Current Legal Issues Affecting Central Banks, Volume IV.
Chapter

Chapter 16 Banking Law Reform in China

Author(s):
Robert Effros
Published Date:
April 1997
Share
  • ShareShare
Show Summary Details
Author(s)
TOBIAS M.C. ASSER

Introduction

It was in the fall of 1992 that China decided to change its command economy to what is called a socialist market economy. Although the Chinese authorities are still in the process of giving content and definition to the term “socialist market economy,” this much is known: China’s economic system will be unique, as it will reflect the unique social, political, and cultural traditions of China’s vast and diversified population.

In the fall of 1992, the Chinese authorities also requested the IMF to provide assistance to the People’s Bank of China in drafting new central bank and banking legislation that would provide the necessary institutional and regulatory support for China’s banking sector in a socialist market economy. In response to this request, staff of the Legal Department and the Monetary and Exchange Affairs Department of the IMF embarked on an intensive legislative assistance program.

As part of this program, the People’s Bank of China was given detailed memoranda prepared by IMF staff that discussed some of the principal issues that had to be considered with respect to the proposed central bank and banking reform program, a collection of central bank and banking legislation of representative countries around the world, and illustrative models of provisions that should be included in China’s new legislation. This assistance program culminated in a joint workshop that was given in Beijing in September 1993 by managers of the People’s Bank of China and senior staff of the IMF and several European central banks; the workshop was attended by high-level officials of China’s State Council and People’s Congress, and by representatives of China’s banking community. Since then, China’s leadership has been engaged in extensive discussions concerning the principal characteristics of the new central bank and banking system that must be reflected in the new legislation.

As far as is known, no definitive decisions have yet been taken in China concerning its banking reform. Therefore, this discussion of banking law developments in China must be somewhat tentative and remain incomplete. It is possible, nevertheless, to sketch an outline of some of the difficult issues that must be addressed by China in adapting its banking sector to a market economy environment.

Among these are some fundamental issues that go to the heart of the financial system: the role of the People’s Bank of China as guardian of the value of the national currency and as regulator of the banking system; and the financial and operational independence of commercial banks in a market economy, including freedom of contract.

Law Reform in China

Before these topics are addressed in greater detail, however, some general comments should be made about the task of law reform in a society that is in transition from a command economy to a market economy.

To be successful, the transition from a command economy to a market-based economy requires not only changes in economic thinking but equally changes in legal thinking. In fact, the changes in legal thinking that are required are nothing short of revolutionary, mainly because there is a fundamental difference between the function of law in a command economy and the function of law in a market economy. Whereas in a market economy the law governs economic agents and their transactions, the law in a command economic setting is an instrument of power designed to serve the interests of the principal economic agent, the state.

This functional difference of the law is particularly significant with respect to the economic activities of enterprises. In a command economy, the law is designed to preserve the freedom of the state only, and individual enterprises generally lack the freedom of economic decision making or freedom of contract that is one of the hallmarks of a market-based economy.

In a command economy, the principal function of economic law, such as banking law, is to regulate the manner in which state enterprises conduct their day-to-day business. This function is not only justified but also unavoidable because in a command economy state enterprises are instruments of the state that are bound to carry out their designated tasks under a state plan. In a command economy, state enterprises have no true independence and little freedom of economic decision making as most decisions are taken by the central government under the plan. The negotiation of contract conditions governing the supply of goods or services to or from other economic agents is mostly ritualistic and has little economic significance because most of these conditions are carefully controlled by the state.

In a market-based economy, there is no state plan. Even if enterprises are owned by the state, they are responsible for their own economic decisions in an environment where prices are determined not by the state but by the market. Contracts with other economic agents are freely entered into at conditions negotiated between the parties. As a market economy cannot function without this freedom of economic decision making, the law functions to support and preserve this freedom.

For these reasons, the functions of banks and, consequently, of banking law in a command economy differ fundamentally from the functions of banks and banking law in a market economy.

