] See Decision, Para. 257:

Through the Convention, China gained additional rights in the areas adjacent to its coasts that became part of its exclusive economic zone, including the areas adjacent to any island entitled to such a zone. It necessarily follows, however, that China also relinquished the rights it may have held in the waters allocated by the Convention to the exclusive economic zones of other States.” See also Decision, Para. 262: “Accordingly, upon China’s accession to the Convention and its entry into force, any historic rights that China may have had to the living and non-living resources within the ‘nine-dash line’ were superseded, as a matter of law and as between the Philippines and China, by the limits of the maritime zones provided for by the Convention. This should not be considered exceptional or unexpected. The Convention was a package that did not, and could not, fully reflect any State’s prior understanding of its maritime rights. Accession to the Convention reflects a commitment to bring incompatible claims into alignment with its provisions, and its continued operation necessarily calls for compromise by those States with prior claims in excess of the Convention’s limits.

[6] The Tribunal could perhaps be criticized for going beyond the minimum necessary to resolve the dispute before it, especially in such a contentious case. I will leave the judgment on that issue to the reader. The Tribunal would be on much firmer ground if it were customary, or at least not rare, in international state-to-state arbitration for tribunals to engage in this kind of practice. Unfortunately, I do not know whether this is so.

July 13, 2016 in Commentary | Permalink | Comments (0)

Monday, June 20, 2016

Julian Ku, "A Guide to Countering Chinese Government Spin on the Fairness of the South China Sea Arbitration Tribunal"

Friday, June 17, 2016

China to require government agencies and SOEs to hire lawyers and to listen to them

Here's the report from Xinhua. According to the report, 

China's central authorities has [sic] ordered the adoption of a legal counsel system at governments and Communist Party committees above the county-level as well as state-owned enterprises (SOE) before 2017, a major step to promote rule of law.

. . .

Government and Party organizations are urged to hear the opinions of legal counsels before making major decisions, involve them in the process of decision-making, formulation of major government policies and intra-Party rules, and the handling of some legal cases and emergency situations, said the guideline.

Legal counsels are also required to participate in negotiations involving the government or party organizations and deal with other legal matters.

Matters that are deemed illegal or in violation of regulations in the opinion of legal counsels should not proceed, said the guideline.

I cannot see this as a "major step" to promote the rule of law. If government agencies and SOEs don't follow the law today, it's because the system does not make it important for them to do so. If they don't consult lawyers, it's likely because they make a rational calculation that the advice of lawyers is not important to what they do. Requiring them to hire lawyers does not change any of that. By way of comparison, US financial institutions do not have huge compliance departments, and corporations do not pay securities lawyers millions of dollars, because the government requires them to do so. They do these things voluntarily because the way the system works makes it in their interest to do so. This new Chinese policy is perhaps a nice full-employment program for lawyers, but there's no reason to think that by itself it will increase rule-compliance by its targets.

June 17, 2016 in Commentary, News - Chinese Law | Permalink | Comments (0)

Friday, April 22, 2016

White Paper on Judicial Reform

Last March, the Supreme People's Court posted on its website an English version of its White Paper on Judicial Reform, but for some reason did not make the original Chinese version available online. I now have a scanned version of the original Chinese text; it's available here.

April 22, 2016 in Books, Commentary, News - Chinese Law | Permalink | Comments (0)

Tuesday, March 22, 2016

Again on China's acquittal rate

Here’s an interesting piece from the Dui Hua Foundation on China’s acquittal rate (previously discussed on this blog here). I’m not sure it’s accurate in saying that China’s acquittal rate rose, though. It gives a figure of 1039 acquittals in 2015, which is the number provided in the SPC Work Report, but says this yields an acquittal rate of 0.075%. There are two problems with this:

  1. The SPC Work Report lists a total of 1.232 million people convicted in the first instance. That would yield an acquittal rate of 0.084%. Of course, 1.232 million first-instance convictions + acquittals is not really the right denominator here; we want to know all final convictions + acquittals, but the SPC Work Report doesn’t seem to have that number. An acquittal rate of 0.075% implies an overall number of final convictions + acquittals of 1,384,294, implying total final convictions of 1,384,294 – 1039 = 1,383,255. But I don’t see where this number or an approximation of it appears in the Work Report. Did I miss it?
  2. More than a third of the total acquittals were on self-prosecuted cases. There is every reason to believe that the acquittal rate for cases brought by the procuracy would be way lower, so they shouldn’t be mixed together.
  3. To know whether the acquittal rate rose, we’d have to (a) figure out the answers to the above questions, (b) figure them out for previous years, and (c) satisfy ourselves that any change, given the extremely small numbers, is more than a meaningless statistical blip.

