Chinese Law Prof Blog

Editor: Donald C. Clarke
George Washington University Law School

Friday, June 17, 2016

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

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

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

. . .

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

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

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

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

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

Friday, April 22, 2016

White Paper on Judicial Reform

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

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

Tuesday, March 1, 2016

New web address for Chinese court judgments site

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


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

Sunday, February 28, 2016

China's criminal conviction rate stays high

According to this report from Caixin, in 2014 the percentage of not-guilty verdicts was 0.066%, or fewer than 6 in 10,000. (Figures for 2015 are incomplete.) The report cites figures for other countries, including 2% in Finland, 9% in the US, and a whopping 25% in Russia.

I last blogged about this almost ten years ago, and as far as I know the situation is still pretty much the same:

Without information on what kind of cases are brought to trial - information that only in-depth fieldwork would reveal - it's hard to know what to make of this number. It is theoretically possible that doubtful cases are never brought to trial, although recent well publicized cases of miscarriages of justice (for example, here and here) make that hypothesis a bit implausible. But just how implausible is impossible to say.

Moreover, there is no particular reason why China should look like the US - and in any case, I'd want to know more about where that number for the US came from, given the complexity of the US legal system with its state and federal courts. Still, one can say a few things with a reasonable degree of certainty:

  1. Guilt is obviously not really being determined in any serious way at the trial state. Therefore, either the Chinese system railroads suspects, or it makes a good-faith determination of guilt before the trial so that the non-guilty never get that far. If the latter, then a criminal procedure system that doesn't give suspects full rights to a defense at that critical pre-trial stage is inadequate.  And one must say that there are lots of cases that make one wonder how careful investigators are in their pre-trial investigation.
  2. A high acquittal rate, such as we see in Russia (if it's really that high) would be evidence that judges and prosecutors aren't in bed together. A low acquittal rate is not evidence that they are, since again it could be that prosecutors are really, really careful, but it's consistent with that hypothesis.

February 28, 2016 in News - Chinese Law | Permalink | Comments (0)

Sunday, November 8, 2015

Paul Gillis on the PCAOB's China troubles

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

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

Wednesday, October 28, 2015

Criminalization of test cheating? Less than meets the eye.

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

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

Here's the full text in Chinese:

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

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

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

Friday, August 7, 2015

Follow-up to post on contempt for law by lawmakers

I recently blogged about a notice of "residential surveillance at a designated place" (RSDP) that I stated was blatantly illegal because it wasn't for investigation of one of three statutorily designated crimes. I didn't discuss one exception to the restriction--RSDP may also be imposed where the suspect has no fixed residence (无固定住处的)--because I figured (and still believe) that the suspect in this case was not homeless, and since I was tired it didn't seem worth undertaking an extended discussion only to conclude that the exception didn't apply.

I still believe it doesn't apply, but my friend and colleague Joshua Rosenzweig has kindly permitted me to reproduce an email he sent me (part of which quotes from a forthcoming paper of his (earlier version here)) that shows that the issue isn't quite as undeniable and blatant an illegality--at least from the standpoint of the police--as I had originally supposed.

Both the MPS and SPP [have issued] regulations [that] define ‘fixed residence’ as a ‘legal’ (合法) residence (住处 or 居所) in the city or county where the case is being handled. There is, however, no clear standard for what constitutes ‘legality’ of a residence in the context of criminal procedure, leaving the matter open to a degree of interpretation. According to the definition of ‘domicile’ under civil law, legal residence might be defined as the place of household registration. Many Chinese reside in locations different from their places of household registration, however. Chinese civil law provisions also contain the concept of ‘habitual residence,’ which requires a period of continuous residence of one year or more. But there is also the problem of determining whether a rental unit can be considered a ‘fixed’ residence or how to handle individuals who reside in shared rentals or dormitories.61

This probably has something to do with why the case is being handled by police in Tianjin. Since the lawyers are all from Beijing, they don't have 'legal' residences and thus become eligible for this form of detention.

