Thursday, February 5, 2015
Saturday, January 31, 2015
Just when you start getting depressed about the way things are going in China, along comes Shen Kui (沈岿), a professor and former vice dean at Peking University Law School, to show that at least some of China's thinking people are not going to take the government's policy of intellectual anesthesia in higher education lying down. [Feb. 1 update: A previous version of this post had out-of-date information about Prof. Shen, identifying him as an associate professor and current vice dean.]
On Jan. 30, Minister of Education Yuan Guiren (袁贵仁) spoke at a conference on ideological and propaganda work in higher education, declaring that it was necessary "to strengthen control over the use of original-edition [i.e., not processed through some Party-controlled mechanism] Western materials. We must by no means allow materials that propagate Western values into our classrooms; it is absolutely forbidden for all kinds of speech that attacks and slanders the Party's leadership and blackens socialism to appear in university classrooms; it is absolutely forbidden to have all kinds of speech that violates the Constitution and the law spread in university classrooms; it is absolutely forbidden for teachers to complain and vent in the classroom and to transmit all kinds of harmful moods to students." (加强对西方原版教材的使用管理，绝不能让传播西方价值观念的教材进入我们的课堂;决不允许各种攻击诽谤党的领导、抹黑社会主义的言论在大学课堂出现;决不允许各种违反宪法和法律的言论在大学课堂蔓延;决不允许教师在课堂上发牢骚、泄怨气，把各种不良情绪传导给学生。)
In response, Prof. Shen posed three questions. The first is especially subversive, since it reminds us of the obvious and exposes the whole anti-Western-values campaign for the ridiculous charade that it is:
How do we distinguish "Western values" from "Chinese values"? As everyone knows, the specter of Communism that hovered over haunted Europe almost two centuries ago, after crossing mountains and seas to get to China, helped bring about the birth of the Chinese Communist Party; the Marxism that our current Constitution stipulates we must uphold, and the education in internationalism, communism, dialectical materialism, and historical materialism that the current Constitution stipulates we must undertake, are all from the West and have influenced China. There are countless examples of Western learning traveling east. Let me ask Minister Yuan, would it be possible for you to clearly delineate the line between "Western values" from "Chinese values"? (如何区分“西方价值”和“中国价值”？众所周知，近两个世纪前游荡在欧洲的共产主义幽灵“跨洋过海”来到中国后，才促成中国共产党的诞生；我国现行宪法规定必须坚持的马克思主义，必须进行的国际主义、共产主义、辩证唯物主义和历史唯物主义等的教育，也是源于西方，影响中国的。西学东渐的例子数不胜数，请教袁部长，是否可以请您清晰划出“西方价值”和“中国价值”的分界线?)
Here's his second question:
How do we distinguish "attacking and slandering the Party's leadership and blackening socialism" from "reflecting on the bends in the road in the Party's past and exposing dark facts"? No political party would dare to declare that it never did and never would make errors, and no society, whether socialist or capitalist, would dare to declare that it has no dark side. Let me ask Minister Yuan, would it be possible for you to clearly give us the standard for distinguishing between "attack" and "reflect", and between "blacken" and "expose darkness"? (如何区分“攻击诽谤党的领导、抹黑社会主义”和“反思党曾经走过的弯路、揭露黑暗现实”？没有任何政党，敢于宣布自己是从不会也永远不会犯错，也没有任何社会，无论是姓“社”还是姓“资”，敢于宣称自己是没有任何黑暗面的社会。请教袁部长，是否可以请您清晰给出“攻击”与“反思”、“抹黑”与“揭露黑暗”的区别标准？)
And finally, the third question:
How should the Education Ministry that you lead implement the policy of governing the country according to the Constitution and the law? If you have a clear and understandable answer to the above two questions, please publish another speech in good time; if you still don't have a clear answer, then please henceforth be cautious in your words and actions, because the Education Ministry that you lead relates to "the scientific and cultural level of the people of the whole nation" (Constitution, Art. 19), "the development of the natural and social sciences" (Constitution, Art. 20), and the citizens' "freedom to engage in scientific research, literary and artistic creation, and other cultural pursuits" (Constitution, Art. 47); in short, it relates to the renaissance of the Chinese people. If you casually talk about what can be done and what can't be done, then the least bit of incaution could mean a violation of the Constitution or the law. (如何让您领导的教育部贯彻执行依宪治国、依法治国的方针？如果您本人对以上两个问题已有明显易懂的答案，还请您适时发表另外一次讲话；如果您本人尚无明确答案，还请您以后谨言慎行，因为您所领导的教育部，关系到“全国人民的科学文化水平”（宪法第19条），关系到“自然科学和社会科学事业”（宪法第20条），关系到公民进行“科学研究、文学艺术创作和其他文化活动的自由”（宪法第47条），归根结底，关系到中华民族的复兴。您如果轻言什么可为、什么不可为，稍有不慎，就会存在触犯宪法、法律的可能性。)
Wednesday, January 28, 2015
Back in 2002, the China scholar (and my first teacher of Chinese) Perry Link published in the New York Review of Books what has now become, at least in the world of China studies, a famous essay: "The Anaconda in the Chandelier" [NYRB link | non-paywalled Word version]. In it, he explored the mechanisms of self-censorship, conscious and unconscious, that operate not just among Chinese--for example, the vague dread of crossing an unstated line--but also among foreigners who comment on Chinese affairs, including the fear of visa denial.
That anaconda seems to be present again today (I won't say visible, because one characteristic of the anaconda is that you don't see it) at the hearings of the US-China Economic and Security Review Commission (the USCC) on the foreign investment climate in China, particular as regards competition policy.
China's competition policy has been very much in the news in the last several months; I blogged last September about a highly critical report issued by the US Chamber of Commerce. But although a lot of people want to talk about it, there are also a lot of people who don't, and the presence of the anaconda is manifested by their absence from the hearings.
Here's where I must regrettably get a little mysterious. I know some people who know something about Chinese competition law. One of them, my colleague Bill Kovacic, a former chairman of the FTC, knows a lot about Chinese competition law and is testifying today. Another, however, commented (as slightly edited by me):
Bill will have the courage to say important things. No business wanted to go on the record. [Having been able to pre-read the comments of some panelists], I can tell you that that everyone who has a potential business interest (law firm and consulting firm) will really soft-pedal some procedural fairness issues as well as mention of some industrial policy.
Not having read the comments and not knowing enough about competition policy, I do not know whether witnesses are in fact pulling their punches. But there are some academics who really know a lot about Chinese competition law other than Bill Kovacic, and they are not on the witness list. Obviously, I am not naming any names, but in at least one case the person concerned turned down the opportunity to testify because of visa concerns related both to the content of the testimony and to the fact that it would be before the USCC, which is viewed by the PRC authorities as hostile. (Personally, I don't think that an academic would get on the visa blacklist just for badmouthing the NDRC before the USCC, but everyone has to make their own judgment in these things, so I'm not criticizing.) This is a real shame. Not only is the USCC being deprived of good information, but the Chinese government itself has, as they say in Chinese, lifted a rock only to drop it on its own feet (搬起石头打自己的脚): the threat of visa denial for testifying before the USCC will disproportionately drive away witnesses who are less hostile to the Chinese government, since the more hostile ones have presumably already decided to accept the consequences or are on the blacklist already.
Tuesday, January 27, 2015
The New York Times has a report today about a merger between Dentons and Dacheng, a Chinese law firm. According to the report, "[l]ike a number of other large law firms, the partnership will be structured as a Swiss verein, which allows for the companies to maintain separate profit pools." I would really appreciate comments on this post from knowledgeable readers, because I'm mystified by several aspects of the deal. I'll number the paragraphs for ease of reference in the comments.
- There have been previous deals between Chinese and law firms that were announced as mergers--for example, between Mallesons and King & Wood--and I don't know the details of those, or whether this one uses the same model. But it does raise interesting questions about whether it really makes sense to call this a "merger" as opposed to a simple agreement to share certain kinds of business.