March 22, 2016 in Commentary | Permalink | Comments (0)

Wednesday, March 2, 2016

Interesting study of patent litigation in China: is the conventional wisdom about protectionism wrong?

Here’s a very interesting new paper on patent litigation in China based on an analysis of 471 suits for patent infringement (Love, Helmers & Eberhardt, Patent Litigation in China: Protecting Rights or the Local Economy?). The authors aim to subject to empirical analysis (which they say, to the best of my knowledge correctly [UPDATE Mar. 10, 2016: I'm wrong. See Mark Cohen's blog post on this.], is virtually non-existent to date) the conventional wisdom that the system is biased, probably deliberately, against foreign patent-holders and they can’t get a fair shake. They conclude that the conventional wisdom is wrong:

Though many suggest China set out to create a system that would benefit domestic industry at the expense of foreign firms, our findings suggest that the system has accomplished the opposite. Contrary to conventional wisdom and high-profile anecdotes, foreign litigants in Chinese patent suits play the role of patentee more often than defendant and fare just as well in their suits as privately owned Chinese firms. Moreover, state-owned monopolies—parties the Chinese government presumably has the greatest incentive to protect—rarely sue and, when sued, lose a significant share of their cases.

On the whole, our findings suggest that the Western technology community may have been too quick to write off the Chinese patent system as a rigged game. To the extent that Chinese authorities sought to establish a protectionist system, they appear to be failing. Rather, they seem to have opened the door for foreign innovators to seek redress against local copyists. Industries that have long accused Chinese firms of idea theft may be well advised to take a peek inside.

I think this is a valuable paper that deserves wide circulation—we should always welcome careful empirical work that challenges conventional wisdom—but I think the authors don’t adequately explore the implications of a key methodological problem: that the population of cases they study is not representative of the population of patent disputes and is subject to selection bias. They look only at cases that go all the way to judgment; they don’t have access to cases that settle, they don’t have access to cases where a plaintiff brings suit but the court refuses to docket the case, and of course they don’t have access to cases that never become cases at all because the plaintiff is convinced (rightly or wrongly) that it will lose and so doesn’t bother suing, or the defendant is convinced that it will lose, and so folds immediately upon receiving a threatening letter from the potential plaintiff. For those interested, the selection bias involved in studying reported cases is modeled and analyzed in a classic paper by Priest and Klein, The Selection of Disputes for Litigation (1984).

They acknowledge this problem in a footnote at the end, but seem to overlook it in the main text when stating their conclusions about what their study shows. For example, they state, “when foreign companies sue, they win relatively frequently . . .” One simply cannot say even that, based on this data, since it’s possible that 99% of foreign suits are never accepted by courts, or are ultimately dismissed before judgment for some reason. (Of course, that’s unlikely, but the point is that there is no way to know from this data what the percentage is, and it’s an important number.)

They also say, “the case-level data suggests that patent suits are rarely litigated in smaller inland cities where, conventional wisdom holds, protectionism is most often encountered.” But this result is consistent with the conventional wisdom being absolutely right, and known to be right by non-local patent holders, who therefore don’t bother bringing suit in such cities, or if they do bring suit, find such suits rejected before judgment by local courts.

There are some areas where this methodological problem might be less acute. For example, the authors find that “successful foreign patentees received a median damages award of 100,000 RMB in suits against private Chinese firms, exactly the same amount that private Chinese patentees received when they sued private domestic parties. Interestingly, Chinese patentees received 20 percent less in suits against foreign companies and 60 percent more in suits against state monopolies.” Those with more mathematical sophistication than me can think about whether my intuition is correct that award size might be less susceptible to selection bias than win rates.

In any case, to the extent one can say anything from a study of reported judgments, this study says something new and interesting and adds something valuable to our knowledge.

March 2, 2016 in Commentary | Permalink | Comments (0)

Tuesday, March 1, 2016

New web address for Chinese court judgments site

The official web site for court judgments, 中国裁判文书网, has changed its URL from to Thoughtfully, they have neither installed an auto-redirect at the old web site nor even provided information about the new web address.


March 1, 2016 in Commentary, News - Chinese Law | Permalink | Comments (0)

Sunday, November 15, 2015

More on Taiwanese independence and sovereignty

I posted the other day about a column written by my colleague David Shambaugh in which he averred to a "delusion" that Taiwan was an independent, sovereign state. I argued that by the definition of "state" in the Montevideo Convention, this view of Taiwan was hardly delusional. David has declined my invitation to respond, so I don't know whether he thinks that Taiwan is not a state under the Montevideo Convention definition, or whether he is just using a different definition of "independent, sovereign state."