In other words, this is how the police could respond if accused of violating the Article 73, whereas if the language about "no fixed residence" weren't there, they would really have no defense at all, even a spurious one.

Josh of course is not defending any of this; he's just making the point that there is this linguistic escape hatch. It's a pretty spurious defense, though. If there were a neutral arbiter deciding these issues, I would argue back that given the intention of the new Article 73 (to reduce long-standing police abuse of RSDP by strictly limiting its application), it couldn’t possibly be correct that it could still be used on anyone not living in the place specified in their domicile registration, since that’s probably hundreds of millions of people, and neither could it be right that all you need to do to get around it is to send in police from somewhere other than the suspect’s place of usual residence. And of course mere departmental regulations can’t override a statute, anyway.

But this just underscores the real problem: there is no neutral arbiter, and the police are the judge in their own case. Before the revision to the Criminal Procedure Law, the police were already violating the law on residential surveillance by cooking up RSDP, which had no statutory basis. The law allowed residential surveillance, and there is no basis for thinking that the lawmakers really meant to include surveillance not at the suspect's residence. But there was no institution in China willing and able to call them on this and rein them in. Then in 2012 the legislature decided to try again by allowing it, but only in limited circumstances. As before, the police can issue their own interpretive regulations and engage in practices that clearly violate the spirit of the law and the intention of Article 73, but there is no neutral third party capable of making that call. All the legislation in the world is not going to change police practices; what's needed is institutional change. This is not a breathtakingly original insight; I mention is just to put this particular phenomenon in context.

August 7, 2015 in Commentary, News - Chinese Law | Permalink | Comments (0)

Thursday, August 6, 2015

Should the United States send Ling Wancheng back to China? Could it?

The New York Times recently carried a story confirming a long-standing rumor that Ling Wancheng, brother of the toppled top aide to China’s former top leader, Hu Jintao, was living in the United States. Apparently China wants him back in China—not surprisingly, given his intelligence value. Presumably—apparently it’s all unofficial so far—China is telling the US that he’s wanted on corruption or other criminal charges. This has led to quite a bit of discussion on the question of whether the US could or should send Ling back. (This blog post is a slightly expanded and more legally technical version of my contribution to a discussion at the Asia Society’s ChinaFile site.)

I think it might be useful to lay out some of the legal issues involved here. First of all, let’s distinguish between extradition and deportation. Extradition would take place pursuant to a treaty between China and the US, and critically would not require a finding by US authorities that Ling had violated any US law (or even Chinese law). Nor would any other legal basis for sending Ling back (aside from the treaty) be required. All that is necessary would be for China to make a case—presumably meeting some standard of plausibility—that Ling had violated Chinese law and should be returned to face trial. But for the very cogent reasons discussed by Jerome Cohen in his contribution, there is no extradition treaty between China and the US.

Thus, if the US government wants to keep Ling, it has no obligation to send him back. This raises two issues: (1) Should it want to send Ling back? (2) Assuming it wants to send him back, can it?

On the first issue, one of the points raised in this discussion has been the idea that sending Ling back will promote cooperation by China in US law enforcement. I’m dubious about this. In a wide range of fields, China has over the years been consistently and highly uncooperative with both the US and other countries in their efforts to investigate unlawful activities in China. The Securities and Exchange Commission and the Public Company Accounting Oversight Board have experienced years of frustration in seeking Chinese cooperation in their efforts to investigate securities fraud and accounting malpractices involving Chinese firms and citizens. Just two months ago, an Associated Press report described the “legal firewall” shielding Chinese parties from foreign investigations, in this case Italian attempts—utterly stonewalled by China—to investigate the flow of $4.9 billion in laundered money to China. And despite its denunciations of hacking and denials of government involvement, the Chinese government has refused to help foreign authorities bring Chinese hackers to book. China doesn’t need to do more than anyone else, but it does need to offer the degree of cooperation that’s normal in the international community before it can reasonably ask others to cooperate with it. If the US government has good policy reasons for wanting to send Ling back, so be it, but a vain hope that it will induce greater cooperation by China in a range of law enforcement activities should not be among them.