- First, the report says that the firms maintain separate profit pools. It's a strange merger where the two parties don't merge their revenue streams and profit calculations.
- Second, if they maintain separate profit pools, then it pretty much follows that they are going to maintain separate decision-making structures. Dentons will continue to decide what clients Dentons will take, how much to charge, etc., and Dacheng will do the same for Dacheng. I don't know this for a fact, but it would be very unusual to separate profits from decision-making power. Again, a strange merger where decision-making remains separate and not unified.
- Third, surely Dacheng has not disappeared as a Chinese business organization. Foreign law firms--and although I know almost nothing about the Swiss verein, I'm pretty sure it's Swiss--cannot practice Chinese law, so there has to be a Chinese business entity that remains in existence to engage in the practice of Chinese law. A strange merger where the supposedly merging entities remain in existence.
- Fourth, some jurisdictions have rules forbidding lawyers from sharing certain aspects of law firm operations with non-lawyers. I suppose any rules against sharing profits are taken care of by the separate profit pools. I don't know if China has rules about Chinese firms sharing control with foreigners. Again, if the firms are sharing neither profits nor control, in what world does it make sense to call their arrangement a "merger"? The report also speaks of "a unified compensation system." Will that amount to profit-sharing, and is that allowed by all the relevant jurisdictions?
- Finally, how much information will be shared between the "merged" firms? Will they develop a unified client database that all attorneys can access? This raises serious issues of information security. It is an unfortunate fact that if the state security folks show up at Dacheng's offices and demand access to information that Dacheng attorneys can access, Dacheng attorneys are in no position to say no. If client information is vulnerable in this way, will Dentons clients feel comfortable about that?
Comments welcome and indeed earnestly solicited.
Saturday, January 24, 2015
I want to add one more point about VIEs to my post from yesterday on the draft Foreign Investment Law (FIL) (it was late and I forgot to include it before hitting the "Publish" button).
Let's not forget that as this law goes through the discussion and review process before its enactment in final form, there's going to be a lot of politicking, which is another word for people trying to protect their financial interests. What kind of treatment for VIE structures best serves the interests of existing VIE structures? The answer is: grandfather in the existing ones and bar new ones. It's easy to imagine that in some industries, companies with access to foreign financing can be in a competitively superior position to companies without such access. If foreign financing is forbidden in those industries, then companies that manage to access it despite the prohibition are clearly in better shape to dominate.
Take Alibaba or Baidu. In both cases, the offshore parent--a Cayman Islands company listed in the US--is controlled by Chinese citizens. This means that as the FIL is currently written, it is a Chinese company, not a foreign company. Poof! The illegal (or at least very dicey) foreign investment in a prohibited industry disappears; it's now Chinese investment.
Of course, this result doesn't protect Alibaba and Baidu from competition from other Chinese investors who raise money via controlled offshore companies, since the competition's offshore vehicle would also count as Chinese. But it does protect them from competition from VIE structures that are not controlled by Chinese, since the government now seems more serious about not allowing such structures to exist. I wonder what's going to happen to Sina.com? The last time I looked, its shareholding was widely dispersed and there was no controlling shareholder.
UPDATE JAN. 24: Check out Paul Gillis's China Accounting Blog post on winners and losers. In fact, check out all his posts on this issue.
Friday, January 23, 2015
On January 19th, China’s Ministry of Commerce ("MOFCOM") released a draft of a new Foreign Investment Law (“Draft FIL”) for public comment. It also released an official explanation of the draft (“Explanation”). (Here is the MOFCOM press release with links to both.) The Draft FIL proposes very far-reaching changes in how China handles foreign investment. It also specifically addresses the issue of Variable Interest Entities. The latter point has attracted a great deal of commentary to date, but some of that commentary has overlooked important details, so please don’t forget to read Section V at the end.
I. Structure of foreign investment regulation
The Draft FIL fundamentally changes the way China handles foreign investment. First, it proposes a default norm of national treatment for foreign investment. Second, it abolishes the general requirement for MOFCOM approval and establishes a negative list principle. Third, it abolishes the special corporate vehicles for foreign investment.
A. National treatment for foreign investment
The Draft FIL proposes a default norm of national treatment (国民待遇) for foreign investment, stating, “When foreign investors invest in China they shall enjoy national treatment” (Art. 6). The Explanation states that this language manifests the principle of a “pre-establishment national treatment” (准入前国民待遇), meaning that (except where otherwise specified in law), foreign investors may make investments on the same terms as Chinese investors, without being subject to additional approvals or sectoral restrictions.
Note that, at least as glossed by the Explanation, the Draft FIL’s promise of national treatment does not exclude post-establishment discrimination (for example, charging foreign investors or their Chinese enterprises more for utilities once the factory is set up). Compare the notion of “pre-establishment national treatment” with the language of Art. 3, Para. 1 of the 2012 US Model Bilateral Investment Treaty: “Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.” The Explanation’s understanding of national treatment is much narrower.
Whether the drafters really intended to leave open a space for post-establishment discrimination is hard to say. It’s worth noting that China has made what seems to be a promise of post-establishment national treatment in important areas in its WTO Protocol of Accession. But I don’t see anything that would prevent China from, say, imposing different tax rates on foreign and foreign-invested enterprises.
B. Abolition of investment approvals; establishment of negative list
As part of its implementation of the national treatment principle, the Draft FIL abolishes the general requirement of government approval for all foreign investments. Instead, it establishes a default principle that foreigners may make any investment that domestic investors may make, and in the same way. Setting up a company will still require approval from the local Administration of Industry and Commerce, for example, but that’s true for domestic investors as well. What is gone is the general requirement of approval from MOFCOM and the National Development and Reform Commission. Nobody is going to be examining joint venture contracts or company articles of association any more. Instead of ex ante review, we have a system of ex post reporting.
Any deviation from this default principle must have a source in law (i.e., rules issued by the National People’s Congress or its Standing Committee), administrative regulations (i.e., rules issued by the State Council), or a State Council decision (Art. 22). The deviation must be listed in a special catalog of special regulatory measures (特别管理措施目录) (“Special Catalog”). The Special Catalog will, it seems, replace the current Guidance Catalog for Foreign Investment, which specifies the sectors in which investment is forbidden, restricted, or encouraged (all non-listed sectors being classified as “permitted”). An important difference between the Special Catalog and the Guidance Catalog is that the Guidance Catalog did not do away with the foreign investment approval process itself. It was instead more of an instruction to the approving entity on how to manage its business. By contrast, investments not covered by an exception in the Special Catalog are (at least presumptively) not subject to foreign investment approval at all (Art. 26).
The Special Catalog will list prohibited investments and restricted investments. Restricted investments are of two types: (1) those that exceed investment limits set by the State Council, and (2) those that are in certain sectors. Investors in restricted investments must apply for foreign investment approval (Art. 27), submitting a variety of materials set forth in Article 30. The Draft FIL sets out a variety of rules regarding the approval process, including the nice touch that where the approval authority does not notify the applicant of any deficiencies in the application within five working days, the application is deemed accepted for review and the clock starts ticking on that process (Art. 31). This may not be very meaningful, since the approval process remains discretionary, and so it remains necessary for the applicant to please the reviewing authority regardless of what formal deadlines may have passed.
The fact that non-restricted investments are not subject to the above foreign investment approval process seems to create some problems with other parts of the Draft FIL. Article 34, for example, deals with the interaction between foreign investment approval and national security review. Where the reviewing authority discovers a potential national security issues, it should refer the project over to the relevant body for national security review. But if the project never comes before the approval authority, how does the state ever become aware of a potential issue? I discuss this further below in the section on national security review.
