For those who love their beef noodles, July was not a happy month. China’s fast food connoisseurs were up in arms at the news that instant noodle prices were going to rise by an average of 20%. Their budget snack was becoming less budget and they didn’t think this was fair. They were correct.
An investigation conducted in August by the National Development and Reform Commission (NDRC) found that members of the International Ramen Manufacturers Association were illegally colluding with one another to fix prices. The noodle makers were duly punished.
It was a victory for consumer activism and, following government approval of China’s first proper antitrust law in September, further success could follow.
“This new law [which outlaws monopolistic behavior such as price fixing] raises public awareness of the competition issue,” said C.F. Lui, a senior associate at law firm Baker & McKenzie in Shanghai. “People will know that they can make official complaints.”
The passing of the antitrust law, which comes into effect on August 1, 2008, marks the end of an 18-month period in which China has placed a large body of commercial legislation on to the statute books. In addition to antitrust, the most significant new laws cover bankruptcy, company activity, property rights, labor contracts and securities. All of them have an international flavor, a reflection of the time lawmakers spent researching the experiences of other countries.
The sense is that the policy is being put in place to shepherd China as it enters a more globalized and market-driven era, one in which corporate ethics and individual rights have much greater weight.
“They have got pretty much the full set of commercial and private property laws,” said Graeme Johnston, a Shanghai-based partner with Herbert Smith. “The challenge of the next 10 years will be getting these laws neutrally administered, interpreted and enforced.”
At the 17th Chinese Communist Party Congress in October, the people tasked with meeting this challenge may well be put in place.
Race for succession
The congress will see further discussion of President Hu Jintao’s twin policies of creating a “harmonious society” and pursuing “scientific development.” These are the cornerstones of his vision for the future: a country in which the growth-at-any-cost mentality is tempered by a social and an environmental conscience.
But many eyes will be on the race to inherit Hu’s legacy in 2012, when he is supposed to step down as leader.
There are likely to be significant changes to the Politburo Standing Committee (PSC), which comprises the senior leadership of the party. The high-flyers who are elected to the PSC in October will include the odds-on favorites to succeed Hu as party secretary and president.
What is notable about the front-runners to form the “fifth generation” of Chinese leaders, as well as those ascending the ranks beneath them, is their training. Gone are the days of the technocrat; these cadres have qualifications in law, economics, politics and philosophy.
Out in the provinces and municipalities, about half of the people appointed party secretary, governor or mayor since 2002 – the year Hu became party leader – majored in one of these subjects.
“The trend is very clear: Over the next five to 10 years more lawyers will move into the driving seat of Chinese politics,” said Li Cheng, professor of government at Hamilton College in New York state.
The growth story
According to Jonathan Anderson, chief Asia economist at investment bank UBS, this is not the work of a forward-looking leadership that wants to promote lawyers. It is part of a broader phenomenon as China’s rapid economic growth has spawned a demand for people who know how to manage it. In an increasingly corporate society, a premium has been placed on an understanding of the function of law and how it fits into business.
“I would say it is the growth process that is driving change in China and inexorably changing the focus of politics, law and society,” Anderson said.
“There are a large number of analysts who would argue the opposite, but I don’t think that anything can stand in the way of Chinese growth. The central government’s ability to inflict damage on the economy is much smaller than before.”
In this way, the introduction of new commercial legislation can be tied to the shift from public to private ownership that has taken place in China over the last 15 years. Indeed, the principal reason China’s property rights law attracted so much attention was because it was seen to offer a clear-cut recognition of the rights of private property owners.
Chinese people have become shareholders and built up their own assets; they are enjoying previously unseen levels of autonomy by virtue of the market economy freedoms that increasingly govern their lives. Strong laws are seen as a means of protecting these freedoms and Beijing has recognized that it must accommodate this.
“People want a political structure that is line with business reality and can maximize economic potential,” said Li Xiaoming, a partner at White & Case in Beijing.
In theory, the introduction of commercial laws that bear comparisons to those found in the West should make interpretation far easier. This is only partially true.
The new legislation is supposed to update earlier laws that, for example, covered certain aspects of antitrust or securities but not the whole. But these earlier laws have not been repealed, which could create confusion in the courts.
“China’s commercial law and it’s full of ambiguity,” said Stuart Valentine, a Hong Kong-based partner at law firm Mallesons Stephen Jaques.
“The antitrust law did not repeal at least six existing sets of legislation that refer to unfair competition. It was hoped that this law would unify other parts but it just sets up yet another layer of demarcation battles between the Ministry of Commerce, the NDRC and different levels of provincial legislature.”
