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
Friday, July 4, 2014
Over the last few days, I've blogged about the silly charges brought against Pu Zhiqiang and others: a crime named "stirring up trouble and provoking disturbances," in which the offending act seems to be posting something like a press release online after having a private meeting of less than dozen people in someone's home. And last September the Supreme People's Court and the Supreme People's Procuracy issued a joint notice on internet speech crimes that attracted a lot of controversy (and jeering).
Apparently they were paying attention in Wisconsin, and not in a good way. Local authorities brought charges against someone who posted uncomplimentary remarks about the police department right on the department's Facebook page. The charges? "Disorderly conduct" (among others). And the defendant was convicted in a jury trial. Fortunately the appeals court had no trouble in recognizing that the First Amendment still applies (the prosecution had tried to assert a "fighting words" exception) and overturned the conviction - fittingly, the day before Independence Day.
To the extent this case is at all representative of anything, it's that China does not have a monopoly on the notion that people should be punished for sassing the authorities. The idea is alive and well in the United States, too. That's why independent institutions are critical.
Wednesday, July 2, 2014
Yesterday I blogged about a column my friend and colleague Stanley Lubman had written on the charges against Pu Zhiqiang. Stanley has asked that I post his response, and I'm happy to do so. Here it is:
I appreciate Don Clarke’s comment on my recent column on “picking quarrels and stirring up trouble. ” He correctly points out that there is no such crime in the relevant Article 293 of the Chinese Criminal Code. But where, then, is the criminality of “picking quarrels” defined?
The language of Article 293 uses the term as a class of acts that are punishable and states four categories: attacking people, “chasing, intercepting, berating or intimidating others” under “heinous circumstances,” or causing disorder in a public place. Clearly a private discussion in a private apartment does not fall within any of those categories, and, as I noted, Daum refers to the interpretation by the SPC and SPP as having ”significantly clarified when this charge can be supported, [but] it doesn’t seem to have slowed police.”
In the context of other efforts under way to suppress publicly expressed views deemed by police or other authorities to threaten “social stability,” application in Pu’s case of “a very vaguely defined crime of ‘picking quarrels and provoking troubles” is what is occurring. Clarke and I agree that, as he stated, that the law is wildly stretched to apply to Pu, but, as he said, “the authorities are using it anyway.”
In sum, Clarke and I also agree that here we have “a problem of institutions, not of legislative drafting.” I thought that by discussing arbitrary use of power by the police that that was clear, and I thank Don for making that crystal-clear.
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.
Monday, June 30, 2014
The Chinese government and its allies in Hong Kong’s business elite seem to be in full panic mode over the Occupy Central movement (which, let us recall, has not yet occupied so much as a garden shed). First came the PRC government’s stern warning earlier this month in the form of a White Paper reminding Hong Kong who was boss. Presumably emboldened by this, the accountants decided that their input would be valued by the public. Yes, the accountants: the Big 4 in Hong Kong (Ernst & Young, KPMG, Deloitte, and PricewaterhouseCoopers) published a joint statement last Friday in three Chinese-language newspapers [Chinese | English (scroll down)] announcing their opposition to the Occupy Central movement.
Overall, I don’t have much to add to Paul Gillis’s blog post:
The arrogance of the firms is stunning. Did they really think their voice would alter the debate? Do they really think people respect their opinions that much? Did they not see that all they were doing is setting themselves up for ridicule while diminishing their brand worldwide?
Paul also adds some thoughts about whether, if they did this at the behest of certain big clients, they have therefore compromised their independence under IAS (International Accounting Standards).