In a command economy, banking law is mainly prescriptive and regulatory. Its principal objective is to establish precise and detailed rules and procedures that direct and control the operations of banking institutions, which are mostly those of cashiers under the state plan. In a command economy, banks are governmental organizations; they are organs of the state. Therefore, banking law is mainly administrative law written to instruct banks how to conduct their day-to-day business.

In a market economy, however, banks are autonomous economic agents that are independent of the state. In principle, the state has no authority to direct their activities. In a market economy, the principal function of banking law is not to instruct banks how to conduct their business but rather to ensure that banks will avoid inappropriate activities that would endanger the financial system as a whole.

Thus, in short, whereas banking law in a command economy tells banks how to conduct their operations, banking law in a market economy tells banks only how not to conduct their operations. Whereas in a command economy banking law covers the entire spectrum of banking activities, in a market economy banking law only operates at the margin to provide a legal framework within which banks may conduct their business in freedom.

The principal reason for this functional difference between banking laws in these two economic systems must be found in the fundamental difference between these systems in the freedom that they accord to individual economic agents—such as banks—in their economic decision making. Whereas this freedom of economic decision making by individual enterprises is severely restricted in a command economy, freedom of economic decision making is one of the cornerstones on which a market-oriented economy rests.

It is one of the basic functions of the law in a market economy to support and preserve this freedom of individuals to enter into contractual relationships. This principle of freedom of contract has several important consequences for the content and application of the law, in particular banking law. During the mission of the IMF in China, these consequences were discussed at length with officials of the People’s Bank of China.

For China, one of these consequences is that the People’s Bank of China as bank regulator and the commercial banks must each have juridical personality and full operational independence under the law. Another consequence is that market-oriented banking law must operate not at the center of banking activities but at the margin of banking activities. At the center, there is freedom of economic decision making and, perforce, freedom of contract. Therefore, in order to respect such freedom of contract, a good deal of restraint must be exercised in writing and enforcing banking law and the prudential regulations that are issued under its authority.

Reform of China’s Financial Sector

Currently, the monetary policy of China is formulated, adopted, and executed by the State Council. As far as we know, no definitive decision has been taken by China’s leadership to change this.

The staff of the IMF has advised China that experience gained around the world teaches that, to be successful in a market economic setting, monetary policy should be entrusted to an autonomous central bank that is largely independent of the political establishment. However, the time may not yet be ripe for such a drastic transfer of power to the People’s Bank of China. It should be remembered that, in a command economy, the very idea of a governmental agency that is independent of the state is pure heresy and entirely irreconcilable with the structure of a corporate state. It is quite possible, therefore, that China will adopt a model whereby only the execution of monetary policy will be entrusted to the People’s Bank of China, while monetary policy will be formulated and adopted either by the State Council or by a monetary council that would be positioned between the State Council and the People’s Bank of China.

It was decided in principle that the People’s Bank of China would have as its primary objective to achieve and to maintain the stability of the national currency and that this objective would be enshrined in the central bank law.

This decision evoked the question of whether the People’s Bank of China could continue to exist as a kind of government department or whether the People’s Bank of China should be established by law as a legally independent entity endowed with adequate capital resources. It was agreed that, if the People’s Bank of China would lack legal independence, it would lack the operational and financial independence that it would need to execute efficiently its tasks in the areas of monetary and foreign exchange policy and its duties as bank regulator. For example, the People’s Bank of China would carry out monetary policy through the use of monetary policy instruments such as open market operations, which would require the People’s Bank of China to buy and sell in the markets government securities for its own account. Although it would be theoretically possible for the People’s Bank of China to do this as a legal extension of the state, such financial operations would have to be carried on the state budget, which, to say the least, would be inefficient. Therefore, it was decided to establish the People’s Bank of China as a juridical person that would be legally independent of the state.

