China Legal Changes Far-reaching Reforms Liberalize the Economy and Regulate Government!

7-7-2014

China Legal Changes

Far-reaching Reforms Liberalize the Economy and Regulate Government! Article by Nicolas Musy

As we mentioned in our January Analysis, China is at a turning point. In the wake of growing societal unrest, public disillusionment with corruption, growing environmental problems and economic dislocations, the Chinese leadership must face its greatest challenge yet: set the country on a economically sustainable path, all the while winning back the hearts and minds of those who have been disenfranchised by the previous decade of “growth at all costs”.

And as we described, there is no alternative but a radical change of course, should China’s development continue:

In November 2013 Xi Jinping and his government, released the details of the long-term economic and social reforms agenda in a 60 points reform plan. Though the plan does not include any political reform its effect could be as transforming as the agenda pursued by Deng Xiaoping in the 1980s that transformed the Chinese economy and opened China to the world.

A key pillar of the reform agenda is the strengthening of the legal system in favor of the citizens and companies by fostering greater transparency, more judicial independence and professionalizing the judicial decision-making processes. Among others, specialized intellectual property right courts will be established, a clearer State Secret Law has been promulgated and officials have been instructed to provide expanded government information to the public, particularly about the way local governments use their funds.

All in all, these changes show a resolve by the Chinese leadership to build a society and economy where the state plays a regulatory, rather than a directly interventionist role, while regulating the way the government operate. Ultimately, this is intended to create a much more level playing-field for private businesses in China and an environment perceived to be fair by common citizens.

While the international media focus on the conviction of Chinese activists, we thought it also of interest to illustrate the far reaching changes in the making with a few examples:

Anti-corruption campaign

One of the most distinguishing marks of the Xi Jinping administration has been its unrelenting drive to crack down on corruption at all levels in order to bolster the legitimacy of the state and liberate the Chinese economy from vested interest.
The anti corruption campaign is widely expected to culminate with the first indictment of a former standing member of the politburo since the communist government is in power, setting the precedent and communicating the clear message that no one will be spared.

However, in addition a five-year Anti-Corruption Plan (2013-2017) has been issued to establish a frame for long term clear government. Amongst the various measures long expected by the public are the pilot projects that require newly nominated officials to disclose their private assets.

Limiting the arbitrary power of the state

the Central Politico-Legal Commisiion (CPLC), the government body that presides over the entire legal system issued the decision “On Earnest Prevention of Miscarriages of Justice”. later complemented by the supplementary opinion of the Supreme People’s Court on “Completing Systems of Prevention of Wrongful Cases”

While the documents essentially reiterate the existing Criminal Procedure Law and related regulations of the PRC, some fundamental changes have also been made. Amongst these is a clear emphasis on enforcing greater judicial accountability for judges, prosecutors and police; sheltering judgments and decisions from public opinion, hype or disruptive petitioning and establishing a greater division of powers between the judiciary and law enforcement bodies.

An additional fundamental change is the abolishment of the system of re-education through labor which allowed the police to send citizens into labor camps for up to 3 years without involvement of the judiciary or a court judgment.

On the regulatory side, the State Council announced on 25 February plans to establish a transparency mechanism to disclose all approval requirements demanded by China's government, starting first with those at the central government level. Under this arrangement, government agencies will no longer be allowed to interfere in the approval of items not included in their own registers. These same agencies will also need to publish their administrative approvals on their official websites in a bid to boost transparency.

Amendment to the Company Law

To stimulate private investments and entrepreneurship, China’s National People’s Congress adopted the “Amendment to the Company Law of People’s Republic of China” on December 28, 2013, which has lowered establishment requirements and reformed capital registration regime for new companies. As from 1 March 2014, the most significant changes are as follows:

The change from the system based on paid-in registered capital to one based on subscribed registered capital is expected to have the greatest impact. By allowing investors to contribute capital over a much longer period, companies are given much more flexibility in developing their operations.
The minimum registration capital of RMB 30,000 for limited liability companies will be cancelled, as well as the RMB100,000 minimum for single shareholder companies and the RMB5 million minimum for joint stock companies. Theoretically, investors will be able to establish a company with a registered capital of one RMB. The amendment also cancels the requirement that at least 30 percent of the registered capital contribution be made in cash, by allowing capital contributions to be made in non-cash form.
In addition companies are not required to go through a yearly inspection anymore. Instead they will provide annual reports, part of which will be publically disclosed via an online government platform.

Foreign-invested companies in China will see the same easing of company registration requirements provided by the latest amendment to the company law.

This is widely expected to benefit entrepreneurs and businesses by removing government red-tape all the while decreasing the time necessary for businesses to have projects approved by the government

Change of legal principle: introduction of the “Negative List” in the Shanghai pilot FTZ

On September 29 2013, the Central Government announced, what promised to be the biggest event since the open door policy was introduced more than 30 years ago: the inauguration of the pilot Shanghai Free Trade Zone.

The establishment of the pilot FTZ is especially significant as it is designed to test the next economic reforms before they are rolled out throughout the country to bring the economy to its next, sustainable level.

Under its framework, the FTZ is to open up five service sectors to foreign investment, by relaxing or removing registered capital requirements as well as shareholders ratios and business scope restrictions. These are 1) Financial Services 2) Shopping services 3) Business Services 4) Professional Services and 5) Cultural services.

However, the new test economic zone will certainly be remembered for its groundbreaking change of the corporate legal philosophy that is still applied elsewhere in China. At the moment any private business activity that is carried out in China must first be approved by the authorities while in the Shanghai pilot zone all activities not expressly forbidden in the so-called “negative list” are automatically freely allowed.

As a consequence, businesses in the free trade zone need not anymore be approved by the local authorities; instead they are simply registered, as is the case in western economies.

The significance of this cannot be understated as it is understood that the policies implemented in the FTZ, will later be implemented country-wide.

Indeed, these changes show a consistent resolve by the Chinese government to use structure to ensure that “power is locked up in a cage of rules” and the economy is freed to develop its full potential.

This was most aptly illustrated by the Prime Minister Li Keqiang during an anti-corruption speech on 11 February 2014 in which he declared that:

“Whatever the law does not prohibit can be done as far as the market is concerned, while whatever the government does must be authorized by law.”

We hope that the above can be of support for your China strategy and plans. For more information about this topic, do not hesitate to contact n.musy@ch-ina.com.

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