In another forum in which I posted my comments, some have suggested a plausible, different definition of sovereignty: that it necessary involves an element of recognition by many other states. If so, and if we define "recognition" narrowly, then it could certainly be said that because Taiwan is not recognized (in the narrow sense) as a state by many other states, it therefore does not meet this particular definition of "sovereign." But if we use that definition of "sovereign," then we have to drop the claim that anyone is delusional, because nobody thinks that Taiwan is in fact recognized in this narrow sense by many countries. Some people celebrate that fact and some people bemoan it, but nobody disputes that it is a fact. Thus, under some definitions of sovereignty, Taiwan is in fact sovereign, and so people aren't deluded to think it is; under other definitions, it's not, but nobody thinks it is, so people aren't deluded in that case either. I cannot think of a fact-based definition of sovereignty about which people could be said to be deluded, since people of all political views pretty much agree on what the current facts on the ground are regarding Taiwan's ability to govern itself and its place in the international community. Of course, they disagree on the ought, but not on the is.

November 15, 2015 in Commentary | Permalink | Comments (2)

Friday, November 13, 2015

Is Taiwan an independent sovereign state?

In a recent op-ed in the South China Morning Post, my colleague David Shambaugh spoke of “the delusion and illusion that Taiwan is an independent sovereign state”. I’m not sure what he means by this. Needless to say, people have different views on whether Taiwan should be an independent, sovereign state. But as for whether it actually is one now, that is a matter of (a) facts and (b) how those facts fit one’s definition of “independent sovereign state”.

I’m not sure there is too much disagreement on the facts; in the same op-ed, David refers to Taiwan’s “de facto autonomy”, and autonomy is of course just a synonym for independence. That is at least one important fact. The question then becomes, what does he mean by “independent sovereign state”? Everyone is of course entitled to their own definition, but for a definition that is reasonably well accepted in international law and wasn’t simply cooked up with Taiwan in mind, we could turn to the Montevideo Convention of 1933. That says, in pertinent part:

The state as a person of international law should possess the following qualifications: a) a permanent population; b) a defined territory; c) government; and d) capacity to enter into relations with the other states.


The political existence of the state is independent of recognition by the other states.

Under this definition—and it doesn't seem like a particularly wild and crazy one—it’s hard to see how Taiwan would not qualify. David is of course not obliged to accept that definition himself, but surely it’s going a bit far to claim that anyone who does is delusional.

November 13, 2015 in Commentary | Permalink | Comments (1)

Sunday, November 8, 2015

Paul Gillis on the PCAOB's China troubles

Last Tuesday I blogged about the breakdown in talks between China and the Public Company Accounting Oversight Board. Here's a blog post on the same issue from Paul Gillis at the China Accounting Blog. Check out the comments as well.

November 8, 2015 in Commentary, News - Chinese Law | Permalink | Comments (1)

Wednesday, October 28, 2015

Criminalization of test cheating? Less than meets the eye.

The Shanghaiist blog recently reported on a recent amendment to the Criminal Law that will come into effect on Nov. 1st, saying, "Chinese students who cheat on exams could now face up to 7 years in prison." (Here's a similar story from the China Daily headlined "Cheating in civil service exams means seven-year jail".) Well, not exactly. Actually, not even close.

There is indeed a new rule about cheating on official state examinations, including the all-important gaokao (university entrance examination). It will appear as Article 284A (第二百八十四条之一) in the revised Criminal Law.

Here's the full text in Chinese:

  • 在法律规定的国家考试中,组织作弊的,处三年以下有期徒刑或者拘役,并处或者单处罚金;情节严重的,处三年以上七年以下有期徒刑,并处罚金。This provision provides for up to seven years' imprisonment for those who organize cheating in serious circumstances. This is not a punishment for the cheaters themselves.
  • 为他人实施前款犯罪提供作弊器材或者其他帮助的,依照前款的规定处罚。 This provides punishment under the previous paragraph for those who assist in the above offense by providing cheating equipment or other assistance. Again, no punishment for cheaters themselves.
  • 为实施考试作弊行为,向他人非法出售或者提供第一款规定的考试的试题、答案的,依照第一款的规定处罚。This provides punishment under Para. 1 for those who sell or other supply exam questions and answers in order to help people cheat. No punishment for cheaters themselves.
  • 代替他人或者让他人代替自己参加第一款规定的考试的,处拘役或者管制,并处或者单处罚金。Finally, we have some language that provides punishment for cheaters themselves. But it applies only to one kind of cheating: impersonating a test-taker to take the test, or having someone impersonate you to take the test. There is no punishment for any other kind of cheating. And the punishment for cheating by impersonation is light: detention (拘役), which is for between one and six months, or control (管制), which is similar to probation.