The most important argument supporting legal independence for the People’s Bank of China is that without such independence it would be impossible to establish the People’s Bank of China as a central bank with sufficient autonomy to carry out its primary objective of achieving and maintaining the stability of the value of the national currency.

China has decided in principle that the licensing and supervision of all depository credit institutions will be entrusted to the People’s Bank of China and its vast network of provincial and local branch offices. This decision will ensure that the regulatory standards that will apply to individual classes of banks will be the same throughout China. Thus, China will ensure a level playing field on which all banks that belong to the same category will be subject to the same regulatory cost base.

It must be expected that the institutions to be regulated by the People’s Bank of China will include the four specialized banks, such as the Bank of China. All four banks were chartered and supervised directly by the State Council. As these banks are large and powerful, one of the questions that remains to be resolved is whether special steps must be taken to bring them under the regulatory control of the People’s Bank of China, for instance, by replacing their charters with licenses issued by the People’s Bank of China.

Legal and Operational Independence of Banks in China

In order to exercise freedom of contract in China’s new socialist market economy, the banks in China must be independent entities under the law. In contrast with banks in command economies, banks in market economies must be truly independent of the state. The Chinese authorities realize that, if banks would lack such independence or autonomy, they would not be able to exercise the freedom of economic decision making that is required for the efficient execution of their important tasks in China’s growing socialist market economy.

The autonomy of banks does not necessarily depend on their ownership. In several countries, independent commercial banks are owned by the state. France is a notable example; however, French state ownership of commercial banks has not diminished their autonomy of economic decision making or their freedom of contract.

Banks must be granted adequate operational autonomy and independence from their respective owners. For a state-owned bank, this requirement concerns the manner in which the bank conducts its business—whether as an extension of the government or as an autonomous commercial entity. To ensure such autonomy for state banks, it may be necessary to reorganize them and to give them a commercial legal personality and corporate structure. China appears to be firmly committed to a program of law and policy reform that will ensure legal and operational independence under the law and full protection from the law for all banks, regardless of ownership.

However, establishing independence by law for the commercial banks, and even for the People’s Bank of China, will not be sufficient in and of itself. More than the law, the command economic practices must change in China. There are several examples of countries in transition from a planned economy to a market economy where law reform remained largely without its intended effect because it was not accompanied by a corresponding change in the command structure of the government. Legal independence of the People’s Bank of China (and the commercial banks) can be meaningful only if the state (and the People’s Bank of China as bank regulator) respects such independence as true operational independence, as independence of decision making. Obviously, such independence can be successfully maintained only if the central bank is accountable to the state for its decisions. These fundamental and, therefore, difficult changes in attitude and behavior cannot be expected to be made overnight in China.

Policy Reforms in China’s Banking Sector

Policy reform may be the most problematic area of reform of China’s banking sector. More than the other areas of reform, policy reform requires a change of thinking, a change of attitude. This is especially true for the government. Whereas in a command economy the government exercised control over the national economy, this control must now be relinquished and transferred to an ill-defined and highly unpredictable entity known as the markets. Making this change requires a great deal of resolve, strength, and courage. All governments—whether in command or market-based economies—have an instinctive dislike for relinquishing power. The recent spate of deregulations in industrialized countries and the gut-wrenching decisions that were required of politicians and bureaucrats alike may serve to illustrate this tendency.

Banking supervision is one of the areas where a command economy differs significantly from a market economy. In a command economy, banking supervision consists mainly of ex post control of the implementation of the state’s credit plan. In a market economy, however, banking supervision concerns the soundness of banks and thus the compliance with prudential standards that are designed to regulate and limit the risks that banks may be exposed to—and the risks that the financial system as a whole may be exposed to through the banks. In a market economy, banking supervision involves not only ex post but especially also ex ante supervision.

One of the areas where policy reform is urgently needed in China is the practice known as policy-based lending. Policy-based lending is a euphemism for bank loans to persons or on terms that would not be made available to such persons or on such terms if the bank making the loans had not been so instructed by a government official or politician.