I wonder a bit if the statement was drafted by someone with PRC connections. To be fair, it doesn’t read exactly like PRC Chinese; there are many places where it uses words and expressions not common in PRC officialese. (For example, it says 各式各样 instead of the more common 各种各样, and 进行著 instead of 进行着.) But in the signature line it names Deloitte Hong Kong as德勤.關黃陳方會計師事務所 instead of using Deloitte Hong Kong’s official name, 德勤.關黃陳方會計師行. For those who don’t read Chinese, it used the common mainland term for “accounting firm” (kuaijishi shiwusuo) instead of a different term that Deloitte Hong Kong actually uses (kuaijishi hang). If you check out this page, you can see that Deloitte uses “kuaijishi hang” for its Hong Kong entity and “kuaijishi shiwusuo” for its mainland PRC entity. (Thanks to sharp-eyed commenter “percysmith” on Paul Gillis’s blog, who spotted the misnaming.)
Not surprisingly, “[w]hen the Financial Times approached the big four’s global headquarters for comment, it emerged that they had only learned of the advertisement through press reports.” The various local entities sporting the names of the Big 4 are typically not properly characterized as “branches”; they are more like franchises that bear a common name and may have some level of cooperation, but they don’t have common ownership. The Big 4 in Hong Kong could have issued this statement without the knowledge or approval of any other Big 4 offices anywhere in the world.
Wednesday, June 25, 2014
There has been quite a bit of attention in the Chinese press recently to proposed and perhaps in-process reforms to the Chinese judicial system. These reforms were authorized in broad strokes by the 3rd Plenum of the 18th Central Committee last fall, and at least some are now on the road to implementation. An important reform is that of partially centralizing (i.e., up to the provincial level) the power of appointments and funding for local courts (see para. 32 of the Third Plenum Decision).
Recently, the Central Leading Group for Comprehensively Deepening Reform, a Party body headed by Xi Jinping, issued three documents relevant to judicial reform: (1) Opinion on Deepening Reform in the Judicial System and Social System and Plan for Division of Labor in Implementation (关于深化司法体制和社会体制改革的意见及贯彻实施分工方案); Framework Opinion on Several Issues Relating to Experimental Points in Judicial Reform (关于司法体制改革试点若干问题的框架意见); and (3) Work Plan for the Shanghai Experimental Point in Judicial Reform (上海市司法改革试点工作方案). Unfortunately, none of these documents have been made public, but their content has been sketched in the official press. Here are two articles from the Chinese press [first | second] and very helpful English-language summary courtesy of Chinese Law Translate.
These documents (at least as explicated by a government spokesman) contain a number of worthy and important reforms. Financing of all local courts is to be handled at the provincial level, as are appointments. Apparently this reform is already in process in Shanghai. (Shanghai has the administrative status of a province.) What this means is that district (区) governments and People's Congresses will no longer have power over finances and personnel respectively in Basic-Level People's Courts in their district.
This is all very well, but what seems to have been overlooked in the zeal to reform the court system is the fact that you can't do it just by making some decisions within the Party. The system whereby local authorities (i.e., Party, government, and People's Congress) control courts at the same level (at least as to personnel appointments) is enshrined both in the Court Organization Law (Art. 34) and the Constitution (Art. 101). To be sure, as reported it is not crystal clear that the reforms formally take the power of appointment away from local authorities. But it is crystal clear that local authorities will not be making the decisions. The decision as to who will be a judge in a local court will be made at the provincial level, and then "the local People's Congresses will appoint or dismiss in accordance with legal procedures" (人大依照法律程序任免).
In other words, a project designed to improve the legal system is treating legal rules as at best meaningless formalities and at worst non-existent. It seems that the problem of weak legal institutions is being dealt with the same way Simon Leys (quoting Alexandre Vialatte) describes the fate of cannibals in a certain republic: "There are no more cannibals in that country since the local authorities ate the last ones."
The death sentence imposed on Li Yan, who killed her abusive husband, was recently overturned on review (not technically an appeal) by the Supreme People's Court. The case will go back to the Higher-Level People's Court (i.e., the provincial-level court) of Sichuan Province for re-trial.