The second issue is whether the US government can send Ling back, assuming it wants to.

The short answer is maybe. There are three general types of legal basis. (There may be others.) The first is contained in 8 USC § 1227(a)(4)(C)(i), which states that “[a]n alien whose presence or activities in the United States the Secretary of State has reasonable ground to believe would have potentially serious adverse foreign policy consequences for the United States is deportable.” There are some exceptions to this deportation power but they don’t seem applicable to Ling’s case.

The second legal basis would be in a violation by Ling of immigration law in connection with his entry into the United States. This is not of course to say that Ling did violate immigration law when he entered the United States—I have no knowledge of the circumstances under which he came here—but if, for example, he entered on a non-immigrant visa without the intention, at the time of entry, to depart when the time came, that would be a violation of immigration law and likely grounds for deportation, as would any other kind of false statements (at least if they were material) in the visa application process.

The third legal basis—which I use as a catch-all category—would be the commission of various acts (for example, terrorism and other crimes) that Congress has deemed grounds for deportation. Again, I have no reason to believe that Ling has committed any such acts.

The point, then, is that the US government operates under some constraints where deportation is involved. It cannot just decide to deport and then deport. There must be a statutory basis.

Let us suppose, then, that the US government relies on deportability on foreign policy grounds—the first basis above, which does not depend on any violation of US law by Ling. That is still not the end of the story. There is a further complication posed by the fact that Ling could raise various bars against deportation. He could, for example, claim that he is the subject of political persecution and seek asylum on those grounds. Such a claim would not, of course, necessarily succeed.

A second and more plausible claim—since it relies importantly on conditions in China and not much on Ling’s personal characteristics—would be that he was in danger of being tortured if returned to China. The United States is a party to the United Nations Convention Against Torture (CAT). The CAT is one of the reasons that the Canadian courts made it so difficult for Canada to send Lai Changxing back to China. Art. 3 says, "No State Party shall expel, return ("refouler") or extradite a person to another State where there are substantial grounds for believing that he would be in danger of being subjected to torture.” The US has declared that it interprets this to mean "more likely than not."

The status of the CAT under US law is complicated, but the long and the short of it is that Ling can raise a claim of possible torture to try to avoid getting sent back to China. (As with all claims, to say he can raise it is not to say he can raise it successfully.) In 1998, Congress passed legislation intended to incorporate the rules of the CAT, which the US had ratified, into US law, precisely because the US had specifically declared upon ratification that the CAT would not automatically become part of US law. Congress specifically directed the executive to enact regulations implementing the US’s obligations under the CAT, and to use as definitions of various terms the definitions of those terms in the CAT. But Congress also added that any regulations so enacted would not be reviewable by courts. In other words, the executive branch would have the last word on what compliance with CAT meant. Other countries might disagree, but that wouldn’t affect anyone’s rights under US law. Thus, Ling could attempt to resist deportation by asserting whatever rights he has under the relevant Department of Homeland Security (DHS) regulations designed to implement the CAT.

Even assuming he can successfully make a case under those regulations, however, there is still a final question: does the Secretary of State’s power to deport under 8 USC § 1227 trump an alien’s right not to be deported under the relevant DHS regulations implementing the CAT? Who wins in case of a conflict? The same conflict could crop up if Ling seeks asylum on the grounds of political persecution. I do not know the answer under US law, but it might well be different from the answer under international law.

Finally, let me caution readers that I am not an expert in this area of law, and would welcome correction where I have got it wrong.

