Academic journal article Journal of International Affairs

Business Law in China: Evolutionary Revolution

Academic journal article Journal of International Affairs

Business Law in China: Evolutionary Revolution

Article excerpt

Western investors in China are of two minds. They are at once frustrated by the lack of transparency and predictability in the Chinese legal process. Indeed they frequently see China as having no law in the Western sense, with guan xi (personal connections) taking precedence over any formal contracts and providing better (i.e. more politically sound legal protection.)(1) At the same time, Western investors often find that the Chinese laws most applicable to their projects inhibit their objectives to such an extent that they have to press their Chinese counterparts to ignore the rules, rules which stifle creativity and in themselves stall China's swift and sure rush toward a market economy. Law, in this sense, is equated with a numbing bureaucratic process, entangling sound business projects in endless review, overlapping government ministries with no evident purpose and endless opportunities for corruption and gratuities.

Like all facile observations, these insights are, at times, accurate. Certainly in the early days of foreign investment in China, and even today in smaller regional transactions, particularly those of the slash-and-burn variety, relationships did and still do carry significant weight. But as the pace and permanence of foreign investment in China quickens, and as the administrative process for creating and administering China's laws matures, the overriding importance of personal relationships as a substitute for carefully thought-out, fully negotiated contracts will significantly decline.(2)

Indeed, as is becoming clearer with each new law promulgated, there is now an extensive body of Chinese law governing foreign investment, one of increasing sophistication and transparency. The process of formulating and administering foreign investment law has been in place since the start of the new economic reform era, making it worthwhile to review its development and structure.

The list of new laws is extensive. Beijing began to develop legislation to attract foreign direct investment in 1979 with the People's Republic of China Law on Joint Ventures using Chinese and Foreign Investment, or the "Equity JV Law," which permitted Sino-foreign equity joint ventures with limited liability to be formed. Implementing regulations have been created since 1983, and various pieces of legislation have supplemented the Equity JV Law to regulate areas such as labor management, taxation, land use, foreign-exchange transactions and technology transfer by joint ventures.(3) The Law for Cooperative Enterprise, popularly referred to in China as Sino-foreign contractual joint ventures, was promulgated in 1986, with Detailed Rules for the Implementation of the Contractual JV Law being approved by the central government's State Council and promulgated by the Ministry of Foreign Trade and Economic Cooperation in August 1995. Options for foreign investment were expanded through legislation permitting wholly foreign-owned enterprises in April 1986, holding companies in April 1995 and the creation of foreign-invested share companies for which provisional regulations were issued in January 1995.(4) To address concerns about the transfer of state assets to joint ventures or other economic enterprises in which there was foreign ownership, the State Council promulgated the Administration of State Asset Valuation Procedures in 1991.(5)

In 1995 alone, we have seen the introduction of a law outlining the role of the People's Bank of China,(6) a commercial banking law,(7) a law governing the insurance industry in China(8) and a national law providing, for the first time, the legal structure for the creation of security interests in real estate and personal property.(9) Perhaps most significantly, the principal governmental organizations responsible for administering China's foreign investment laws - the State Planning Commission, the Ministry of Foreign Trade and Economic Cooperation and the State Economic and Trade Commission - promulgated Interim Provisions on Guiding Foreign Direct Investment (the "Investment Guidelines") in June 1995. …

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