Here are the key elements of the case as reported that I want to discuss:
1. "China's Supreme People's Court has ordered a higher court in the southwestern province of Sichuan to retry the case because of insufficient evidence and lack of clarity on some facts"
2. "Li, 43, was sentenced to death in 2012 for killing her husband Tan Yong. Tan had physically, sexually and verbally abused Li for more than three years, burning her with cigarettes and cutting off one of her fingers"
3. "Li beat her husband to death with an air gun after he threatened to shoot her."
4. "Supporters say Li should not have been sentenced to death because the police and the first two courts did not take into consideration the abuse she had suffered."
Point 2 is a claim that certain facts existed.
Point 4 is a claim that those facts are legally relevant to the case, and that the first two courts committed an error of law by not taking them into account.
Point 1 appears to represent an acknowledgement by the SPC of the validity of Point 4.
Finally, Point 3 suggests that regardless of whether other facts exist and are relevant, the homicide was not premeditated.
The point of all this is to note the disparity in the sentence meted out to Li Yan on the basis of apparently undisputed facts and the sentence meted out to Gu Kailai, the wife of Bo Xilai who was convicted of the murder of Neil Heywood. (Gu got a death sentence with a two-year suspension; such sentences are virtually always commuted to life imprisonment at the end of the two-year period.) In that case, there was no dispute that the homicide was premeditated. There is also generally no dispute that premeditated homicide is worse than non-premeditated homicide. Thus, even if the first two courts in Li Yan's case were right, and the evidence of prior abuse was either insufficient or irrelevant, we still find someone convicted of unpremeditated murder getting a harsher sentence than someone convicted of premeditated murder.
It's not that Li's sentence is unusual; it's that Gu's sentence is unusual.
Friday, June 6, 2014
China's Global Times, a newspaper known for its highly nationalist bent, commemorated June 4th by publishing an op-ed by a man named John Ross, currently a senior fellow at People's University's Chongyang Institute of Finance and a former advisor to former London mayor Ken Livingstone. I'm not going to reproduce the whole thing here - just click on the link to read it. I want to address some of the arguments Ross makes because I see them over and over, and they don't get better with repetition.
1. “China” has lifted X million people out of poverty. Since “China” here is way too vague to be a meaningful concept, what can this statement possibly mean? I take it it must mean something like “wise Party policies”. By all means let us give appropriate credit to those who revoked policies that imposed poverty on the people of China. But let’s also give credit to the people of China who built their own wealth. I didn’t see Deng Xiaoping or Xi Jinping down there at the construction site. Furthermore, by this logic we should also give full credit of course to Great Britain for bringing us the Industrial Revolution, and to the much-maligned US two-party system for sponsoring the postwar economic and political order that lifted large sections of the world out of poverty as well. Finally, this formulation completely avoids the question of whether things like political repression were a necessary part of those poverty-eradicating policies.
2. By pointing out bad things about the US, or the hypocrisy of its foreign policy, one can successfully refute criticisms of China. The silliness of this position is obvious on its face. I don’t know why anyone with academic pretensions would use it. Why does everything have to revolve around the United States? It’s just one country. Can I revalidate the criticisms of China by showing that the countercriticisms of the US don’t apply to, say, Canada or Australia or Botswana? It’s all so silly.
3. Critics of China unreasonably demand that it adopt every trapping of Western democratic systems. “Consequently the attempt to reduce 'human rights' to a Western style political structure, as though having a 'parliamentary' system were the most important question facing human beings, is ridiculous.” What’s even more ridiculous is the straw man that this is what people who care about human rights are demanding. It’s much simpler, really: for example, give people accused of crimes a fair hearing, which means, among other things, not kidnapping witnesses and lawyers; don’t beat up people like Ni Yulan until they are crippled, and then imprison them without crutches so they have to drag themselves around in the shit on their cell floor; etc.
