Thursday, July 30, 2015
More Catholic than the Pope: UK government states Ai Weiwei has criminal conviction in China (he doesn't)
In an astounding cock-up of monumental proportions (because it could so easily have been avoided by spending a few minutes searching around the web), the UK government has accused Ai Weiwei of lying on his application for a UK visa. In a letter issued to Ai, the "Entry Clearance Manager" for Beijing stated:
It is noted that in answer to the question on the visa application form on whether you have ever had any of the following in the UK or a different country:
- A criminal conviction, at any time
- A driving offence, at any time, e.g. for speeding or no insurance
- I was arrested or charged, and I am currently on or awaiting trial
- A caution, warning, reprimand or fixed penalty notice
- A court judgment, e.g. for debt
- A fine for breaking UK immigration law (called a 'civil penalty')
You have stated: 'No, I have never had any of these'. It is a matter of public record that you have previously received a criminal conviction in China, and you have not declared this.
The ECM goes on to say that Ai will be granted a visa, but for less time than he had applied for. He or she urges Ai to respond truthfully next time, and notes that there is a place on the form to explain any answers.
Let me be clear about my own view: It is not unreasonable for the UK government to ask these questions, and applicants should respond truthfully. It would, of course, be unreasonable for the UK government to treat politically-motivated criminal convictions as equal to a genuine criminal history, but that's not what's at issue here. If Ai had had a criminal conviction, he should have said so.
The problem is that Ai does not have a criminal record in China. It is most emphatically not a matter of public record that he has previously received a criminal conviction in China. Anyone who claims this should be asked to produce this public record. (After all, it's public, right?) It's rather astounding that when the Chinese government, for all its harassment of Ai, did not see fit to charge and convict him on criminal grounds, the UK government should step up to the plate and do it for them.
Some people say, "Oh, but didn't he have some tax troubles a while back?" And others respond, "Yes, but those were politically motivated." All beside the point. To the second group, I say that he should respond truthfully and then explain, even if only as a practical matter, given that not telling the truth about things that really are in the public record is just not going to work. To the first group, I say that the ECM did not state an objection to Ai's failures to mention (a) his 2011 detention, allegedly for investigation of tax issues, or (b) the assessment and fine levied as an administrative (not criminal) matter on his company (not him). The ECM's objection was to Ai's failure to state that he has a criminal conviction. But he doesn't have one.
The ECM might have been on firmer ground had he or she said something along the lines of, "Really? No 'caution, warning, or reprimand'? Ever?" I suspect Ai has received a lot of communications that would qualify. Of course they are politically motivated, but that's what the place on the form for an explanation is for. But that's not what the ECM said.
It's understandable that everyone's memory is a little fuzzy about what happened back in 2011. What's harder to understand is how someone could give legal effect to that fuzzy memory without bothering to take just a few minutes to google around to verify the facts. Even more disappointing is that the UK authorities seem to be digging in their heels and refusing to admit their mistake. A Foreign Office spokesman, confronted with questions on this issue, said, “This is a visa issue, where applications are decided by UKVI [UK Visas and Immigration] based on relevant legislation.” Yeah. thanks. We know it's a visa issue. And we know that UKVI is supposed to decide on applications on the basis of relevant legislation. Does the relevant legislation really call for decisions to be made on the basis of made-up facts?
By the way, if you think you've heard this kind of bland, bureaucratic non-answer before, you have. Here's Chinese Foreign Ministry spokesperson Hong Lei on questions about Ai's 2011 detention: “China is a country under the rule of law, and relevant authorities will work according to law.” And here's Chinese Foreign Ministry spokesperson Hua Chunying on questions about Pu Zhiqiang's detention: "The judicial authorities of China handle the relevant case in accordance with the law."
Well done, Britain!
POSTSCRIPT: I'm not yet willing to dismiss the theory that this is just a low-level bureaucratic cock-up: somebody thinks he's fibbing because they misremember; they ask their superiors what to do, precisely because they don't want to deny him a visa, not because they do; the superiors, who assume that their subordinates have got their facts right, say, "Well, just give him a slap on the wrist and tell him not to do it again."
