The Development of the Chinese Legal System Howard Davies

What Is the ‘Rule of Law’?

n The legal system is separate from political or economic power –the judges are independent and cannot be given orders by those in power

What Is the ‘Rule of Law’? n The legal system is separate from political or economic power –the judges are independent and cannot be given orders by those in power n The law is fully promulgated –everyone can find out what the law is, no secret laws

What Is the ‘Rule of Law’? n The legal system is separate from political or economic power –the judges are independent and cannot be given orders by those in power n The law is fully promulgated –everyone can find out what the law is, no secret laws n Everyone’s conduct is regulated by the rule of law –The law must be obeyed by all, even the rich and powerful

What Is the ‘Rule of Law’? n The legal system is separate from political or economic power –the judges are independent and cannot be given orders by those in power n The law is fully promulgated –everyone can find out what the law is, no secret laws n Everyone’s conduct is regulated by the rule of law –The law must be obeyed by all, even the rich and powerful n The law is applied in the same way to every case –no arbitrary judgments on when and how to apply

What Is the ‘Rule of Law’? n The legal system is separate from political or economic power –the judges are independent and cannot be given orders by those in power n The law is fully promulgated –everyone can find out what the law is, no secret laws n Everyone’s conduct is regulated by the rule of law –The law must be obeyed by all, even the rich and powerful n The law is applied in the same way to every case –no arbitrary judgments on when and how to apply n The law can only be changed by due process of law

What Is the ‘Rule of Law’? n The legal system is separate from political or economic power –the judges are independent and cannot be given orders by those in power n The law is fully promulgated –everyone can find out what the law is, no secret laws n Everyone’s conduct is regulated by the rule of law –The law must be obeyed by all, even the rich and powerful n The law is applied in the same way to every case –no arbitrary judgments on when and how to apply n The law can only be changed by due process of law

What Is the Difference Between ‘Rule of Law’and ‘Rule by Law’?

n ‘Rule by Law’ is where one group has control of the law and uses it to achieve its goals. That group is often not subject to the law n In Marxist theory the law was a tool of the capitalists and after Revolution it becomes a tool of the workers and peasants - through the CCP. Or is it just a tool of the CCP?

Two Topics Have Have Highlighted the Importance of the Legal System n Guanxi - the use of personal connections is important in China partly because the legal framework is weak. Guanxi supports transactions and allows business to take place, but at the cost of inefficiceny and corruption n Technology Transfer - as protection for intellectual property is weak, major foreign corporations will not transfer strategically important technologies and the incentive to innovate by Chinese firms may be weakened

China;s Legal System Has Been Under- developed for Historical Reasons n Under the Emperors, and in Confucian thought, emphasis was on rule by the scholar gentry –Lead the people with governmental measures and regulate them by law and punishments and they will avoid wrong-doing but they will have no sense of honour and shame. Lead them by virtue and regulate them by the rules of propriety and they will have a sense of shame and, moreover, set themselves right - Confucius -The Analects n ‘Rule by Man’ not ‘Rule of Law’ n Law as norms, with enforcers having wide discretion n Widespread abuse, ordinary people avoid the law

After Liberation? n In Marxist thought, the law is an instrument of class war, used by the exploiters n A legal system is therefore unnecessary in a socialist society n If everything is owned by everybody, no private property rights to protect n If everything is centrally directed the distinction between laws and administrative procedures is difficult to identify n the legal profession was disbanded, only re-formed in q979 n “Better to be Red than Expert” n “Rule by the Party” not “Rule by Law”

Building a Market Economy Requires a Functioning Legal System WHY?

n Transactions are no longer decreed by the centre, but take place between autonomous individuals and organizations. Those transactions must be supported by some form of law –buyers must know they will receive what they paid for, sellers must know they will get paid –buyers and sellers must know they can deal with anyone if the economy is to be efficient –CONTRACT LAW IS NEEDED

Building a Market Economy Requires a Functioning Legal System WHY? n Transactions are no longer decreed by the centre, but take place between autonomous individuals and organizations. Those transactions must be supported by some form of law n Property rights need clear specification and protections –if not, who is allowed to do what with what? –Foreign investors will not come unless their property is protected –intellectual property rights are needed to encourage technological progress

Building a Market Economy Requires a Functioning Legal System WHY? n Transactions are no longer decreed by the centre, but take place between autonomous individuals and organizations. Those transactions must be supported by some form of law n Property rights need clear specification and protections –if not, who is allowed to do what with what? –Foreign investors will not come unless their property is protected –intellectual property rights are needed to encourage technological progress n Enterprises and firms must have clear status, rights obligations and responsibilities