4. Each country has the right to choose its own form of government. Again, abstract words like “country” are just obfuscations here. The whole point is, who gets to speak and decide for “the country”? Does Ross mean “the citizens of each country”? If so, he must therefore be rejecting systems where citizens don’t get a choice. But then he seems to think absolute monarchy is OK if “the country” wants it, so apparently “the country” is something different from the people who live in it. I have never heard anyone say, “We must respect the choices this country has made” where it didn’t mean, “We must respect the choices the current configuration of political power has come up with”. The vapid language of respect for choice obscures critical distinctions about how that choice was made and whether it’s worth respecting – questions not susceptible to a single right answer, to be sure, but certainly questions that need to be asked.
Thursday, June 5, 2014
Thursday, May 29, 2014
Here's a piece just published by Jerry Cohen entitled, "Lawfare or Warfare? Let Impartial Tribunals Cool Asia’s Maritime Disputes."
Sunday, May 25, 2014
According to the Financial Times, "China has ordered state-owned enterprises to cut ties with US consulting companies such as McKinsey and Boston Consulting Group because of fears they are spying on behalf of the US government." This comes on the heels of a report just a few days earlier that "Beijing has banned central government departments from installing Windows 8." (I will assume for the sake of this discussion that "installing" includes "purchasing.")
Questions have been raised as to whether these moves are WTO-compliant. Fortunately, the Windows 8 case is easy, and we don't even have to figure out whether software is a good covered by the GATT or a service covered by the GATS. This is because the ban applies to "central government departments," and so is clearly a case of government procurement. As China has not yet joined the Government Procurement Agreement (GPA), it can do what it likes in that area.
The management consulting case is harder. The first thing to do is to check China's schedule of commitments under the GATS to see if it made any commitments in the area of management consulting. Yup, there it is:
The next step is to figure out if there's any reason why that commitment should not apply in this case. How about government procurement? After all, the government didn't order everyone to stop using US consulting services; only state-owned enterprises (SOEs).
But making this argument puts China in an awkward position. At this very moment it is negotiating the terms of its accession to the GPA and resisting demands from other members that SOEs be included as subject to GPA commitments, presumably by arguing that SOEs are just regular market-oriented folks who seek the best product at the cheapest price and don’t take orders from government. This is in fact what it stated in the WTO accession negotiations in response to Working Party concerns. Here are the relevant parts of the Working Party Report:
6. State-Owned and State-Invested Enterprises
43. The representative of China stated that the state-owned enterprises of China basically operated in accordance with rules of market economy. The government would no longer directly administer the human, finance and material resources, and operational activities such as production, supply and marketing. The prices of commodities produced by state-owned enterprises were decided by the market and resources in operational areas were fundamentally allocated by the market. The state-owned banks had been commercialized and lending to state-owned enterprises took place exclusively under market conditions. China was furthering its reform of state-owned enterprises and establishing a modern enterprise system.
44. In light of the role that state-owned and state-invested enterprises played in China's economy, some members of the Working Party expressed concerns about the continuing governmental influence and guidance of the decisions and activities of such enterprises relating to the purchase and sale of goods and services. Such purchases and sales should be based solely on commercial considerations, without any governmental influence or application of discriminatory measures. In addition, those members indicated the need for China to clarify its understanding of the types of activities that would not come within the scope of Article III:8(a) of GATT 1994. For example, any measure relating to state-owned and state-invested enterprises importing materials and machinery used in the assembly of goods, which were then exported or otherwise made available for commercial sale or use or for non-governmental purposes, would not be considered to be a measure relating to government procurement.
45. The representative of China emphasized the evolving nature of China's economy and the significant role of FIEs and the private sector in the economy. Given the increasing need and desirability of competing with private enterprises in the market, decisions by state-owned and state-invested enterprises had to be based on commercial considerations as provided in the WTO Agreement.
46. The representative of China further confirmed that China would ensure that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial considerations, e.g., price, quality, marketability and availability, and that the enterprises of other WTO Members would have an adequate opportunity to compete for sales to and purchases from these enterprises on non-discriminatory terms and conditions. In addition, the Government of China would not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises, including on the quantity, value or country of origin of any goods purchased or sold, except in a manner consistent with the WTO Agreement. The Working Party took note of these commitments.