Thursday, July 23, 2015
Story below. I think this falls under the “be careful what you wish for” category. We always complain about the weakness of Chinese courts in enforcing their judgments, but this reminds us that if the state is well-organized enough, it can make your life miserable not only for good reasons (as here) but for bad reasons as well. Bullet trains today, credit cards tomorrow, and ATMs the day after. They won’t need to arrest the lawyers in that case.
Bullet Trains Off-Limits to People Failing to Make Court-Ordered Payments
Country's highest court adds high-speed trains to list of banned services for individuals failing to repay debts or make compensation payouts
(Beijing) – People who do not make payments ordered by judges cannot ride on China's popular bullet trains, the highest court has said, adding to the list of services that are off-limits to individuals who fail to make child support payments or repay debts.
The Supreme People's Court said on July 21 the ban is intended to clamp down on people who have been ignoring rulings that they repay a debt or provide compensation for some wrongdoing. The order came into effect on July 22.
In 2010, the top court said that people who did not make payments ordered by judges could not buy airplane tickets, ride sleeper trains, or stay at rated hotels and resorts.
People in China must provide ID when they buy train tickets or check into hotels. To enforce the crackdown, the judicial system gives a list of people who have failed to repay debts or make compensation to airlines, train ticket sellers and hotels.
The country's judicial system is often seen as weak because its orders are often ignored. There is little cooperation between the courts and police regarding civil lawsuits, child support disputes and compensation for injuring someone, for example. This has meant that people who owe debts to others can go about their daily routines unaffected.
Liu Guixiang, who heads a division overseeing enforcement of rulings at the Supreme People's Court, said that adding bullet trains to banned services could prompt more people to make court-ordered payments because this form of transport has become very popular with travelers.
Nearly half of the country's train passengers in the first half of the year – about 2.9 million people – rode bullet trains, data from railroad operator show. China has been building a huge high-speed train network in recent years and is still adding to it. Bullet train travel is generally seen as affordable and comfortable, and the lines linking major cities, such as Beijing and Shanghai, are popular, especially on holidays.
The top court will also urge lower courts to hand out stiffer punishments for failing to repay debts, Liu said. Data from the highest court show that more than 58,000 people were detained from the beginning of 2010 to the end of June for failing to make good on a debt, but only 864 were charged with a crime.
Sunday, June 21, 2015
The Ministry of Industry and Information Technology (MIIT) has just issued a pronouncement stating that foreign investors will, in an exception from existing rules, be allowed to own 100% of companies engaging in e-commerce. Here's a post from the China Accounting Blog, which suggests that this offers an escape route for VIEs. (I think the post is incorrect in stating that the relaxation is limited to the Shanghai Free Trade Zone; the relevant language says, "On the basis of experimentation in the Shanghai Free Trade Zone, [MIIT] has decided to relax on a nationwide basis [the restriction on foreign ownership]" (我部决定在中国（上海）自由贸易试验区开展试点的基础上，在全国范围内放开在线数据处理与交易处理业务（经营类电子商务）的外资股比限制).)
I want to raise a different question: what authority does the MIIT have to relax this requirement? According to the MIIT's notice, the requirement seems to come from a State Council regulation, the "Rules on the Administration of Foreign Investment in Telecommunications Enterprises" (商投资电信企业管理规定). Or perhaps it can be found in the Guidance Catalogue for Foreign Investment, issued jointly by the National Development and Reform Commission and the Ministry of Commerce. As for the first, the MIIT has no authority to override a State Council regulation. As for the second, approval of foreign investment must come from the NDRC and the MOC, so if they aren't on board with this rule, the MIIT can't make them get on board. It's hard to believe we'd see this notice if other relevant ministries weren't on board. But if they are on board, why isn't this notice jointly issued with their signatures under it as well?