C. Abolition of special corporate vehicles for foreign investment
When China first opened up to foreign investment in the post-Mao era, there was no general company law and the government was not ready for such a law, so China had to invent special corporate forms for foreign investment: the equity joint venture ("EJV"), the contractual joint venture ("CJV"), and the wholly foreign-owned enterprise ("WFOE", and collectively, the "Three FIEs"). With the promulgation of the Company Law in the early 1990s, it became theoretically possible for foreigners to invest in regular companies, and eventually it became actually possible as well (subject to various restrictions and approval requirements).
Adding to the complexity of the system was the problem of the degree to which Company Law requirements should apply to the Three FIEs if they were not specifically contradicted by applicable law. (For example, the WFOE Law says nothing about a Board of Supervisors for WFOEs; the Company Law requires one. Should the WFOE Law's silence on the issue be considered a gap that can be filled by the Company Law, or is it an affirmative silence representing a legislative intention that WFOEs not be required to have any corporate governance institution not called for by the WFOE Law?)
The Draft FIE Law gets rid of this problem entirely by simply abolishing the Three FIEs. All foreign investment must use one of the general statutory vehicles for business associations. In practice, this will likely mean a company under the Company Law (that is, a company limited by shares (股份有限公司) or a limited liability company (有限责任公司)) or a partnership under the Partnership Law.
As a policy matter, this seems to me a sensible approach that should be applauded. There is a minor procedural fly in this legislative ointment that deserves some attention. Anyone reading Article 170 might think that the organizational laws for the Three FIEs will disappear when the Foreign Investment Law comes into effect. Not quite. Existing EJVs, CJVs, and WFOEs have three years to convert to a new corporate form, but before they do so they still need some kind of governing law, so they will still be governed by the applicable statutes (that is, the Equity Joint Venture Law, the Cooperative Joint Venture Law, and the Wholly Foreign-Owned Enterprise Law respectively) (Art. 157) and presumably the various regulations promulgated by innumerable government bodies that put flesh on the bones of those statutes. What is a bit odd is that the legal regime for the Three FIEs will have to remain frozen for up to three years, since the laws under which any regulations are promulgated will have disappeared.
II. National security review
The Draft FIL makes all foreign investments potentially subject to a national security review. This review can be triggered by a foreign investment approval authority when it spots a potential issue. But as we have seen, the whole point of the Draft FIL is to put large swaths of foreign investment outside of the review process. How, then, are non-restricted investments with national security implications to come to the attention of the authorities?
One route is self-reporting (Art. 50). This is the approach taken by the United States for CFIUS review: “Despite the voluntary nature of the notification, firms largely comply with the provision, because the regulations stipulate that foreign acquisitions that are governed by the Exon-Florio review process that do not notify the Committee remain subject indefinitely to divestment or other appropriate actions by the President.” Very possibly firms investing in China would take the same approach.
The relevant review body can also initiate an investigation sua sponte (as can CFIUS). In fact, just about anyone can suggest that a national security review is needed, although curiously the suggestion is supposed to be made to the foreign investment review authority, which is completely uninvolved in a non-restricted transaction (Art. 55).
III. Ex ante review replaced by ex post reporting
Chapter 5 of the Draft FIL, starting at Article 75, deals with the reporting system. As noted above, the ambition of the Draft FIL is to generally replace a system of before-the-fact approval with a system of after-the-fact reporting. This places much less of a strain on administrative resources—authorities can concentrate their attention on regulated parties who actually violate the rules (or are suspected of doing so) and not have to spend time on every potential violator of the rules, i.e., every single regulated party. It is the sign of a more confident administration, and is more consistent with a system of predictable rules: after-the-fact reporting works best when those reporting who wish to be compliant with law can self-assess their compliance as they go along.
The one problem here is that the reporting requirement seems to go too far, again possibly as a result of careless drafting. Article 93 sets forth a reporting requirement for all foreign investors—this includes individuals—who own less than 10% of a listed company. The report needs to be submitted only once a year, but nevertheless is going to be exceptionally onerous for any individual investor who is just taking a flutter on the Chinese stock market. Do the drafters really desire or expect that all investors who buy stock in Shanghai-listed companies through the Shanghai-Hong Kong Stock Connect program will file annual reports with all the required information for each stock they own?
IV. The control rule
The Draft FIL contains an important control rule. First of all, foreign entities controlled by Chinese investors can, at least in some circumstances, be considered Chinese domestic investors (Art. 45). Second, Chinese entities controlled by foreigners are considered foreign investors (Art. 11). Both these rules deserve some discussion.
The first rule, which converts Chinese-controlled foreign investors into Chinese investors, will be discussed much more extensively below in the section on VIEs. Here I just want to point out a nice consequence possibly unintended by the drafters. Think about why Chinese money likes to go overseas to form a corporate entity, only to have that money come back to China to fund an investment. This round-tripping used to be explained by all the special benefits—tax breaks and the like—that foreign investors got in China. But those special benefits have pretty much disappeared. What explains it now? I think the answer is that Chinese investors are seeking foreign corporate law. Chinese corporate law has traditionally been quite rigid. It’s improving—China recently got rid of its silly minimum capital requirements—but it still has quite a way to go before it can accommodate the complex and sophisticated financing structures that are possible under the corporate law of other countries.
The problem with organizing abroad now is that doing so has significant costs, one of which is that you are counted as a foreign company and subject to restrictions on foreign investment. In counting foreign companies controlled by Chinese as Chinese companies, the Draft FIL considerably lowers the barriers to Chinese investors taking advantage of foreign organizational law to engage in investments right back in China.
The second rule converts foreign-controlled Chinese entities into foreign investors. This seems symmetrical with the first rule, but in fact does not seem to have been thought through and may be a drafting error. It would make more sense to say that a Chinese entity subject to foreign control is a foreign-invested Chinese entity, not an actual foreign investor. Article 15, for example, defines control through contracts as a type of foreign investment. If a foreign company controls a Chinese company through contracts, then according to Article 15 it has invested in the Chinese company. Why not then simply consider the Chinese company to be a foreign-invested company?
The state makes certain decisions about how it wants to regulate entities with foreign investment—and very possibly subject to complete foreign control—that are organized under Chinese law (for example, WFOEs). It’s hard to see any reason for treating a Chinese company differently simply because the foreign control is exercised through contracts instead of through direct investment. Indeed, the whole point of the actual control test is to say that these are essentially the same and should be regulated the same way. If the contractually-controlled Chinese company is treated as a truly foreign investor, that has all sorts of bizarre consequences. Perhaps it cannot hire employees directly and must instead do so through a labor service company. Perhaps it cannot even engage in business in China—foreign companies engaging in production must set up a Chinese subsidiary.
There is also a possible problem with the definition of “control”. It’s defined in Article 18. But whenever Article 18 talks about proportionate ownership or control of anything, instead of talking about “more than half” or “a majority”, it consistently uses a concept of “half or more”. Chinese speakers all know about the ambiguity of the term yishang (以上); the Draft FIL specifically states that it includes the number preceding it, so every time Article 18 speaks of “50% yishang” or “half yishang”, it must, by the terms of the Draft FIL itself, be interpreted as “50% or more” and “half or more”. This means that under the Draft FIL, two opposed parties could both be deemed in control of an enterprise.
Although neither the Draft FIL nor the Explanation specifically use the term “Variable Interest Entity”, it is absolutely clear that the Draft FIL intends to address the issue. (The Explanation states, “The issue of foreign investors obtaining control rights over domestic enterprises through a series of contracts has received widespread attention.”) What will happen to existing VIEs? What about VIEs in the future?
Let’s recall the basic problem of VIEs: they are an attempt to get around restrictions on foreign investment in particular industries, most notably telecommunications and the internet. They do this by setting up a series of contracts between a wholly domestic Chinese entity (“DCE”), which holds the operating license, and a foreign-invested/foreign-controlled Chinese entity (“FCE”). These contracts mimic the effects of ownership, assigning control and risk to FCE. Money is supposed to flow from DCE to FCE, and thence offshore to FCE’s foreign parent company (“Parent”), and thence to shareholders of Parent.
