Government auditors and environmental watchdogs have made headlines over the last year, confronting thieving and incompetent officials or shutting down polluting factories or halting construction projects that skipped environmental impact assessments. One car maker could not get 79 car models into showrooms when authorities refused licenses because they were at odds with specifications.
China's watchdogs, once viewed as toothless, are starting to show some baby teeth. The question is, how long before they grow healthy and permanent fangs?
Certainly, they are raising their profile. Regulators protecting consumers and industrial workers are making a stand – as members of the general public are starting to do, too, as evidenced by the soaring number of citizen complaints filed in recent years.
Courts and officials are also starting to take complaints of complex issues like copyright infringement more seriously, though there remains a long way to go. Until recently, police rarely paid much attention to crimes other than murder, rape and theft. Judges, too, have sometimes seemed flummoxed by regulatory or copyright cases, sometimes throwing them out due to an inability to make sense of loosely written, conflicting laws. (Cases can still be thrown out, but more for lack of nerve than knowledge – some judges have shown a reluctance to assert their independence from local governments and local state-owned enterprises.)
Change, however, is definitely in the air. A decade of legislation, government reform, rising public anger – and a growing number of increasingly concerned politicians – are behind the regulators' rise to prominence over the last year. And what a signal year it was: it followed the 16th Party Congress, which recognized regulation as one of the government's four main roles in the market economy.
"It's enormously important," says Stephen Green, senior economist with Standard Chartered Bank in Shanghai. "It signals the change in China from a planned economy to a market economy. Instead of telling people what to do, you've got to create the framework for them to do what they want within certain limits."
It would have been neater in some ways if legal foundations and regulatory frameworks had been developed in parallel with, if not ahead of, the transition from command to market economy that started in 1978. But such is China's way, that first reality is changed, and then the rules are changed to reflect that new reality.
China is now furiously writing laws and regulations, aiming to place the economy and every other sphere of human activity under an improved legal code by 2010. Some of those laws are now in place, helping regulators, and giving plaintiffs more tools to rein in officials, corporations and counterfeiters.
"Most Chinese laws are very simple, general guidelines," says Professor Joseph Cheng Yu-shek, a China specialist at City University in Hong Kong. Now they have begun looking at how effective the rules really are in operational terms, he says, and wondering if they can be enforced. The other and closely related issue China has also begun to address is legal incongruity. "Many local laws and other laws are contradictory [so] they are trying to make the whole body of legal schedules compatible and operational," Cheng adds.
Rules are needed because they force companies and organizations to tackle costs and risks at source, either eliminating them or creating a market to deal with them. Without them, different players can dump costs, like pollution, and risks, on other players, the government and the people. These growing liabilities are grit threatening to clog the turbines keeping China's economy on cruising speed.
China's efforts to tame its wilder elements have parallels in the United States of earlier days, observes another academic in Beijing. "How similar is it to the rise of a regulatory state in the USA some one hundred years ago, from the Progressive Era to the New Deal in 1930s?" asks Gao Shiji, who researches development strategies and regional economies at the State Council's Development Research Centre.
Reining in officials
New laws and regulations are also part of bureaucratic reform to curtail officials' power, improve efficiency and match the economy and society's rapid change. Officials who have been used to getting their own way and overriding the basic rights of the citizenry increasingly face trouble, as disturbances swelling to 100,000 showed in Sichuan last October. The trigger for that: local officials taking a fat cut from compensation due to farmers they were pushing aside to make way for a hydro-power plant.
"Although the exact meaning of regulation has to be further developed within the Chinese context, the essence of rule-based government intervention has been gradually introduced to officials accustomed to administration with too much discretion," says Gao.
Grumbling from the masses is gradually getting louder. They are fed up with the government's inability or refusal to act against firms – state, private or foreign – that do as they please, destroying the environment and livelihoods, paying derisory compensation or ignoring workers' rights.
"Pollution, not paying workers, bad conditions, consumer rights, have become issues," says Hui Cheung-Tai, a China economist with Standard Chartered Bank in Hong Kong. "That is apparent from the media. Mr Hu and Mr Wen are talking about improving the sustainability of growth – that can only be done by improving environmental and social safeguards.
"Balanced growth requires a strong regulator," Hui argues.