[UPDATE JUNE 22: Apparently it's not an exception to existing rules. The latest version of the Guidance Catalogue seems by implication to allow 100% ownership of e-commerce ventures - see Item 20 under "Restricted Industries" here.]
Saturday, February 21, 2015
Chinese lawyers file freedom-of-information request for legal basis for ban on teaching of "Western values"
Friday, February 20, 2015
The Feb. 16th isue of the Legal Daily carries three articles (see below for links) about administrative monopolies, prompted by the recent decision by the Guangzhou Intermediate People's Court against the Guangdong Department of Education for requiring the use of a particular brand of software in a contest. This was not only the first court victory against an administrative monopoly; it was the first time such a case had even been accepted by courts and made it all the way to trial.
Among the issues in the case were (1) the role of expert witnesses (they were allowed), and (2) whether the designation in a notice issued by the defendant of a particular piece of software constituted concrete administrative action or abstract administrative action. (Under the Administrative Litigation Law (ALL), one can sue for the former but not for the latter, but since this case was not brought under the ALL, I'm not sure why the distinction was considered important.)
The court found that the defendant's acts were indeed concrete administrative actions and that the defendant violated Art. 32 of the Antimonopoly Law (AML), which states:
Administrative agencies and organizations authorized with administrative powers of public affairs by laws and regulations shall not abuse their administrative powers by limiting, or limiting in disguised form, organizations or individuals by requiring them to deal, purchase, or use commodities provided by designated undertakings.
The reports don't say, however, what (if any) remedy the court provided beyond a mere declaration of illegality. Article 51 of the AML deals with the issue of remedies for administrative monopolies vaguely, but on one point it's pretty clear: courts can't order a remedy. The basic remedy is to hope that the offender's administrative superior will make it come into line:
The administrative agencies or organizations authorized with administrative powers of public affairs by laws and regulations shall be admonished by the superior authorities if they abuse their administrative power to eliminate or restrict competition; the individuals who are directly responsible shall be punished in accordance with the law.
This article shall not apply to cases in which other administrative regulations or laws provide for the regulation of the abuse of administrative power. The Anti-monopoly Enforcement Authority may propose suggestions to deal with in accordance with the law to the superior authorities.
(Translation credit for the AML provisions above: T&D Associates)
Here are some relevant reports:
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.”
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.
Saturday, December 6, 2014
China's Ministry of Foreign Affairs has issued a very legalistic position paper, thankfully short of the usual bluster, setting forth its position on the UNCLOS arbitration brought by the Philippines. Here it is, along with some accompanying documents:
- Position Paper of the Government of the People's Republic of China on the Matter of Jurisdiction in the South China Sea Arbitration Initiated by the Republic of the Philippines (English | Chinese)
- Summary of the Position Paper of the Government of the People's Republic of China on the Matter of Jurisdiction in the South China Sea Arbitration Initiated by the Republic of the)Philippines (English | Chinese)
- Ministry of Foreign Affairs of the People's Republic of China Is Authorized to Release the Position Paper of the Government of the People's Republic of China on the Matter of Jurisdiction in the South China Sea Arbitration Initiated by the Republic of the Philippines (English only)
- Remarks by Mr. Xu Hong, Director-General of the Department of Treaty and Law of the Ministry of Foreign Affairs, on the Position Paper of the Government of the People's Republic of China on the Matter of Jurisdiction in the South China Sea Arbitration Initiated by the Republic of the Philippines (English | Chinese)
And in case anyone was wondering, here's the US government's recently released position, dated Dec. 5, 2014.
The language of the English version of the Chinese position paper is quite sophisticated; this does not read like a document that was composed in Chinese and then translated into English. It seems to represent China's way of responding to the arbitration proceeding in substance without formally doing so.
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.
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.