Chinese contract law is quite clear: contracts to achieve an unlawful purpose are invalid. We even have a recent Supreme People’s Court case right on point telling us so. The disclosures in the “Risk Factors” section of the Alibaba prospectus—by no means unique—do not exactly exude confidence in the robustness of their fundamental corporate structure: “If the PRC government deems that the contractual arrangements in relation to our variable interest entities do not comply with PRC governmental restrictions on foreign investment, . . . we could be subject to penalties or be forced to relinquish our interests in those operations.”
Despite their obvious illegality, VIE structures have been permitted to openly raise funds abroad and operate in China. It is impossible to believe that somehow the Chinese government did not know that Alibaba, or Sina.com before it, was raising funds abroad, or how it was doing it. Like so many technically unlawful practices before it, the VIE structure works—until it doesn’t.
Have we now reached an “until it doesn’t” moment? It’s not entirely clear.
Let’s leave existing VIEs aside for the moment and start with future VIEs. We can imagine three kinds of VIE structures: (1) those in which Parent is actually controlled by Chinese individuals (“Chinese-controlled parent” or “CCP”), (2) those in which Parent is actually controlled by foreign individuals (“foreign-controlled parent” or “FCP”), and (3) those in which the issue of control is not clear. I include category (3) for the sake of completeness and shall discuss it no further. Finally, assume existing law remains unchanged, and that foreign investment in industry X is restricted or prohibited.
For CCP VIE structures, there may be no problem. This is because the control rule, discussed above, may make the VIE structure unnecessary where you have a CCP: even though the CCP is a foreign company, it can be treated as a wholly Chinese entity and lawfully invest directly (without having to use fancy contractual structures) even in sectors where foreign investment is restricted. According to Article 45, if a foreign investor is actually controlled by Chinese investors, it can, when applying for foreign investment approval, at the same time apply to be treated as a Chinese investor.
Note, however, that the actual-control test does not help you if you are trying to invest in a prohibited sector—or at least that’s what Article 45 implies by its mentioning only restricted investments. This may be an unintended drafting oversight; I can’t think of a strong policy reason for using an actual-control test when considering investments in restricted areas, but not when considering investments in prohibited areas. Part 3.3 of the Explanation, in discussing the actual-control test for status as a Chinese investor, does not seem to consider the distinction important; it notes that one suggested path for existing VIE structures in restricted or prohibited sectors would be for them (assuming Parent is controlled by Chinese investors) to seek treatment as a Chinese investor. In any case, the point is that in some cases Chinese-controlled offshore entities can count as Chinese investors and therefore can invest directly in industry X, instead of indirectly through a set of contracts that try to mimic the effects of direct investment.
For FCP VIE structures, it looks like bad news. (Remember, I’m still talking about entities that might be created in the future, not existing entities.) Article 11 lists who counts as a foreign investor, and adds that any domestic Chinese entity controlled by any entity on that list also counts as a foreign investor. Moreover, Article 15 defines control through contracts as a type of foreign investment covered by the law. Thus, there could be no onshore Chinese entity—no DCE—that could hold an operating license in an industry in which foreign investment were prohibited; by virtue of the control exercised over it, the DCE would cease to be a DCE and would become not just a FCE, but an actual foreign investor.
What about existing VIE structures? The consensus of commentators such as Practical Law and the Jun He law firm—and even Dan Harris of the China Law Blog, who thinks the Draft FIL is a death sentence for VIEs—is that somehow the system will let existing VIE structures continue, if only because shutting down the likes of Sina.com and Alibaba is unthinkable.
The Draft FIL actually leaves the relevant article (Article 158) blank and refers to the reader to the Explanation. Part 3.3 of the Explanation offers three proposals for dealing with existing VIE structures and asks for public input, making it clear that nothing is set in stone (or at least, that’s what they want you to think). Here are the alternatives:
1. “Foreign investor enterprises [note: not “foreign-invested enterprises”] exercising control through agreements [i.e., involved in a VIE structure] who report to the State Council’s department in charge of foreign investment that they are subject to the actual control of Chinese investors may retain their structure of control through agreements, and the relevant entity may continue to undertake business activities.” (实施协议控制的外国投资企业，向国务院外国投资主管部门申报其受中国投资者实际控制的，可继续保留协议控制结构，相关主体可继续开展经营活动) Note that this option involves reporting, not applying.
2. “Foreign investor enterprises exercising control through agreements should apply to the State Council’s department in charge of foreign investment for confirmation that they are subject to the actual control of Chinese investors; after confirmation by the State Council’s department in charge of foreign investment that they are subject to the actual control of Chinese investors, they may retain their structure of control through agreements, and the relevant entity may continue to undertake business activities.” (实施协议控制的外国投资企业，应当向国务院外国投资主管部门申请认定其受中国投资者实际控制；在国务院外国投资主管部门认定其受中国投资者实际控制后，可继续保留协议控制结构，相关主体可继续开展经营活动) Note that here an application and approval is required, not simply a self-report.
3. “Foreign investor enterprises exercising control through agreements should apply to the State Council’s department in charge of foreign investment for access permission [准入许可; this is the term used throughout the Draft FIL to mean, in effect, permission to invest]; the State Council’s department in charge of foreign investment shall, in consultation with relevant departments, make a decision based on an overall consideration of the actual controller of the foreign investor enterprise and other elements.” (实施协议控制的外国投资企业，应当向国务院外国投资主管部门申请准入许可，国务院外国投资主管部门会同有关部门综合考虑外国投资企业的实际控制人等因素作出决定)
Let’s consider existing VIE structures with a foreign-controlled offshore parent. By definition, they are dead in the water under the first or second alternatives. Their only hope is the infinitely flexible third alternative, which gives total discretion to government authorities over whether to grandfather them in. The authorities can (if they wish) consider matters other than actual ownership.
Now let’s consider existing VIE structures that have a Chinese-controlled offshore parent. First, we can apply the same analysis (with the same caveats) we applied to future VIE structures with a Chinese-controlled parent: perhaps they don’t even need a VIE structure any more. If for some reason they want to keep a VIE structure, clearly alternative 1 is the best for them. Alternative 2 is more troublesome, but if they are truly Chinese-controlled, things should come out all right in the end. Alternative 3 is the most worrisome for them; they have in effect to re-apply for permission to be doing what they’re doing, and permission isn’t guaranteed; Chinese control is only one element for the authorities to consider.
(Incidentally, on the question of whether corporate organizations that don’t need a VIE structure have the option of keeping it, it’s worth remembering that many VIE agreements provide that if there is a change in law such that the VIE structure is no longer necessary and a conversion to direct ownership is possible, the various parties are obliged to do whatever is necessary to effect that conversion. I’m not holding my breath on that one.)
Finally, a thought about all the energy we are spending on looking at the law. It seems a bit odd to be worrying about what the Draft FIL says about the legality of VIE structures or to say that it somehow makes them illegal. As I argued at the beginning of this discussion, they are already illegal. Hardly anyone denies this. And yet the authorities have permitted them to exist, and indeed to flourish, right under their noses. Back in the 1990s we saw the same thing with the CCF structure: a prohibition on foreign investment that was openly violated through a too-clever-by-half contractual arrangement. That arrangement worked just fine until it didn’t. Then it was resurrected in the form of the VIE structure, which we are now told is being made illegal, or—given that it’s already illegal—at least is not fine any more. Is there any reason to think that the pressures that produced the CCF and VIE structures, despite their being clearly prohibited, won’t survive this new purported prohibition and give us yet another transparent workaround?
* * * * *
JANUARY 24 UPDATE: I forgot to include some comments about the possibly anti-competitive aspects of the Draft FIL's treatment of VIE structures. I've just written a separate blog post on that here.