August 6, 2015 in Commentary, News - Chinese Law, People and Institutions | Permalink | Comments (0)

The Ai Weiwei visa mess - how it might have happened, from a Foreign Office insider

With the kind permission of the author, I'd like to share Kerry Brown's take on how this whole mess might have happened:

I worked as the Head of Policy at UK Visas for six months in 2005. It was my last Foreign Office job, though the department was one shared between the Foreign Office and the UK Home Office. Since then I have been fully rehabilitated back into society! I have to say though, from knowledge from that period, that the Ai Weiwei visa case has all the hallmarks of a cock up. In some ways, it would be preferable had there been high level fiat about this, because at least it would have shown that someone, somewhere was making decisions.

The truth is that Entry Clearance Offices, at least in the British system have God like powers, and the only person who can overturn their decisions, in the end (as this case proves) is the Home Secretary. That means that often very junior and inexperienced visa staff, who are more often than not utterly clueless to the changing rules and regulations governing visa issuance, can make the most extraordinarily perverse judgments. The case I remember best from my brief, inglorious stint in this position (it was hard to do a job where the words in the job title were so completely at odds with the reality of what I was doing - there was, and I suspect still isn't, a visa `policy' - just mildly contained bedlam, so I spent my days reading Guy Debord and the situationists and gazing at the MI6 building gardens next door) was that of issuing work visas to people needed to come and be employed in UK abattoirs. Unsurprisingly, these positions were hard to fill with local staff, so at that time, for some reason, they were recruited from (I think) Ukraine. Staff before going out to post to be visa offices were told that unmarried, largely uneducated, young men from underdeveloped countries were the highest risk and the ones they needed to be most careful about issuing work visas too! (Needless to say, UK Visas resisted all attempts to include its work in relevant racial and gender equality legislation). However, it was precisely this demographic that tended to apply to come to the UK for six months to work in abattoirs.

All worked well, and the annual quota of abattoir workers were happily delivered, until a more pure minded, zealous visa official was sent to work in Kiev, and promptly turned down the whole batch of new applicants, causing chaos in the farming community in the UK reliant on this source of labour, who of course used their considerable clout to protest. It was to no avail though, The person who did the refusing was acting within the law, and there was no way that year any were let through. I think it was only resolved with them being offered some other tasty post to exercise their budding bureaucratic skills, and a more compliant official sent to replace them. .

So I can well imagine the scenario with Ai Weiwei. A visa officer with a sheen of knowledge of his case, mostly culled from the Daily Mail (still no doubt shipped by air freight to the post in Beijing), who sees this Chinese avante garde artist attempting to sully the pure morals of the Great British public, and deciding to make a silent majority stand by turning him down. His or her Entry Clearance Manager, probably a Foreign Office appointee with a bit more political sense, would no doubt have had the `discussion' when reviewing the refusal, and suggesting a compromise (the 20 days). We have, ladies and gentlemen, the final result - a classic, great British cock up. I can well imagine the weary sighs in the Chancery the morning this story broke, because as ever they would be left to clear up a mess which, in this case, I truly believe, was not of their making.

Oh that there had been sinister calculations about how to avoid Ai bashing into Xi Jinping during his September visit. Or at least some artfulness and signs of intelligent (albeit perverse) life. But no, I really don't think there was.

But I would be happy (and relieved) to be proved wrong.

August 6, 2015 in Commentary, News - Chinese Law, People and Institutions | Permalink | Comments (0)

More contempt for law from the lawmakers

Over the last month or so, the Chinese authorities have been engaged in a crackdown on rights lawyers of unprecedented ferocity. Here's Jerome Cohen in a Wall Street Journal article about it:

New York University law professor Jerome Cohen, one of the first American lawyers to work in China after the country opened up in the late 1970s, described the sweep as “insane.” China’s leaders “must be in desperate straits to engage in this extraordinary, coordinated attack on human-rights lawyers,” he said.

Strong words! In any case, after all that stuff at the Fourth Plenum about the rule of law and exercising power within a cage, you might think that the authorities, with the power to make law completely in their hands, would manage to abide by it, right? Wrong. There are of course many stories about lawyers and others being rounded up without proper procedures, but today I came across a particularly glaring example that exists in black and white and cannot be denied or explained away.