Friday, August 8, 2014
British corporate investigator Peter Humphrey and his wife and business partner Yu Yingzeng were sentenced on August 8th to 30 months and two years in prison respectively on charges of illegally obtaining personal information about Chinese citizens. I hope to have some commentary up shortly, but first I want to read the trial transcript, which was posted by the Shanghai No. 1 Intermediate People's Court on its Weibo site. I've collected all 31 entries (they are graphic files in jpg and png format) and put them in a zip file, available here.
Sunday, July 6, 2014
Those who are interested in elder law might be interested in a debate now going on in China over some draft legislation proposed in Shandong. According to the legislation, those who have a duty to support the aged (i.e., the children) must maintain their parents' standard of living at a level at least equal to their own, and they are not allowed to seek property from their parents on the grounds of being unemployed, etc. (有独立生活能力的成年子女要求老年人经济资助的,老年人有权拒绝。成年子女或者其他亲属不得以无业或者其他理由索取老年人的财物。) Yes, the last bit is as vague as it sounds. Here's an article in the People's Court News in support of the law; here's Peking University law professor Shen Kui's critique, in which he says that the nanny state (保姆国家) must not go too far.
Last May, the writer Murong Xuecun (慕容雪村, real name Hao Qun 郝群) published an op-ed in the New York Times protesting the arrest of Pu Zhiqiang and others for "stirring up trouble and provoking disturbances" and announcing his intention to turn himself in upon his return from Australia. Today (or perhaps yesterday - the statement is undated) he made good on his word, issuing a Statement of Surrender. Here's the Chinese text, followed by my translation.
Statement of Surrender
Two months ago, Pu Zhiqiang, Xu Youyu, Hao Jian, Hu Shigen, and Liu Di were arrested on suspicion of “stirring up trouble and provoking disturbances.” This so-called “stirring up trouble and provoking disturbances” was in fact nothing more than people getting together at home: some ten-odd people met at Hao Jian’s home and discussed the Tiananmen Incident of 25 years earlier, and this became a crime. I was supposed to have been there, but on the day of the meeting I was to go to the University of Sydney to be a visiting scholar, so I made only a written declaration stating my own views of the Tiananmen Incident. I never imagined that in this so-called People’s Republic even this kind of trivial incident could become a crime. I made a declaration on the internet stating that I also participated in their stirring up trouble and provoking disturbances but was currently abroad, and asked the authorities to please wait for two months until I had finished by trip to the University of Sydney, when I would return to China and surrender.
I in no way accept the arrest of these people, but also don’t feel that I should get some special treatment. I did the same thing that they did and cannot stay outside of the matter. I have already returned to Beijing and await arrest at any moment. For the next 24 hours after issuing this statement of surrender, I will be waiting in my home in Haidian District, and request that those who come bring the appropriate documents. After 24 hours, please telephone in advance to arrange a time.
Hao Qun (Murong Xuecun)
Saturday, July 5, 2014
Reuters reported a few days ago about the lawsuit brought by Qilu Bank against a local government financing vehicle (LGFV) in the same city (Jinan in Shandong Province) for unpaid debt. The lawsuit is unusual for two reasons: first, it is apparently the first openly disclosed default of a LGFV on a bank loan, although few doubt that there have been others that have been quietly dealt with, and second, not only is the debtor a shareholder in the creditor (albeit small: only 0.08%), but the debtor is controlled by the local government, which probably controls the creditor as well. In addition to the informal influence the Jinan city government undoubtedly enjoys, what appear to be entities directly under its control hold more than 20% of Qilu's equity. And of course the Jinan political authorities also have the power to ensure that no local court will issue a verdict displeasing to them.
LGFVs exist because in general, local governments in China don't have the power to borrow, but they still want to spend more than they have for things like infrastructure projects. They then set up wholly-owned corporations (LGFVs) to do the borrowing and undertake the construction. The problem is that local governments also lack the power to guarantee debt. Thus, LGFV debt as a legal matter is either unsecured or secured by something other than a government guarantee - for example, land-use rights that the local government has transferred to the LGFV.