 “Except as otherwise provided for in this Protocol, foreign individuals and enterprises and foreign-funded enterprises shall be accorded treatment no less favourable than that accorded to other individuals and enterprises in respect of:
(a) the procurement of inputs and goods and services necessary for production and the conditions under which their goods are produced, marketed or sold, in the domestic market and for export; and
(b) the prices and availability of goods and services supplied by national and sub-national authorities and public or state enterprises, in areas including transportation, energy, basic telecommunications, other utilities and factors of production.”
Friday, January 16, 2015
It may seem incredible, but apparently the authorities believe that the rights of Chinese lawyers need to be even further restricted. Thanks to Joshua Rosenzweig for his translation of, and commentary on, an open letter signed by more than 500 Chinese lawyers in opposition to proposed changes to the Criminal Law that would criminalize such acts as “insulting, defaming, or threatening a judicial officer or participant to the litigation after being told by the court to stop” and “engaging in other acts that seriously disrupt the order of the court.”
Wednesday, January 14, 2015
While the Chinese government has never accepted the principle of separation of powers, it has (in the post-Mao era) allowed a space for a limited conception of judicial independence. In that conception, the courts as an institution should be independent of political pressures - officials outside of the court system should not pressure them, and they should not yield to such pressures. Within the court, on the other hand, it has always been part of the system that the views of individual judges who hear cases can be overridden by senior judges and the Adjudication Committee.
It seems that now even this limited conception of judicial independence (which did not actually function in practice in any case) is under attack, although the attack has yet to rise to the level of an unambiguous Party position. Here's an excellent article by Qian Gang of the China Media Project on recent developments: Who gave "judicial independence" a death sentence?
Tuesday, December 9, 2014
On Saturday I posted links to position papers by both China and the US on China's South China Sea claims. Here's an analysis of the dueling papers.
Sunday, December 7, 2014
Displaying a level of control freakery that probably reminds many women of their f'irst husband, the Chinese government has banned puns. I am not making this up. Here are some reports:
- "Punning banned in China" (Language Log)
- "No laughing matter: China's media regulators ban puns" (L.A. Times)
- "Chinese Government Moves To Crack Down On Puns" (The Guardian)
- "Nowhere to Pun Amid China Crackdown" (WSJ China RealTime Report)
- "Like a pun in a China shop" (Chicago Tribune) (weird humorless headline that contains no pun and uses an old expression apparently only because it contains the word "China" in it)
The Language Log blog has posted a translation by David Moser of the relevant document from the State Administration of Press, Publication, Radio, Film, and Television, whose acronym sounds like flatulence in a Don Martin cartoon.
Friday, November 7, 2014
The Chinese government often complains the criticisms of its human rights record are hypocritical. After all, aren't there a lot of problems in Western countries, too? (Typically, the U.S. is always singled out as the representative of "the West"; probably it's just a target-rich environment, as they say.) This complaint is flawed for two reasons, the second of which I'll address here.
The first reason is of course that the critics aren't all governmental, and may well denounce the same abuses that the Chinese government denounces. I recall being at a conference many years ago at which an ACLU representative asked the Chinese government representative whether China would consent to prison visits by organizations such as the ACLU. The Chinese representative indignantly refused, asking (in her own mind, rhetorically) whether the ACLU would favor prison visits to US prisons by Chinese government representatives. Needless to say, the ACLU wouldn't object to that kind of thing at all.
The second reason that the complaint about hypocrisy is flawed is that even if the critic is being hypocritical, so what? This does not wash away the rights violation or make the victim feel any better. If you care about human rights, the question should always be "Does the criticism make the situation better?", not "Is the critic a hypocrite?"
Exhibit A in this argument is the text accompanying an exhibit at the National Civil Rights Museum in Memphis.
It explains how the Kennedy administration's actions to advance civil rights were stimulated at least in part by Soviet propaganda that made the US look bad. Were the Soviets hypocrites who didn't actually care about human rights? Judging by their own record, the answer is obviously yes. Would the world, and the civil rights movement in the US, have been better off if they had kept their mouths shut about racist abuses in the US? Obviously (to me, anyway), no. When you're criticized for doing bad stuff, you have two options: deny the criticism, attack the critic, and hide the bad stuff, or just stop doing the bad stuff.
Wednesday, October 29, 2014
The Fourth Plenum’s Decision is now available on the Law Genius site in annotatable form in both English (translation courtesy of Rogier Creemers and Jeremy Daum) and Chinese. I’ve already added annotations to the English text.
By way of explanation, genius.com is a site that crowd-sources knowledge by allowing texts of various kinds to be annotated. (It started as a site for annotating rap lyrics – go figure.) It has various sub-sites: Law Genius, Rap Genius, Poetry Genius, etc. – you get the idea. (Full disclosure: I know about it because my daughter runs the Law Genius site.)
I encourage anyone who might like to annotate the Decision to check out the site and add your wisdom. The annotating function is pretty intuitive: just highlight the text you want to annotate and then move your cursor over into the blank space on the right. An annotation box will appear. For tips on how to format your annotations (add italics, links, etc.), see this page.
The text of the decision passed by the Fourth Plenum on Oct. 23rd, entitled “Decision on Several Important Issues Regarding the All-Around Promotion of Ruling the State According to Law,” has finally been released [Chinese | English]. As expected, it offers more detail than did the Communiqué released earlier, but I don’t see anything here that would require a fundamental revision of the preliminary assessments that observers (including me) made after reading the Communiqué. Even though those assessments were varied, my sense is that whatever you thought the Communiqué indicated, your opinion will be reinforced, or at least not overturned, by your reading of the Decision.
The big-picture summary is that the Decision contemplates no fundamental reform in the relationship between the legal system and the Party. It is clear that institutionally speaking, the Party will remain above the law. At the same time, the Decision does contemplate some genuinely meaningful (and in my opinion positive) reforms. It also has a lot of stuff that might look meaningful but isn’t. I’ll explain below. Please note that I wrote this under a lot of time pressure, so it is not as well organized as it might be. Conclusions are tentative.
1. Party first, law second
My impression (which I have not taken the time to verify) is that whenever the Party and the law appear in the same sentence, the Party comes first. Certainly it comes first in some important places.
(a) Section 1 of the Decision lists several important principles that must be upheld in order to achieve the goal of ruling the state according to law. The first: leadership of the Party.
(b) Section 6 states that judges should be loyal to four things: the Party, the state, the people, and the law. Notice which comes last. Grammatically speaking, of course, there is no reason why this sentence could not be interpreted as giving all elements equal value; in any list, something has to come first. But we know that in a document like this, nothing – not even a comma – is accidental. The elements of this list come in the order they do for a reason.
(c ) The “Three Supremes” (三个至上) long associated with former Supreme People’s Court president Wang Shengjun (a man on whose CV not a single day of legal education appears), are resurrected in the same section. Legal system personnel should give highest priority to the cause of the Party, the interests of the people, and the constitution and laws – again, listed in that order. Lawyers must support the Party’s leadership and party cells in law firms should step up their activities.
In addition, obedience of officials to law is presented throughout as a kind of internal Party policy goal: this is something that Party members should do, and officials will even be scored on it (Section 7, Subsection 3). Those who have a “special privilege” mentality will be criticized and educated, and if necessary removed from office. But because the Decision contemplates no changes in the relationship between the legal system and the Party, the system in which powerful officials can override law if they wish to remains comfortably in place. The Decision just wants them to wish to override it less often.
2. Meaningful reforms: major
(a) The Decision calls for some significant reforms in the system for managing judges.
(i) First, it says that judicial tenure should be protected; judges should be removed from their posts only for legal reasons and in accordance with legal procedures. It’s hard to know exactly what this means; at present, as a formal matter, local people’s congresses have the right to appoint senior judges in a court, and there’s nothing in the law to suggest they can’t replace them as they please. In any case, no more detail is provided, so we’ll put this aside for now.