In China, the practice of policy-based lending is pervasive. As one of the participants in the IMF’s workshop in Beijing said: “In the banking system of China, one acquaintance is often worth more than ten tjaps.” The era of “everyone eating out of one big rice bowl” cannot be brought to a close before a strict separation is made between commercial banking and government-inspired banking at all levels of governmental and commercial activity. Only when this separation is achieved can banks, and especially state banks, be truly independent and responsible for their own profits and losses.

The issue of policy-based lending by specialized banks and commercial banks is complex. One of the guiding principles must be that in a market-based financial system all bank lending, including policy-based lending, should be subject to market-oriented prudential standards. Loans to uncreditworthy borrowers or on terms and conditions that are significantly more favorable than sound banking practices dictate should by definition be regarded as inconsistent with the reasonable prudential standards imposed under the banking law. Such loans should, therefore, not be made by banks for their own account unless they are entirely funded or guaranteed by the central or local government.

This judgment does not imply that all concessional lending should be discontinued. Most industrialized countries have governmental loan and loan guarantee programs (for example, for agriculture, small business development, or export financing) that are carried out through the banking system; these could serve as models to be considered. Such programs, however, are normally authorized by special legislation apart from the banking law. Accordingly, China has decided to establish several non-commercial banking agencies through which policy-based loans would be channeled in the future.

Although much policy-based lending could be transferred to a governmental institution, such as, for instance, an industrial bank or an agricultural development bank, several remaining loan categories would be more difficult to transfer out of the present banking system. The most problematic of these—and this may expose the heart of the problem—are the loans made at the suggestion or request of officials at various levels of government to finance expenditures that should be financed from budgetary resources (or should perhaps not be financed at all).

The foregoing considerations have implications for the banking law of China and the introduction of its prudential requirements. For instance, as banking law normally includes provisions governing lending operations of banks, one group of issues to be addressed is how existing policy-based loans should be treated on the balance sheets of banks: should these loans be transferred to the state or to one or more state development banks, or should they be covered by explicit state guarantees or by government bonds issued to the banks?

Related Reforms Required for China’s Banking Sector

There is no question that great strides have already been made by China in transforming and developing its legal system into one that is suitable to support a socialist market economy. It is also true, however, that much remains to be done, not only in the area of legislation but also and especially in the areas of the administration of justice and legal education.

During the past decade or so, China has been blessed with explosive economic growth. The legal and institutional reforms that are required to support this development have lagged behind, however. In several areas of economic activity, in particular in the financial sector, this lag has led to what may be called legislative self-help at the provincial level. The result has been a diversity of provincial regulations and decrees that, although justifiable as emergency measures, should soon be harmonized and incorporated into one national legal system. Uniformity of law is a desirable objective not only from a legal standpoint but also and especially from an economic standpoint. Differences in law create uncertainties as to the content of the law.

Banking sector reforms may begin with law reform but they cannot end there. Without corresponding institutional reforms and extensive training of bank regulators and external accountants, as well as of commercial bank personnel, banking reform cannot be completed. The same applies in China.

But it is perhaps even more important that banking law is by no means the only law that governs banks and their operations. For a sound banking system, more law than just a banking law and more institutional infrastructure than just a bank regulator are required.

Thus, China will need a market-oriented company law, which is under preparation. China will need a sophisticated property law and law of obligations that meet the needs of a sophisticated financial sector. China’s banks will prefer to have their loans secured by collateral; this may require a system of registration of mortgages and other collateral rights. China’s banks will need to have the means to enforce their contractual rights under loans through a competent and impartial judiciary and appropriate enforcement procedures set forth in a comprehensive law of civil procedure. China’s banks will require a proper bankruptcy law that will permit them to pursue their claims against insolvent debtors. China’s banks and its regulators will require the assistance of a qualified and experienced accounting profession to help establish and maintain for the banks effective accounting control mechanisms that enable bank managers to monitor constantly their risk exposure on a consolidated basis.