As the Reuters article reports, many lenders consider (or at least at the time of lending considered) LGFV debt to be informally guaranteed by local governments. Now, apparently, they are having second thoughts. They should have more of these. I was struck by a paragraph in an earlier version of the Reuters report (apparently removed from the version now at the link):
A senior bond trader at a major Chinese state-owned bank in Shanghai noted that while investors still largely considered debt issued by provincial-level financing vehicles to be effectively guaranteed, that no longer held true for lower level entities.
Any non-central government guarantee of LGFV debt is invalid and legally worthless, full stop. And this is over and above the fact that even if the guarantees were legally valid, a creditor could not win a case and enforce a judgment against an unwilling guarantor government. What is remarkable is that creditors still continue to believe in these guarantees, and possibly quite improperly carry these loans on their books as if they were guaranteed. The worthlessness of the guarantee is evident in the sentence itself: it says that investors “no longer” consider lower-level LGFV debt to be effectively guaranteed. So they considered it guaranteed at time A, and at time B they do not consider it guaranteed, even though nothing of legal significance has happened. That’s not what “guarantee” means; it is a legal obligation that persists despite changing circumstances. If investors understand that a lower-level guarantee can evaporate, why do they think that a provincial-level guarantee can’t? It looks like the GITIC bankruptcy all over again.
- Reuters news story
- Qilu Bank 2013 annual report disclosing the existence of the bad debt and the lawsuit (excerpts) [English | Chinese]
- October 2013 IMF Working Paper explaining LGFVs
- Short article from Sept. 2013 International Business Times explaining LGFVs
Tuesday, July 1, 2014
Stanley Lubman has a column today in the China Real Time section of the Wall Street Journal online edition that discusses the charges against Pu Zhiqiang. With the greatest respect for Lubman, I think that his discussion could give readers an inaccurate understanding of those charges and what they say about the Chinese legal system, so I want to add this modest clarification to his discussion.
Lubman states that Pu
now awaits trial for “picking quarrels and provoking troubles,” a crime with no clear definition.
His case dramatically illustrates the contradiction between attempts to increase legality in an authoritarian regime and that regime’s overwhelming anxiety about maintaining social stability. The vagueness of the “crime” of “picking quarrels” – authorities didn’t say who Pu allegedly picked a quarrel with, or about what — allows police unlimited discretion to detain and arrest offenders for almost any action.
This, I think, is misleading. There is in fact no general and vaguely defined crime of "picking quarrels and provoking troubles" (寻衅滋事), and there's no need for the police to identify the other party or the subject of any quarrel. The relevant article of the Criminal Law, Art. 293, states, "In the event of one of the following acts of picking quarrels and provoking troubles, ..." (emphasis added). It then lists four relatively specific acts -- or at least more specific than the vague "picking quarrels and provoking troubles." Things that could be called "picking quarrels and provoking troubles" but that do not fall within one of the four listed categories are not crimes. As a matter of written law, therefore, the police do not have unlimited discretion to detain offenders under this vague rubric. Moreover, as Jeremy Daum has pointed out in his excellent analysis of this crime, there is a further judicial interpretation of Art. 293 that narrow its scope even more. Lubman is aware of this and links to Daum's article, but the main message of the column seems still to be that there exists a very vaguely defined crime of "picking quarrels and provoking troubles."
The reason I think it's worth taking this issue up is that if the diagnosis is wrong, the cure is going to be wrong. If the diagnosis is that the law is vague, then it would seem to follow naturally that the solution is to make the law less vague. I want to stress here that in fact the law is not all that vague, and as applied to Pu's case has to be stretched beyond all recognition in order to apply. But the authorities are using it anyway. The problem lies in the lack of any independent body that could put boundaries around the ability of police to make words mean anything (or more to the point, not mean anything). In other words, it's a problem of institutions, not of legislative drafting.
I doubt Lubman would disagree with any of this, and possibly it's what he meant to say. I'm just not sure the column actually says this, so I want to add my two cents.
JULY 3, 2014 UPDATE: Here's a response from Stanley Lubman.