(ii) A very important reform in my view is the proposal (Section 6, Subsection 1) to establish essentially a career civil-service model for the judiciary. Junior judges should be selected by provincial-level courts and should start their careers in basic-level courts. They will then be promoted to higher-level courts based on their ability. The Decision does not actually specify who will do the promoting, although it would make sense for this power to be in the hands of the provincial-level courts as well. The same principle applies to procurators. This reform is significant precisely because such a model does not exist now. Courts are still making their way out of the work-unit (单位 danwei) model. The main (or at least, an important) way to become a senior judge at a high-level court is to start out as a junior judge at a high-level court – presumably by graduating with excellent grades from a famous law school. There is not now a good system for identifying promising judges at lower levels and promoting them to different courts at higher levels.
(b) The Decision also calls for some significant reforms in the court system, both apparently designed to address the problem of local protectionism. Because courts at a given administrative level are in practice answerable to local political authority at that level (which has power over appointments and finances), they tend to protect any party that local political authority wants to protect – for example, prominent local businesses. The Chinese legal community has long viewed this as a problem and proposed various ways of addressing it.
(i) The Supreme People’s Court is to establish “circuit tribunals” (巡回法庭 xunhui fating) each with jurisdiction over several provinces, to try cases involving more than one province. Note that this proposal does not involve setting up another layer of courts. The institutions in question are tribunals, meaning they are simply branches of the SPC. A decision of such a tribunal would be a decision of the SPC. A model for this currently exists in basic-level people’s courts, which can establish “people’s tribunals” (人民法庭 renmin fating) that exist in, or travel to, areas physically distant from the court’s location. The decisions of such tribunals are decisions of the court itself.
(ii) There is another, different proposal to establish another layer of courts that will cross jurisdictional boundaries, again to try cases that are in some sense cross-jurisdictional. Such a proposal would require legislative and possibly constitutional amendments. The Decision gives it only a sentence, so we know basically nothing about how this proposal might be carried out.
Note that in both cases, the institutions involved (whether tribunal or court) are intended to hear only a particular kind of case: cross-jurisdictional cases. They do not appear intended to solve in a general way the problem caused by the dependence of courts on political power at the same administrative level.
3. Meaningful reforms: minor
(a) The Decision calls for breaking the link between amounts received by a government agency in fines and confiscations and that agency’s (or, presumably, its officials’) interests. The reasons for (and merit of) this are obvious. In fact, it’s a reform that has already been carried out, at least to some degree, in a number of sectors. (I just wish the U.S. government would adopt the same principle in its civil forfeiture laws.)
(b) The Decision calls for control over personnel and finances of state auditing organs to be centralized up to the provincial level. This is presumably to provide auditing bodies with more independence from local officials, who might pressure them to look the other way during their investigations.
(c) The Decision calls for reforms in the case docketing (立案 li'an) system. Any court system needs a gate-keeping procedure to weed out non-meritorious suits before they get very far. The problem with China’s current system is that in practice, courts can avoid hearing troublesome cases (for example, cases where no matter what they do they’ll be criticized) by simply refusing to docket them (i.e., refusing to accept the case filing). While such a refusal can be appealed, courts can get around this by simply refusing to refuse; they don’t issue a decision rejecting the filing, but instead just do nothing. The Decision calls for reforming this by (it seems) removing the discretion of courts to refuse cases. Instead of a system where courts can review filings for docketability (and thus have the power to reject the filings), we will get a system of “case registration” (立案登记制 li’an dengji zhi). But if so, the system will still have to come up with some way of filtering out frivolous and otherwise utterly no-hope cases without having to do a proper hearing on the merits.
(d) The Decision has some welcome language on civil rights. It specifies the principle of the presumption of innocence (疑罪从无 yi zui cong wu: literally, something like “when there is doubt about the crime, err on the side of finding no crime”). It also endorses the principle of exclusion of unlawfully gathered evidence. I put both these items in the “meaningful but minor” category because I don’t want to say they’re meaningless, but at the same time we have heard this before and problems persist.
(e) The Decision endorses an Anglo-American type jury! At present, China has a system of so-called “people’s assessors” (人民陪审员 renmin peishenyuan): lay people who in certain cases sit alongside judges and have (in theory, although of course not in practice) exactly equivalent decision-making power over the case. It’s just a vote at the end. Thus, it’s not appropriate to call them a jury, even if they functioned exactly as they are supposed to in theory, instead of (as seems to be the case in practice) as decorative extras. But the Decision calls for the gradual implementation of a system whereby assessors will decide only issues of fact (did A actually call B a stinker?), not issues of law (assuming A called B a stinker, is B entitled to damages for hurt feelings?). This is exactly how the Anglo-American jury is supposed to function.
I group this with the minor reforms because although it would be major if actually implemented, I’m not confident that it will get very far. I should also say that it’s not unambiguously positive. Just because it resembles the Anglo-American jury doesn’t automatically mean it’s a great thing. I’m undecided on this one.
3. Meaningless feel-good language
The Decision gives a shout-out to innumerable Good Things, from constraining state power to increasing legal aid. Typically, it calls for strengthening or increasing something that is already there. Consider how often the following verbs appear:
No. of occurrences
jianquan (健全 strengthen)
wanshan (完善 perfect)
tigao (提高 raise or increase)
It would be otiose to go through them all. I would instead propose that the burden be on those who assert in any particular case that this language means something to point to the specific institutional reform that accompanies it. If there is none, then we can only wait and see. Talk is cheap. Something may come of the promise and something may not. Here are a few examples.
(a) The Decision calls for strengthening the system of constitutional review of legislation. There is such a system in place now, but it appears to be utterly non-functional. The Decision does not propose a fundamentally different way of ensuring that legislation and government actions conform to the constitution. It essentially calls for maintaining the current system of (potential) top-down review, but doing it better.
(b) The Decision makes a bow to the concept of limited government in several places, but typically only in general terms. The institutional changes that would actually accomplish this do not appear. An important principle is declared in Section 3, Subsection 1: administrative organs cannot act without specific legislatively delegated authority. This seems pretty good, and in general might be laudable, except that it is profoundly unrealistic. Emergencies happen. It might be better to establish the principle that administrative organs must act within certain bounds or according to certain principles (set forth, for example, in the constitution or a statute). Here as elsewhere, we see the idea that while the actions of state officials need to be controlled, that control should be internal to the system and not achieved through external constraints.
(c) The Decision denounces attempts by leading officials to interfere with court cases, and calls for the establishment of a system for keeping track of such attempts. But the same system of incentives that now makes judges responsive to such attempts is going to make them reluctant to record and report on them. Moreover, the same Decision elsewhere (Section 7, Subsection 1) stresses the importance of the Legal-Political Committee, a Party body that exists at various administrative levels, and calls for the Party organization in political-legal bodies (which includes courts) to report important matters to the local Party committee. Given what we know about how China operates now, I think it’s fair to ask for very, very strong evidence before believing that powerful officials will no longer be able to interfere in cases that interest them. Does anyone really believe that Bo Xilai’s case was decided solely by the judges who presided at the trial, or that Zhou Yongkang’s case will not be decided by the Standing Committee of the Politburo?
4. Dogs that didn’t bark
Curiously unmentioned in both the Communiqué and the Decision is an important reform mooted at last year’s Third Plenum: the centralization up to the provincial level of court finances and personnel appointments. This reform, designed to counter local protectionism, is apparently already being tried out on a pilot basis in Shanghai and perhaps other places. It’s odd not to see it mentioned here. [UPDATE, Oct. 29, 5:30 pm EDT: This reform is popular among legal academics but controversial among judges. There are at least two reasons for this. First, judges fear that a more hierarchical system of authority in general will increase the power of court leaders over them. Second, judges in prosperous areas fear that putting court finances under a higher adminstrative authority (i.e., the province) will mean a unified salary scale for all judges under that authority. Judges in poor areas might get more, but judges in rich areas will get less. Or so they fear. In any case, the absence of language about this may well be evidence that this reform has stalled.]