Complaints, petitions and pleadings from the people continue to flow into Beijing. Laws and regulators potentially offer alternatives to relieve the pressure, giving people the rights and tools with which to sue those perceived to threaten their lives or livelihoods – while creating offices with the sole mission of protecting the public interest.
Cases against the state will presumably rise as public awareness of new channels of recourse, and constraints on officials and firms, grows. Court costs should fall and access increase under new policies too.
New laws and more open-minded courts are creating opportunities for lawyers looking for new business, a potentially huge market offering advisory opportunities to foreign law firms experienced in class action suits and the like.
With politicians regularly boasting that law is paramount, the door to justice is seemingly open. More and more people are walking through that door, even though the struggle can be long and trying. Between January and November 2004, courts accepted 85,000 administrative cases. Since implementing the administrative law 14 years ago, plaintiffs have won more than 20% of cases. Of 18,000 compensation cases against the state heard since approval of the state compensation law in 1995, plaintiffs have won more than a third.
Yang Qiaoxing walked out of Shanghai's Huangpu District People's Court in February with a spring in his step and a few more yuan in his pocket after winning compensation from the Shanghai Labor and Social Security Bureau. Though the court agreed Yang's domestic service agency had flouted its license, as he was originally charged, it ruled the greater crime was the Bureau's – which meted out punishment disproportionate to the offence.
Last November, after a three-month campaign, residents of a luxury apartment complex in Shanghai won their campaign to force local officials in central Jing An district to withdraw permission for a bar strip they had authorized to go up outside their front door. Residents, including lawyers, a retired judge, ?migr?s returned from North America, and real-estate developers proved more than a match for officials unused to being challenged – shocking neighbors with their bravado, and all the more for actually winning.
Increasingly in big cities, major developments face at the least delays from public hearings sometimes drawing crowds of irate citizens, such as that considering a 220kW power line held by the Beijing Environmental Protection Bureau last August.
New political awareness
Politicians fret that the public's anger at the costs of growth and with it, the widening gap between rich and poor could boil over, especially when the Internet and mobile phones are eroding the government's control of information and news. Their answer: more law and empowered regulators.
"It is a significant change," says City University's Cheng. "I think Chinese leaders in general understand now that. Short of democracy, the government has to be more responsive to the people and more effective in handling the complaints and grievances of the people."
Public and foreign investors' concerns have partly influenced Beijing's decisions on where to act. "They would like to avoid difficult areas unless they are pretty sure how to deal with them – which means they try to tackle the easier problems first," says fellow City University academic Linda Li Che-lan. "Another factor affecting the choice of issues is where the pressure is greatest. The government has to at least be seen to be doing something."
One result is Auditor General Li Junhua hanging dirty linen in public. Last June he sparked a nationwide uproar reporting that only 70% of RMB1.4bn (US$169m) stolen or wasted by 41 of 55 government departments in 2003 was recovered. By Li's count, seven departments falsely drew money from the central budget. Even local disaster, education and poverty-relief funds were misused.
Li has warned that his office is intensifying efforts to uncover corruption and champion transparency. In December he announced all government audits, including financial institutions and banks, will be public by 2008, as against only 10% in 2003.
"The abuse of public money that Auditor General Li Jinhua had exposed is too widespread and too serious to be ignored," noted China Daily in a December commentary. His next report, due in June, is eagerly awaited, given government spending ratcheted up to RMB3.2trn (US$390bn) for 2005 and China's tradition of government waste and corruption.
Discovering theft or incompetence is perhaps the easy part. Defining responsibilities and penalties to tackle the problem, and then finding the backbone to take action, especially against high-level officials, is much harder.
"There's a lot of reports about investigations of senior officials," says Stanchart's Hui. "The question is: will these stop at a certain level? That dilemma will become more apparent: what is the determination to push things through, even if it means heads rolling at the top? That is a little harder to predict."
Consumer watch and IP
Consumer watchdogs have chalked up successes recently. In March, the China Consumers' Association persuaded Shanghai Telecom, part of China Telecom, to refund or transfer unused credit on expiring telephone cards, after winning a similar concession from China Mobile and China Unicom.
Air travelers, long treated as cattle to be herded and penned in planes for hours of waiting on the ground, may finally start to see conditions improve. Civil aviation authorities promised in March to get tough with airlines over delays and poor service. Indeed, Shenzhen Airlines spotted a PR opportunity the month before, becoming the first to announce compensation for delays. But passengers had begun to resort to sit-ins to win compensation.