As long as these laws and legal institutions are not available, the transition to a market-based banking sector cannot be completed. A market economy cannot function efficiently without a well-developed legal system. In a market-based economy, lack of law tends to create uncertainties among market participants concerning their respective rights and obligations under market transactions. Such uncertainties will constrain market activity or will lead to higher prices because suppliers will seek to reduce their risks by increasing the prices that they charge for goods and services.

This entire process of law reform should be planned and executed in an orderly fashion. This means, in particular, that new legislation should not become effective before the administrative infrastructure required for its enforcement has been put into place. Law that cannot be enforced is worse than no law at all because it tends to diminish public respect for the law in general.

However, especially in the area of bank regulation, law enforcement is no panacea. It is impossible to maintain a sound banking system unless the large majority of banks voluntarily comply with the prudential rules issued by the bank regulator. The savings and loan crisis in the United States and, to some extent, the scandal involving the Bank of Credit and Commerce International in the United Kingdom demonstrate that our bank regulatory structures and even our external auditing procedures cannot be relied upon to discover intentional fraud by bankers in time to avoid major damage to the banking system as a whole. China’s bankers should be convinced that strict compliance with sound banking principles is in their own best interest as it helps build public confidence in the banking system. Confidence of the public is easier lost than gained. It is a fact of financial life that public distrust of some banks increases the cost of banking for all banks.

In many of these areas, China has a long road ahead of it. The restrictive practices of the past appear to have given way to often-unbridled freedom. China’s bank regulatory system is still in its infancy and cannot develop further without effective banking laws and regulations. China’s bank regulators have not yet been adequately trained in the unusual ways of a market-based banking system. Both market-oriented legislation and training are urgently needed. Nearly a year has passed since draft central bank and banking legislation was submitted to the State Council. China’s bank regulatory system is overwhelmed by the explosive growth of new and often improperly licensed financial institutions. In the absence of appropriate banking legislation, the Chinese authorities are courting disaster.

However, there is another, more hopeful side to this story. The strong social and cultural fabric of China, the impressive energy of its peoples, and its age-old wisdom will help it overcome the inevitable problems that will present themselves during the difficult period of China’s rapid transition toward a socialist market economy.

[Editor’s Note: Following the presentation in May 1994 of this chapter, China adopted (i) Law of the People’s Republic of China on the People’s Bank of China (March 18, 1995); and (ii) Commercial Bank Law of the People’s Republic of China (May 10, 1995).]

COMMENT

NATALIE G. LICHTENSTEIN

Current Developments in the Legal System of China

It has been recognized for some time that China’s accelerating transition to a market economy requires corresponding changes in the legal framework for economic activity. The laws and regulations that were already in force cover economic activity in many ways. However, China’s lawmakers and policymakers, as well as its enterprise managers and workers, all recognize that more laws and regulations are needed; many also recognize that more attention to the implementation and enforcement of these laws is essential if they are to achieve their desired ends.

Changes in the legal framework cover a wide range of areas. This comment focuses on a few of the principal ones evident by 1994.

Property Ownership

In recent years, a multiplicity of ownership forms has grown out of the reform experiments in China. No longer are the convenient categories provided by the Constitution (ownership by the whole people, collective ownership, or individual ownership) either sufficient or mutually exclusive.1 For example, issues may arise concerning the ownership form of a company with state and individual shares or the real ownership of a collective enterprise. To give meaning to property ownership, the rights and obligations of ownership must be defined and enforceable, whether different owners of adjacent real property or several owners of intangible property (a shareholding company, for example, or a security) are involved. In many civil law systems such as China’s, the basic distinctions among types of ownership and the provisions for acquisition, transfer, and disposal of ownership rights would be found in either the civil code or a law on property or ownership. Save for a few provisions found in the General Principles of the Civil Code,2 enacted in 1986, China has neither.