Building a Market Economy Requires a Functioning Legal System WHY? n Transactions are no longer decreed by the centre, but take place between autonomous individuals and organizations. Those transactions must be supported by some form of law n Property rights need clear specification and protections –if not, who is allowed to do what with what? –Foreign investors will not come unless their property is protected –intellectual property rights are needed to encourage technological progress n Enterprises and firms must have clear status, rights obligations and responsibilities n Owners and managers must have clear status, rights, and responsibilities –IF NOT CORPORATE GOVERNANCE WILL BE WEAK –COMPANY LAW IS NEEDED

Building a Market Economy Requires a Functioning Legal System WHY? n Transactions are no longer decreed by the centre, but take place between autonomous individuals and organizations. Those transactions must be supported by some form of law n Property rights need clear specification and protections –if not, who is allowed to do what with what? –Foreign investors will not come unless their property is protected –intellectual property rights are needed to encourage technological progress n Enterprises and firms must have clear status, rights obligations and responsibilities n Owners and managers must have clear status, rights, and responsibilities n Hiring and firing of employees and managers must be possible

Building a Market Economy Requires a Functioning Legal System WHY? n Transactions are no longer decreed by the centre, but take place between autonomous individuals and organizations. Those transactions must be supported by some form of law n Property rights need clear specification and protections –if not, who is allowed to do what with what? –Foreign investors will not come unless their property is protected –intellectual property rights are needed to encourage technological progress n Enterprises and firms must have clear status, rights obligations and responsibilities n Owners and managers must have clear status, rights, and responsibilities n Hiring and firing of employees and managers must be possible n Arbitrary intervention by officials must be prevented

What Has Been Done? Phase I n Partly driven by the need for foreign investment –Joint Venture Law 1979 –Joint Venture Regulations 1983 permitted foreign investment principle of ‘equality and mutual benefit’ (???) must have ‘advanced’ technology and equipment’must export n Also began support for transactions –Economic Contract Law 1982 specified 10 types of transaction which could be the subject of a contract made contracts enforceable BUT still focussed on implementing the State Plan

Phase II n 1984 Decision of the Third Plenum of the 12th Central Committee –state and collective enterprises lacked decision-making power and initiative –scope of mandatory planning to be reduced –greater role for market forces –wider diversity of enterprise types n General Principles of Civil Law –enterprises are legal persons with rights and duties n State Industrial Enterprise Regulations 1983 –allowed ‘supplemental’ production and some autonomy

Phase II n State Enterprise Law 1988: Bankruptcy Law 1988 –ownership and control separated –‘responsibility systems’ introduced –bankruptcy possible (but rarely used) –reduced role for government –allowed to deal with foreign firms n Foreign Enterprise Law 1986 (and Implementing Rules 1990) –permit WOFEs –prohibit FDI in some industries –bans expropriation –WOFEs become Chinese legal persons n Co-operative Joint Venture Law 1988 –CJV may be a legal person –capital contributions in kind or intellectual property –management strcuture and rules set out n Patent Law 1985: Paris Convention 1985

Phase III: 1988 to 1993 n October 1987: Zhao Ziyang’s Report to the 13th National People’s Congress –major ideology shift - private enterprises to play a part –Provisional Regulations on Private Enterprise 1988 –1990 Revision of the JV Law –Shareholding Measures 1992 –‘Opinions’ on Standards for Joint Stock Companies and Limited Liability Companies –Copy right Law 1990: Regulations on Protection of Software 1991

Phase IV: 1993 to Date n November 1993, Third Plenum of the 14th CCP Central Committee n Decision on Some Issues Concerning the Establishment of a Socialist Market System n Economic Contract Law Revised –no requirement that contracts conform to State Plans –‘principle of exchange of equal value’ abandoned –prices to be negotiated by parties to a contract –greater role for the courts and arbitration

Phase IV: 1993 to Date n Towards a Modern Corporate Structure –aim for consistency with international standards –separate government administration from enterprise management –change format of SOEs:joint stock or limited liability if investment from more than one source –state retains contrlolling shares in ‘key’ and ‘basic’ industries n The Company Law of the PRC 1993 –establish a modern enterprise system –rules on capital contributions, meetings, Boards of Directors, voting, listing etc n Action Plan on Effective Protection and Enforcement of Intellectual Property 1995:Criminal Law 1997 –‘a reasonably effective set of laws and regulations relating to intellectual property rights’ (ICC 1995)

Where is the Rule of Law Today: The Positive Side n There is a recognition that building a market economy requires the rule of law - a major theme of the NPC 1999 n The ideological barriers have been cleared n Learning from Western systems now seen as using ‘Man’s common heritage’ not re-introducing capitalism

Where is the Rule of Law Today?: The Negative Side n Building a legal system is a huge task n The CCP is not willing to give up control - so is ‘Rule of Law’ possible? What if the law works against the Party? n Conformance to the law is a major issue –Only 20% of laws properly implemented??? –Widespread intellectual property abuse –poor protection of other property rights n Institutional basis is weak - not enough lawyers n ‘Rule of Man’ may be too deeply entrenched in Chinese culture - does the HK Secretary for Justice understand what ‘rule of law’ means?