Bottom line: The headline should read, “Chinese students who cheat in one particular way on exams could face up to six months in detention.”

October 28, 2015 in Commentary, News - Chinese Law | Permalink | Comments (0)

Monday, September 21, 2015

Central Committee and State Council issue document on state-owned enterprise reform

Last month, the Chinese government (to be precise, the Central Committee of the Communist Party together with the State Council) issued a document on state-owned enterprise (“SOE”) reform: the Guiding Opinions on Deepening the Reform of State-Owned Enterprises (关于深化国有企业改革的指导意见) (the “Opinions”). Given the level at which they were formulated and issued, the Opinions seem intended to be a major statement about SOE reform. But what do they actually say? The following comments are based on a quick read and are not, for better or worse, informed by what anyone else has written, because I have not come across any other commentary so far. (I haven’t looked.)

If you are looking for a statement that the government will reduce the role of SOEs in the economy, or engage in large-scale privatization, this is not that statement. Quite the contrary. Indeed, it still scrupulously avoids the term “private” when talking about investment or ownership, using instead such clumsy circumlocutions as “non-public”. (This term has been used for so long it doesn’t even sound silly any more, even though Cao Siyuan properly skewered it many years ago, pointing out that we don’t refer to our right hand as our “non-left” hand.) I think it’s safe to say that if in 2015, policymakers still can’t bring themselves to say the word “private” in a major document about the economy, there are certain conclusions we can draw about policy goals.

The Opinions declare that public ownership shall remain the mainstay of the economy. For the Opinions, the point of reforming SOEs is to do state ownership better, not to reduce it or even eliminate it. This goal appears not only in the specific proposals of the Opinions, but also in the language that permeates the document: a mounting pile of clichés that I last saw in such profusion back in the 1980s, when the same goal prevailed.

The diagnosis of SOE problems seems as muddled as ever and no good solutions are offered. For example, the Opinions promote the separation of ownership (所有权) from control (expressed as “the right to manage” (经营权)) as a positive good. This has been a mantra of SOE reform for decades. Yet it fails to recognize that where the state is an owner, it must necessarily act through human agents. Those human agents—SOE managers—exercise control. If there is any aspect of SOE operations they don’t control, that’s because someone superior to them—another human agent of the state—controls it. Thus, ownership and control necessarily are now, have always been, and always will be, separated in SOEs. If SOEs are not performing properly, it is not because ownership and control are insufficiently separate. It is because management does not have the right set of incentives that align their interests with those of the state owner. The separation of ownership from control is an unavoidable problem to be managed, not a solution to be embraced.

This inattention to the problem of incentives is reflected in the language about enhancing internal supervision of SOEs, among other things by strengthening the oversight role of the enterprise’s staff and workers congress (职工代表大会). Assuming the staff and workers congress is not dominated by management and in fact represents the interests of the staff and workers—a big assumption—then one would expect it to exercise any power it had in the interests of staff and workers, which will not be congruent with the interests of the state owner. There is no point in giving people power over management decisions without a clear understanding of the direction in which they are going to pull such decisions.

A great deal of language in the Opinions is devoted to the idea that SOEs should be more “independent”. But independent of what or whom? The chief significance of separate legal status in a US corporation is that it delineates a pool of assets that are available to corporate creditors—the assets of the corporation—as against the assets that are not—the assets of the stockholders. Protection works the other way, too: creditors of the stockholders cannot seize corporate assets. They can seize only the rights of the stockholder, and those rights don’t include a right to take a percentage of corporate assets at will.

Yet the Opinion seems to conceive of independence as meaning that SOEs have a kind of will and interest of their own. They should manage themselves, be responsible for their own profits and losses, and bear risks themselves. One sees what the Opinions are getting at, of course: SOEs (more accurately, people who work at SOEs) shouldn’t expect endless subsidies from the state. But this way of putting it obscures two important points. First, it’s entirely appropriate for SOE managers to be accountable to some outside body, and a body representing the state, which after all put up the money, is a reasonable candidate. Second, the state shareholder is taking risks when it owns SOEs. If the SOE is profitable, the shareholder wins. If the SOE loses money and eventually becomes bankrupt, the shareholder loses. The state shareholder is not legally required to pay the debts of the bankrupt SOE—that’s what limited liability is all about—but that doesn’t mean that the SOE as such bears risks. It’s all the interests associated with the SOE—state investor, management, workers, and suppliers, among others—that actually bear the risks of things going bad.