Structure and Governance of Economic Entities

Reforms have also brought new forms of entities beyond the categories of state enterprise, collective enterprise, and individual household, which might have sufficed in an earlier time. Joint-stock companies have mushroomed, but only an interim set of directives gave them legal life until July 1994, when the Company Law entered into effect.3 Even under the Company Law, attention needs to be paid to the conversion process. Township and village enterprises are often described as a major factor in China’s economic growth, but establishment of their legal structure awaits a new law. The leasing of small state enterprises to private operators requires clarity as to the legal rights and obligations of owner and operator. And the list goes on.

Commercial Transactions

Increasing reliance on market-based transactions between independent contracting parties requires a functioning system of commercial law. This system includes contract law and intellectual property law, as well as rules for commercial transactions. An adequate mechanism for enforcing commercial rights and obligations is a necessity, whether through a general or specialized court system or arbitration mechanisms, or a combination of both. While the Economic Contract Law was revised in 1993,4 unification of this law, the foreign economic contract law, the technology transfer contract, and contractual rules for individuals are on the national legislative agenda. Intellectual property rights are now subject to a comprehensive legal regime,5 but enforceability is the next frontier. Beyond contractual provisions, general rules for commercial transactions also lack the comprehensive treatment that a commercial code would offer.

Promoting a Competitive Market

Promoting fair and effective competition among autonomous enterprises is a cornerstone of the market economy. At the same time, there is a public interest in protecting against anticompetitive behavior that harms consumers through higher prices or lack of products and, equally, in protecting against harmful or shoddy goods in the marketplace. Competition law has a new beginning in China with the recent enactment of the Anti-Unfair Competition Law,6 but more will need to be done to establish antimonopoly provisions and effective enforcement mechanisms. Protection and promotion of competition is especially important in a transition economy such as China’s, where governmental barriers to trade need to be dismantled while the permissible bounds for enterprises’ competitive behavior are still being defined. Consumer protection, too, has been the subject of several legislative actions in 1993. The Consumer Protection Law passed in the fall of 1993.7

Another aspect of bringing market competition to enterprises is the pressure of market exit, for which bankruptcy law provides a framework. China’s bankruptcy law applies only to state enterprises,8 while other enterprises may be put into bankruptcy under the provisions of the Civil Procedure Law.9 A more comprehensive, market-oriented framework for bankruptcy, regardless of ownership, is needed to bring order into the insolvency process and, especially for state enterprises, to bring the threat of forced exit more fully into play. China’s legislative officials are contemplating revising the bankruptcy law along these lines.

Market Access to Resources

Specialized legal provisions are necessary for the operation and regulation of markets in capital, land, and labor. Capital market legislation in China has made a start, with local legislation introduced earlier in Shanghai and Shenzhen followed in 1994 by nationwide regulations on the issuance and administration of shares, as well as by market regulation.10 Still, a nationwide securities law remains a legislative goal, and the banking and financial systems necessary to underpin the capital markets are at early stages of development, as both central banking and commercial banking laws have only recently been enacted.11 Land markets are booming, based on national legislation and supplemented by local legislation detailing land-use rights and their administration, transfer, and ownership. Concern over fragmentation and potential speculation in land markets has prompted calls for a nationwide real estate law, which would give a more substantial and consistent basis for land market transactions. Labor markets are also at an early stage, and their development will depend, in part, on the ability to provide social welfare benefits (health, unemployment, and pension) separately from employment. In this area, too, legislation is in an early phase.

Enforcement and Dispute Resolution

Perhaps one of the most striking changes in legal behavior from a planned economy to a market-based one is the reliance on legal instruments in lieu of government directives to enforce rules and resolve disputes. Economic actors must believe that they will be held to their legal obligations, and that their legal rights can be given meaning through legal protection. Government regulators, who should no longer command enterprises or individuals to make economic decisions, must have the ability to use administrative sanctions and to resort to courts, whether in protecting the environment or the sanctity of the market, when those economic decisions fall afoul of the new legal rules. Moreover, this behavioral change should be accompanied by a strengthening of the expertise and independence of the dispute resolution systems, whether mediation, arbitration, or litigation. Some structural experiments are under way, such as the specialized intellectual property court in Beijing and in other provinces. The training of judges and court personnel in economic subjects is also an important aspect of this judicial strengthening.