Looking for guidance, Valentine researched China’s original unfair competition law, which was enacted in 1993. Although the law is expressed so broadly that finding grounds for enforcement would have been relatively straightforward, he couldn’t find any record of an enforcement decision being made.
He sees the empty case file as an indication of just how murky the law can be in China.
Official vagueness is a common feature in Chinese legislation. According to Article 13 of the most recent text of the antitrust law, the prohibited monopoly agreements are price fixing, restricting supply, dividing markets, restricting the purchase or development of technology market division and collusive boycotting.
But the list ends with a catchall, also citing “other agreements confirmed by the Anti-Monopoly Enforcement Authority under the State Council.”
This widening of the scope of the law is followed by a widening of the possible exemptions to it. Article 15 lists a string of exemptions on largely public-interest grounds as well as “other cases stipulated by the law or the State Council.”
To some, this deliberately broad phrasing is a necessary precaution. China is seeing profound economic changes but its legal system is immature. Therefore, a degree of legislative fine-tuning is permitted at enforcement level so laws don’t have to be redrawn from scratch.
“When they wrote the property law, they said in an accompanying commentary that a certain area had been left open deliberately,” said Steven Dickinson, a Shanghai-based partner at boutique law firm Harris & Moure and one of the authors of the China Law Blog.
“They said that it isn’t until cases are tried and people work out the issues over time that they will know the answers.”
It is, in a sense, typical of the civil law system. The lawmakers start with a big-picture articulation of the legal principles involved and this is used as the basis for analysis of the law as well as regulations that are published alongside it.
There is, however, another side to the argument: The “wiggle room” present in Chinese legislation gives authorities the ability to offer special treatment or impose censure at they see fit.
“Almost all Chinese law of any significance is drafted in a way that not only leaves room for interpretation at the margins, but also has scope to push the practical effect of the central provisions one way or another according to what force you give to different bits of it,” said a partner at an international law firm in China who asked not to be named.
While significant as a piece of legislation, the perceived loopholes in the antitrust law have left people wondering whether it will actually deliver the level playing field it promises. Concerns are most readily expressed by overseas investors who fear that provisions allowing for national security reviews of foreign acquisitions will be used to shut them out of the market.
The idea of a law being used to engineer a predetermined outcome appears to undermine the notion that China’s new set of commercial legislation is a response to the demands of an increasingly autonomous and economically free society. Do these laws equip the private individual with any new protection at all?
Valentine’s answer is an unequivocal no. People may have more freedoms, he argues, but these are still state-prescribed. The major purpose of these new laws, he says is merely to entrench the current system and “give the government a concrete basis for continuing to do what it has done in the past.”
Or, as Jacques deLisle, a professor of law at the University of Pennsylvania who specializes in contemporary law and politics in China, puts it: “The laws give rights to those who hold political power and create opportunities for them to accumulate wealth.”
With this in mind, it’s not unreasonable to ask how a legally trained leadership would be any different to a technocrat one – especially when the legally trained leaders have never actually practiced law. Ultimately, government edict will always trump rule of law no matter who is sitting at the head of the table.
But the rise of lawyers through party ranks is in itself an indication of the changes taking place in China.
“The issues of the law are only partly related to the rise of lawyers but more to do with the realization that these laws are important to the country,” said Li Cheng. “The technocrat leadership was introduced to the country by Deng Xiaoping but he wasn’t a technocrat. Hu is no lawyer but he has introduced legal reforms.”
There is a hope that the “fifth generation” of leaders will bring with them a sense that rules matter. Li Xiaoming believes this could create a trickle-down effect and reinforce the notion of respecting the law in Chinese society.
“You have to make people feel like the law really matters – that you get punished if you don’t comply and rewarded if you do,” he said. “Take intellectual property laws: The Chinese attitude towards IP protection is changing as more Chinese themselves are victims of IP theft. They have to be on the other side of the table to appreciate the value of the law.”
A civil society
Li feels the best way to facilitate this is through the creation of a civil code, which would unite the different elements of the law – property rights, labor contracts and so on – under a single banner.
“A civil code will draw people’s thinking away from the vicissitudes of government directives. It will have a strong psychological impact on society,” he said.
“Law is a double-edged sword – it promotes rule in a country but also poses limits. With a [civil] law of this complexity, when the government talks about how it will do things, it cannot fail to look at it.”
Li and others are generally positive about the direction in which China’s legal system is moving. They appreciate that it is unfair to draw comparisons between the centuries-old legislative apparatus of the West and a system with less than 30 years under its belt. Yet there is no denying that China still has a long way to go.
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