A welcome (to me) absence in the Decision is language downplaying legal professionalism and touting closeness to the masses, praising the Ma Xiwu adjudication style, etc. We have seen a lot of this language in recent years (for a thorough analysis, see Carl Minzner’s “China’s Turn Against Law” and Ben Liebman's "A Return to Populist Legality? Historical Legacies and Legal Reform"), so it’s a bit surprising not to see it here. There is a moderately troubling line endorsing the move of “qualified” military officials into the ranks of legal system personnel; it doesn’t exactly support the much-criticized practice of retired military officers simply donning judicial robes, but the drafters of the Decision cannot have been unaware of this background.
[UPDATE, Oct. 29, 3 p.m. EDT: It occurs to me that this fits well into a professionalization model, but not very well into the story of deprofessionalization, populism, and China-turns-against-law that we see in the work of Carl Minzner and Ben Liebman (a story that I generally agree with). In addition, it suggests a greater role for court decisions as sources of legal authority and not just one-off judgments as between two disputing parties. If a court decision is just a one-off judgment unrelated to anything else the legal system does, then it doesn't much matter if untrained lay people decide legal questions as well as factual ones. But if a court decision constitutes legal authority to any degree, then you want to control who's making that decision and how they make it. This reform, if carried out, makes it more possible for court decisions to have precedential value.]
5. Objectionable items
While I am disappointed (but not surprised) at the continued invocation of the need for the Party to control everything, many and perhaps most of the specific reforms endorsed in the Decision are positive. But not all. Take the problem of judges being too responsive to media pressure. This is a real problem: sometimes the media will take a particular view of a case, and the actual facts get completely lost in the dominant narrative. But why do judges feel pressure to satisfy the media? The media does not pay their salaries; the public doesn’t even know their names. The reason is institutional: they are getting phone calls from their political superiors, who are getting phone calls from their political superiors, and everyone is barking, “What the hell is going on down there in your jurisdiction? Make this fuss go away!” Chinese officials lose favor in the eyes of their superiors when there’s a commotion in their jurisdiction; the superiors don’t care about the merits. But instead of addressing this problem, the Decision takes the easy way out: let’s control media reporting (Section 4, Subsection 6).
This policy has to be seen in the context of recent rules severely restricting the ability of lawyers to comment on cases they are handling; it’s part and parcel of a general crackdown on information regarding court cases. Since getting your case into court was one of the few ways remaining for marginalized people to have a legitimate way of getting press coverage (the press can’t report on a demonstration, for example, but can report on a court case), the policy represents a further closing, not an opening.
Sunday, October 26, 2014
The International Society for Chinese Law & History has a feature on its (terrific) website called the Chinese Legal Documents Series. Here's what it's all about:
This special series invites researchers to introduce a document from their own collections, provide a translation, and discuss what these texts might be used to study. Our goal is to showcase the research of members, offer a small corpus of legal texts for the training of students, and give readers a wide view of what the study of Chinese legal history looks like.
An introduction to the series, as well as the first post in it, are here.
Thursday, October 23, 2014
You can’t call something a disappointment if your hopes weren’t high to begin with. And that sums up the official communiqué of the just-completed Fourth Plenum of the Chinese Communist Party’s Central Committee, a meeting dedicated to discussing the legal system and its place in China’s political order.
The official term for the plenum’s topic was “yi fa zhi guo”, variously translatable as “governing according to law,” “rule of law,” and “rule by law.” Few observers expected radical proposals – for example, institutional changes that would make the Party itself more accountable to legal norms – and the communiqué confirms these low expectations. For the most part, the communiqué is long on platitudes and short on specifics. (To be fair, that’s common in documents like this; specifics may be in the Fourth Plenum’s official resolution, which has not yet been released.)
Still, the communiqué does contain meaningful reform proposals that are specific enough to constitute an agenda. For example, it endorses the idea of courts whose jurisdiction will span current administrative boundaries as a way of reducing local protectionism; at present, judges at a given administrative level owe their positions and salary to political power at the same level, and thus are inclined to follow orders where local interests are concerned. Puzzlingly, it fails to mention another reform with the same object that was proposed at last November’s Third Plenum: putting all courts below the Supreme People’s Court under the control of provincial (and not lower) authorities. This reform does not challenge the principle of Party supremacy and is just a way of making authoritarianism work better. It is a bad sign for the leadership’s program if even this has run into obstacles.
The communiqué also endorses the idea of giving public prosecutors jurisdiction to bring public interest suits outside the criminal sphere – for example, suits against polluters. This liberalization must be understood, however, against a background of policy that severely disfavors – sometimes with intimidation and jail sentences – private parties who attempt to implement social policy goals through litigation. In the view of the Chinese state, determining and implementing social policy is the government’s business, not the citizens’.
One intriguing proposal is to “make the trial the center” of litigation. In other words, matters litigated should be decided at the trial itself, not before the trial in opaque, out-of-court processes. At least in criminal trials, this would be a major change from the current practice, where a case typically does not get to the trial stage unless the authorities, including the court, are satisfied as to the defendant’s guilt. (The current conviction rate is over 99%.) A process of guilt determination is not necessarily unfair, of course, simply because it happens before a proceeding labeled “trial,” but make no mistake about it: the trial is at present more the effect than the cause of that determination.
Finally, the communiqué endorses the strengthening of a constitutional review and interpretation mechanism. As a practical matter no such mechanism currently functions; the constitution is, legally speaking, almost a dead letter. But the communiqué uses verbs such as “strengthen” (jianquan) and “perfect” (wanshan), implying that such a mechanism is already in place, and just needs to work better. It is hard to avoid the conclusion, then, that major changes to the role of the constitution in the legal and political system aren’t in the cards.
This is about as earth-shaking as the communiqué gets. There are other proposals – reduce the incidence of powerful officials interfering in cases, increase transparency, reduce corruption in courts – but they are mom-and-apple-pie goals that are neither specific nor new.
Lest anyone get the wrong idea from even its modest reform proposals, the communiqué takes care to stress, at length and in several places, that the leadership of the Party over all aspects of the legal system is to continue as an absolutely unquestionable and unshakeable principle. Indeed, the communiqué calls for strengthening Party leadership in a number of areas, although this is likely just rote and meaningless language; it is hard to see how Party leadership over the legal system could be further strengthened beyond what it already is. And in language reminiscent of the famous “Three Supremes” which judges a few years ago were asked to observe – the supremacy of the Party’s mission, the people’s interests, and the law – the communiqué declares the policy goal of developing a corps of judges who will be loyal to the Party, the state, the people, and the law. Nothing is accidental in the language of a Party communiqué, and the word order here is no exception. As always, the Party comes first.
Friday, October 3, 2014
Budget Law revisions tighten, not loosen, central government's control over local government bond issues
Recent amendments to the Budget Law have been reported as liberalizing the regime for local government bond issuance, but it doesn’t look that way to me.
For a long time, local governments in China have generally not been allowed to issue bonds. In order to finance projects such as infrastructure construction, therefore, they have turned to what are called local government financing vehicles (LGFVs): companies established and wholly owned by local governments that raise money through bank loans and bond issues. These LGFVs have some serious debt problems, as has been noted in many places, and those debt problems are generally viewed as local government debt even though local governments are typically not on the hook as a legal matter.
Many have proposed that local governments should be allowed to issue bonds directly, and that letting them do so would somehow alleviate the problems of LGFV debt. It has never been clear to me exactly why this should be so—infrastructure projects that don’t pay off when financed through LGFVs are not going to be more profitable when financed through direct local government bond issues—but that’s tangential to the purpose of this post, which is to discuss recent relevant amendments to the Budget Law regarding local government bonds.