Take a look at the document below: it's a notice of "residential surveillance at a designated place", i.e., so-called residential surveillance where the police hold you at some place that is neither a nail nor your residence -- and we're not talking about a fancy hotel here. The suspect is the lawyer Xie Yuandong, and the suspected crime is that of "stirring up trouble".

  Residential surveillance

The problem with all of this is that under Article 73 of the Criminal Procedure Law, which reflects a 2012 amendment designed to reduce police abuses of this procedure, "residential surveillance at a designated place" may be imposed on a suspect only for three crimes: “Where there is suspicion of the crime of endangering national security, the crime of terrorist activities, or the crime of receiving bribes in serious circumstances, and implementing residential surveillance at the suspect's residence could hinder the investigation, then upon approval by the next higher people’s prosecutor’s office or public security authority, residential surveillance may be implemented at a designated place of residence[.]" (对于涉嫌危害国家安全犯罪、恐怖活动犯罪、特别重大贿赂犯罪,在住处执行可能有碍侦查的,经上一级人民检察院或者公安机关批准,也可以在指定的居所执行。)

Thus, placing Xie in residential surveillance at a designated place is an open-and-shut violation of the Criminal Procedure Law and is nothing more than kidnapping. Of course, the whole problem could easily have been avoided had the authorities had the wit to fill in the blank for the suspected crime with one of the eligible ones. But this is exactly the point: the law means so little to them that they can't be bothered to understand or follow it even when it would be easy to do so.

[AUG. 8th UPDATE: The situation is a bit more complicated. See this follow-up post.]

August 6, 2015 in Commentary, News - Chinese Law | Permalink | Comments (1)

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."

AUGUST 6th UPDATE: Kerry Brown, formerly of the Foreign Office, has kindly permitted me to publish his take on how this might have happened.

July 30, 2015 in Commentary, News - Chinese Law | Permalink | Comments (1)

Thursday, July 23, 2015

China bans high-speed rail travel for people with outstanding judgments against them

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

By intern reporter Shan Yuxiao


Images of convicted debtors flashed across a giant digital billboard at the entryway of the Changsha Railway Station on the afternoon of January 20 / CFP

(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.

July 23, 2015 in News - Chinese Law | Permalink | Comments (0)

Sunday, June 21, 2015

E-commerce policy: who's in charge?

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.]

June 21, 2015 in Commentary, News - Chinese Law | Permalink | Comments (0)

Saturday, February 21, 2015

Chinese lawyers file freedom-of-information request for legal basis for ban on teaching of "Western values"

Here's the story, from the Fei Chang Dao blog.

February 21, 2015 in News - Chinese Law | Permalink | Comments (1)

Friday, February 20, 2015

First successful case against administrative monopoly

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:

February 20, 2015 in Commentary, News - Chinese Law | Permalink | Comments (0)

Tuesday, January 27, 2015

Dentons-Dacheng merger: some questions

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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?
  6. 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.


January 27, 2015 in Commentary, News - Chinese Law | Permalink | Comments (1)

Saturday, January 24, 2015

China's draft Foreign Investment Law and VIEs: one more point

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 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.

January 24, 2015 in Commentary, News - Chinese Law | Permalink | Comments (0)

Friday, January 23, 2015

Comments on China's draft Foreign Investment Law

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.[1] 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.

V.              VIEs

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 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 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.


[1] “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.”

January 23, 2015 in Commentary, News - Chinese Law | Permalink | Comments (0)

Friday, January 16, 2015

More obstacles for Chinese lawyers

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.” 

January 16, 2015 in Commentary, News - Chinese Law | Permalink | Comments (0)

Sunday, December 7, 2014

China bans puns

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:

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.

December 7, 2014 in Commentary, News - Chinese Law | Permalink | Comments (2)