One possible meaning of “independence” is the idea expressed in the Opinions that SOEs shouldn’t have to answer to multiple masters, and that no government department may interfere in their operations without proper authority. The question is, what allows that to happen now, and how will it be prevented? If managers are appointed by and responsible to Agency X, why do they need to listen to Agency Y? If Agency Y is going beyond its mission to impose burdens on the SOE, why does the SOE have no remedy at present? The approach of the Opinions seems to be to ask those doing improper things to stop doing them, not to give the victims of the improper doings a means to resist.

While promoting the independence of the SOE (and presumably its management), the Opinions proclaim at the same time the critical and leading role of the Party organization in the SOE. The Party’s role should be written into the SOE’s corporate charter, and the Chairman of the Board should generally be the Party secretary. The Opinions call for upholding the unity of the principle of Party control over cadres and corporate procedures for electing directors and appointing management (i.e., election by shareholders and selection by the board respectively), but don’t make clear how the apparent contradiction between the two principles is to be resolved.

The Opinions propose that SOEs should be divided into two categories: commercial and public-interest. (The actual work of categorization is to be carried out by whichever state body acts as the investor.) The goal for commercial SOEs? Strengthen the state-owned economy and maintain and increase the value of state assets. In other words, do SOE operations better. Private investment in these enterprises may be allowed in order to diversify the shareholder base. As long as the enterprises remain controlled by the state, this of course has the effect of increasing the amount of assets under state control.

For commercial SOEs in competitive sectors, the Opinions encourage diversification of the shareholder base by allowing in private investors and other state investors. Curiously, the Opinions state that in addition to retaining absolute or relative state control in such enterprises when private investment is allowed in, it will also be permissible for the state merely to have equity participation, which presumably means something less than even relative control. But if the state has neither control over, nor a majority economic interest in, an enterprise, in what sense can we continue to call the enterprise “state-owned”? In any case, the Opinions set forth standards for the assessment of managers in such commercial SOEs; the standards are about business results and asset values.

For commercial SOEs in key economic sectors and sectors related to national security, private shareholding is permitted, but the state must maintain a controlling interest. The standards for assessing managers are the same.

With respect to public-interest enterprises, the Opinion suggests, albeit not very clearly, that the state must maintain a controlling equity interest here as well. Managers will be assessed on business results and asset values, with some attention paid to “social assessment” (社会评价).

The Opinions also address the issue of state holding companies, also known as group companies (集团公司). These companies are not well understood; apparently some have yet to undergo formal corporatization under the Company Law and are still structured as traditional SOEs. The Opinions encourage further corporatization of holding companies, and suggests that in some circumstances they could be listed. State equity could in some circumstances be converted to preferred shares, and the Opinions also suggest the possibility of something that looks like a golden share—that is, a state share with super voting rights or a veto over changes in control. Since it is customary for interests labeled “preferred shares” not to have voting rights, it is not clear how the Opinions contemplate that state control or influence will be maintained in companies where the state’s interest takes that form.

The Opinions devote a great deal of text to what they call the principle of management over capital as opposed to management over enterprises, and stress the importance of the former. Judging from the content of the discussion under this heading, it seems to mean that enterprises as such shall no longer be sacrosanct in the state’s approach to managing SOEs; instead, it will be quite acceptable to close down one enterprise and move state-owned capital to a sector where it will be more productive. In other words, the goal is not to maximize the performance of state-owned enterprises as such; it is to maximize the performance of state-owned capital—within, of course, the limits of the policy that the state must remain invested in certain sectors and types of industry. This could be an important change in the way the state manages its assets.

* * * * *

On the whole, the Opinions do not seem to set forth a radically new policy toward SOEs. The language can seem quite old-fashioned at times; it seems to come from the 1980s. It contains no hint at all that the state intends to get out of the business of owning enterprises; instead, its goal is to have the state manage its enterprises better. But this is not a new goal; the state has been trying to do this since SOEs first came into existence. And basically no radically new policies are proposed to achieve this goal. The one new policy (at least, new to me) is that of the principle of managing capital instead of enterprises. This is sufficiently vague, however, to require that we wait and see how it is implemented before pronouncing it meaningful.

Comments welcome.

September 21, 2015 in Commentary | Permalink | Comments (0)

Monday, September 7, 2015

Robert Precht on the ABA's non-statement about the crackdown on lawyers in China

Here's his op-ed.

[POSTSCRIPT Sept. 7, 2015: Here's Jerome Cohen's statement about the statement.]

September 7, 2015 in Commentary | Permalink | Comments (2)