The 1994 Budget Law (Art. 28) stated clearly that local governments could not issue bonds unless there was a statute or State Council rule stating otherwise. No statute ever gave this permission. Only in 2011 did the State Council first provide the explicit permission required by law for four local governments (Shanghai, Zhejiang, Guangdong, and Shenzhen) to issue bonds directly, and in 2013 the provincial governments of Shandong and Jiangsu were granted permission to issue bonds.
The Budget Law was revised on Aug. 31, 2014, with the revisions to be effective on Jan. 1, 2015. The revisions relating to local government bonds (now in Article 35) have been reported as liberalizing the rules. For example, a Bloomberg report is headlined, “China to allow local governments to sell bonds directly.” The rating agency Fitch welcomed the amendments as “formalising long-running proposals to enable local governments to issue debt directly for the first time.”
But how much have things really changed?
Under the previous Budget Law, local governments at any level could not issue bonds unless explicitly authorized by statute or by the State Council. Under the revised Budget Law, that condition is still in place. Bonds may be issued only by local governments authorized by the State Council. In fact, the revisions tighten the conditions in two ways: first, only local governments at the provincial level may issue bonds. Second, bond issues may be used only to finance public utility projects and not to finance commercial projects; neither limitation was in the original Budget Law.
In short, the revisions don’t allow local governments to do something they could not do before. State Council permission is still required, and in fact the terms upon which the State Council may grant permission have been tightened, not loosened.
UPDATE, Oct. 4, 2014: It occurs to me that I should add a clarification here: tightened standards don't necessarily mean few or no local government bond issues. Very possibly the revisions and the publicity around them are a sign that the State Council intends to change its cautious approach and grant permission liberally. But it's still up to the State Council's discretion, as before, and indeed the State Council has lost the discretion it had before the revisions to allow cities (such as Shenzhen) to issue bonds.
Monday, September 29, 2014
Tuesday, September 23, 2014
I suppose I shouldn't be shocked any more by this kind of thing, but I think I was not alone even among cynics in being taken aback by the harshness of the life sentence imposed on Ilham Tohti, a professor in Beijing of Uighur ethnicity, on charges of separatism. In an orgy of vindictiveness, the authorities, in addition to the gross mistreatment in detention and the sentence itself, extended punishment to his family by confiscating all his (and his wife's, under China's laws of marital property) assets, thus reducing them to penury.
Even if you think separatism is a heinous crime, the charges in this case were utterly bogus: Ilham ("Tohti" is his father's name, not a surname) is well known as someone who does not support independence for Xinjiang. I have met him and talked about these very issues. He does support more genuine autonomy for Xinjiang and for less repressive policies toward Uighurs. He has criticized the government. (These points are all true of a number of Han Chinese, too, but they have not been thrown into jail.) Apparently that was enough.
As many people have pointed out, jailing and intimidating Ilham and moderates like him is just about exactly the most counter-productive path on could imagine for the Chinese government to follow. They don't want moderate Uighurs; do they prefer radicals?
Sunday, September 21, 2014
If you're following Hong Kong politics, you'll know that the pan-democrats in Hong Kong are upset about the Chinese central government's idea of how to interpret its promise of "universal suffrage" in the next election for Chief Executive: everyone will get to vote, all right, but the choice of candidates will be limited to two or three approved by a Beijing-controlled nominating committee. Just by coincidence I ran across a 3rd Circuit case today in which the court discussed this kind of democracy in the context of elections to a corporate board of directors:
We rest our holding as well on the common sense notion that the unadorned right to cast a ballot in a contest for office, a vehicle for participatory decisionmaking and the exercise of choice, is meaningless without the right to participate in selecting the contestants. As the nominating process circumscribes the range of the choice to be made, it is a fundamental and outcome-determinative step in the election of officeholders. To allow for voting while maintaining a closed candidate selection process thus renders the former an empty exercise. This is as true in the corporate suffrage contest as it is in civic elections, where federal law recognizes that access to the candidate selection process is a component of constitutionally-mandated voting rights.
Note how the court (along with everyone else in the world other than the Chinese government) viewed the principle as obvious in the political context; it was just clarifying that the same principle applied in the corporate context as well.
Tuesday, September 9, 2014
US Chamber of Commerce releases report on (actually, indictment of) Chinese competition law enforcement
I just finished reading the U.S. Chamber of Commerce’s indictment of Chinese antitrust enforcement that was made public yesterday. [Text | NY Times story] It’s very well done – quite detailed and terrifically sourced. My congratulations to the anonymous authors for great research.
The main complaint is twofold: First, that what I have called “enforcement” isn’t really enforcement of law as such; it’s more in the nature of case-by-case extortion having very little to do with whether laws were actually violated. After all, if that were the concern, why is the National Development and Reform Commission (which seems to be the main culprit here) warning targets that they had better just do what they’re told and not call in their lawyers? Second, that “enforcement” is biased against foreigners. The report points out that in MOFCOM’s review of mergers, only 7.6% of the transactions reviewed were domestic-to-domestic; a huge number of domestic transactions that should have been reported were not, and MOFCOM was not doing anything to punish the companies that didn’t report. Moreover, all the cases in which MOFCOM had blocked a transaction or imposed conditions on its proceeding involved at least one foreign company. (Hats off to my friends Lester Ross and Kenneth Zhou of WilmerHale’s Beijing office, whose research is responsible for this information.)
The report makes a good case in showing that something more than just inexperience by the regulators or whining by sore-loser foreign companies is going on here. It does that by showing that China is an outlier in three ways. First, many of its practices are unique and not reflected in international practice. Second, the practices that the report complains about are not observed in other countries that also have new antitrust regimes administered by inexperienced officials. Third, China’s regulators have not joined the International Competition Network, the international club of antimonopoly regulators, even though it has joined similar bodies in the areas of banking, insurance, and securities.
I have to say that in a few places the report seems to be reaching a bit in its arguments. For example, the presence in Article 1 of the Antimonopoly Law of language talking about the “healthy development of the socialist market economy” is taken as sinister evidence of the improper integration of industrial policy into competition policy. This kind of language is compatible with just about any economic policy or lack of policy and to my mind is basically just meaningless fluff.
Second, the report suggests that China’s antitrust policy (as actually implemented) violates its WTO obligations. With the caveat that I’m not really a WTO expert, I think this argument is extremely weak. The report simply gets its facts wrong when it says (p. 6) that China made a WTO commitment via the section of the Working Party Report that says, “The representative of China noted that the Government of China encouraged fair competition and was against unfair competition of all kinds.” Not only is that language way too weak and general to support a concrete commitment—it’s not even phrased as a commitment—but it appears in Para. 65 of the Working Party Report, which is not one of the paragraphs incorporated by reference as a commitment in the final Protocol of Accession. It’s the Protocol of Accession as well as all the WTO agreements, and not the Working Party Report, that tells you what China’s commitments are.
The report also notes (in a footnote) the existence of Para. 203 of the Working Party Report, which was incorporated by reference into the Protocol of Accession. That paragraph says, inter alia, “Permission to invest, import licences, quotas and tariff rate quotas would be granted without regard to the existence of competing Chinese domestic suppliers.” To the extent that antitrust policy blocks investment by foreign companies in order to protect Chinese domestic suppliers, then it’s a violation of this commitment. Since this is a stronger argument, it might have been better to highlight it in the text and relegate the much weaker argument about Para. 65 to the footnote.
Finally, the report injects a nice bit of comedy into the subject by showing what happened to the supposedly confidential submissions of InterDigital to the NDRC during the latter’s investigation of the former: they ended up on Chinese television! If you look in the upper right hand corner of the document shown at 0:20 in the clip and in the screen shot below, you can see the characters 保密文件 (confidential document). I don’t think any lawyer working with foreign clients dealing with Chinese regulators believes confidential submissions will really stay confidential and not get leaked to competitors, but we never had this kind of smoking gun before to validate the belief conclusively. Actually, this is not just a smoking gun; we are watching the gun actually being fired. Hats off to the intrepid researcher who found this broadcast and noticed this outrageous and irresponsible leak.