47. The representative of China confirmed that, without prejudice to China's rights in future negotiations in the Government Procurement Agreement, all laws, regulations and measures relating to the procurement by state-owned and state-invested enterprises of goods and services for commercial sale, production of goods or supply of services for commercial sale, or for non-governmental purposes would not be considered to be laws, regulations and measures relating to government procurement. Thus, such purchases or sales would be subject to the provisions of Articles II [regarding most favored nation treatment], XVI [regarding market access] and XVII [regarding national treatment] of the GATS and Article III [regarding national treatment] of the GATT 1994. The Working Party took note of this commitment.
The commitments mentioned in Paras. 46 and 47 are more than just idle promises; they are incorporated by reference into China’s WTO Protocol of Accession and therefore form part of its WTO obligations. Thus, it seems that were China to call this a case of government procurement, it would not only be undermining its current position in the GPA negotiations, but would also be violating its specific commitments in its WTO Protocol of Accession.
Well, wait a minute, you might say. Isn't there some kind of broad national security exception countries can always invoke? It turns out that the national security exception, at least as written, is pretty narrow. Here's what the GATS says about it in Article XIV bis:
1. Nothing in this Agreement shall be construed:
(a) to require any Member to furnish any information, the disclosure of which it considers contrary to its essential security interests; or
(b) to prevent any Member from taking any action which it considers necessary for the protection of its essential security interests:
(i) relating to the supply of services as carried out directly or indirectly for the purpose of provisioning a military establishment;
(ii) relating to fissionable and fusionable materials or the materials from which they are derived;
(iii) taken in time of war or other emergency in international relations; or
(c) to prevent any Member from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.
That's it. Surprisingly enough, it doesn't look like "fear of state secrets leaking into the hands of a foreign power," no matter how legitimate that fear might be, counts. Needless to say, there is absolutely zero chance that any government would put WTO rules above its own conception of its security needs.
My conclusion, then, is that the anti-Windows 8 measure passes muster but the anti-management consulting measure does not. Let me add that I'm not a WTO expert and don't even play one on television, so there may be some aspect of the issue that I've overlooked. Check this space for a red-faced update.
Thursday, May 15, 2014
Wednesday, May 7, 2014
Wednesday, April 30, 2014
Tuesday, April 29, 2014
I have received the following announcement of job openings, including one in governance and law, from my friend David Kelly at China Policy. Note that only Chinese nationals can be considered.
China Policy is seeking lead analysts in our key sectors: Economy; Energy, Resources and Environment, Governance and Law, Social Policy and Agriculture Food and Water Security. These positions are well-suited to recent PhDs returning to China for employment. Visa restrictions mean only PRC passport holders can be considered. See our website for job descriptions.
A little bit about CP
China Policy is an evidence-based, knowledge-intensive information and advisory company registered in Beijing and operating worldwide. CP has in a few short years gained a growing client base among government, corporations and international organisations.
Our operations cluster around cp.context, an online research and learning tool. This supports regular publications: cp.leads, which is widely distributed, and cp.briefsand cp.records that are client-only publications The comprehensive policy records appear monthly, with one record for each of our major policy sectors (Governance and Law; Economy; Social Policy; Energy, Resources and Environment and Agriculture Food and Water Security) appearing in sequence weekly.
Staff producing these cutting-edge services all meet professional requirements in relevant disciplines as well as in Chinese and English. Junior staff are for the most part at grad student level, and lead analysts at PhD level or with equivalent work experience in one of the sectors.
Sunday, April 27, 2014
Wednesday, April 16, 2014
Noted political commentator and former (until fired) Southern Weekend columnist Chen Min, who writes under the pen name Xiao Shu (笑蜀), will speak at George Washington University Law School at 6 p.m. on April 22, 2014. Details are in this flyer. The talk will be webcast here: http://bit.ly/1tbgW5l.