The food and beverage industry, again stung last year by baby deaths from toxic formula and milk products made in unlicensed factories, is seeing more regulatory action, and not only in affected segments. A new clearer national wine standard, for instance, is promised this year. But, true to China's conflicted habit of wishing for better but worrying about jobs, the China Alcoholic Drinks Industry Association says its new guidelines focusing on additives and the authenticity of product claims may be voluntary.
Poor standards and lax enforcement were partly blamed for baby milk poisonings last year, killing dozens of infants. "The baby milk powder caused outrage throughout society," says Thomas Pattloch, an associate with corporate lawyers Schulz, Noack and Barwinkel. "It's just another example of something that could be stopped with correct legislation."
That said, compulsory certification of health or safety products has accelerated with China's membership in bodies like the World Standardization Organization and the World Trade Organization (WTO). Of over 150,000 products now certified, 137,000 are locally made.
China's medicine chest is crowded with fakes, says Pattloch, who heads the intellectual property rights (IPR) working group of the European Union's Chamber of Commerce in China. "China is battling very hard, but 30% of antibiotics are fake. If you're lucky, it's just powder that doesn't damage your health – in 2003 you had 200,000 dying from the side effects of fake medicines."
Enforcing intellectual property rights would go some way to eliminating fake medicines, many argue. Though for centuries a counterfeiter's paradise, partly because Chinese culture traditionally values ideas differently than the West, a change of heart regarding protecting copyrights is taking place, not surprisingly more so in Beijing and Shanghai than in Qinghai or Xinjiang.
Officials are welcoming advice and input from copyright holders, especially where firms dedicate an executive to building relations and trust. "I think in general they are all very open," says Hong Sun, external affairs officer for spirits maker Hennessy in Beijing. "They welcome ideas and support when we approach them."
Chinese copyright holders themselves are now clamoring for protection – from Chinese and foreign IP owners alike. For all the racket from outside China, only 3% of copyright cases heard in China involve foreign ideas. "Chinese companies are increasingly subject to infringements themselves," says Pattloch. "The Chinese see IPR as a weapon to defend and conquer markets."
Trade deals, which allow sanctions and other barriers, also add to the pressure. "According to the Trade-Related aspects of Intellectual Property Rights (TRIPS) agreement, they are required to provide effective measures; if they don't, it can be regarded as a breach of TRIPS and WTO. The Chinese side fears being accused of not meeting its obligations," Pattloch says.
Other areas crying out for the regulator's strong arm are notable for next to no action so far. Stocks in particular are a sore point, with small investors sulking over heavy losses, which they blame on crafty brokerages, many now effectively bankrupt anyway, and listed firms lying. No surprise that mainland stock markets are at five-year lows, despite the economy's never-ending growth story.
That they have a case is not in doubt, that they should be more careful is also not in doubt. Were the market at five-year highs they would probably not lament the lame China Securities Regulation Commission (CSRC), the first regulator established in China.
It has a long way to go. Tackling stock market regulation is complex, raising issues over state shareholdings, minority shareholder compensation, a brokerage clean-up, and even the split nature of the stock markets, foreign involvement and exchange rates. So far, the commission has moved some to tidy up governance and strengthen the voice of minorities in corporate decision-making – and it has tightened rules for listing spin-offs to avoid asset stripping. In conjunction with the ministry of finance, the CSRC also just last month announced a new US$6bn fund to compensate investors victimized by bungling and cheating brokers. Ultimately, it will have to deal with the masses of non-tradable SOE shares held by the state, which overhang the market and threaten to dilute investor holdings.
But an even more pressing problem is bank reform. "In the last three years it's been banking reform that has been the priority. Some of those reforms haven't gone as smoothly as one would have hoped; there's been some resistance," says Stanchart's Green.
Capacity is perhaps one of the biggest challenges facing regulators. Money alone will not train legions of savvy forensic accountants, lawyers and policemen regulators need overnight. Rushing the job risks creating incompetent regulators, who will fall short for a public impatient for justice. And without laws, regulators are impotent anyway.
For most foreign investors, the rise of a regulatory state should be good news, promising clearer, fairer, consistent regulations coupled with better prospects for preventing or catching victims of everything from property and intellectual property fraud to abusive bankers and bureaucrats. If regulators move closer to ensuring smoother and more transparent markets – whatever their sphere – foreign investors might even hope to make more money.
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