From this silhouette of China’s economic laws, it can be seen that much progress has been made, although a wide range of subjects remains to be more fully treated in the formal legal structure, such as property law, securities law, and bankruptcy law. Beyond the specific areas of law in which further developments are necessary and anticipated, however, some elements of the legal reform process in China also deserve attention. Two key elements are the process of preparing and enacting legislation, and the legal education and training needed to ensure implementation of the new legal framework.

Legislative Process

Judged by output alone, the legislative process in China in recent years has been increasingly active. All levels of the process—the preparation of laws at the line ministry stage, the review among agencies under the aegis of the State Council, the revision and discussion at the State Council or the National People’s Congress or its Standing Committee—have important functions, and all levels have been shouldering and will continue to shoulder a heavy burden of legislative work related to the market economy. While it will be important to strengthen the number and training of the legal personnel in these agencies to keep up with this burden, there are some other concerns that, if not abated, could slow the process.

Automatic Resort to Law and the Problem of Fragmentation

Each central ministry department typically has a list of laws that it feels are urgently needed, and that it is uniquely qualified to draft. While each of these proposed laws may address a problem in the economic transition (for example, investment law, planning law, public funds law, or anti-monopoly law), not all of these are problems that require a law to solve. Often, several different agencies may claim exclusive responsibility for drafting the same law. Even where laws are necessary, it is not always clear that separate laws are needed for each area; sometimes, different agencies are discussing subjects that would be better treated as chapters of the same law than as separate laws. Treating related topics in one law often brings the advantages of consistent standards, consistent application by the same enforcement agency, and ease of future revision.

Uneven Progress

To the outside observer, it sometimes appears that China’s legislative progress has been uneven. For example, some fairly sophisticated securities regulation topics are being addressed, such as standards for the staff of the securities regulatory commission, but a nationwide securities law has yet to be enacted (although one is in preparation). Joint-stock companies are all over China, many with shares traded on the exchanges at Shanghai and Shenzhen; yet, until July 1994, only Shanghai, Shenzhen, and Guangdong had company legislation, and the national legislation consisted of agency directives rather than State Council regulations. There are still gaps in the basic foundations in a few places (such as property law), while the towers and parapets are being put into place in other parts of the legal structure. Some of this uneven progress is quite normal, but what is important is to ensure that parapets are not added where the foundations are weak. Tensions have also arisen because some subjects are more fully treated in local legislation than national legislation because of either the absence or the vagueness of national legislation.

Departmentalism

The bulk (about 80 percent, by some estimates) of the laws eventually enacted by the National People’s Congress (NPC) or its Standing Committee are prepared under State Council auspices, that is, by the departments and agencies under the State Council. The balance are prepared initially at the NPC level. Some observers have suggested that, where a line ministry is primarily responsible for considering policy content, preparing initial drafts, and organizing other agencies in drafting groups, it is most likely to act in its institutional self-interest. That behavior may not always be in the overall interest of the public, and it becomes difficult for higher-level reviewers (such as the State Council or NPC) to counteract these tendencies once the draft law is at an advanced stage.

These departments’ lawyers, however, often have been exposed to the detailed rules and functioning of other market economies in their specific sector, so that their knowledge of the subject matter may turn out to be deeper than the reviewers’. One goal of technical assistance would be to deepen the comparative knowledge of specific legislative topics in the core reviewing bodies.

Access to Foreign Experience and Comparative Laws

Many legislative drafters have expressed interest in having access to foreign laws and experiences as they prepare economic laws. However, it is not always easy to provide this access in a timely and meaningful way. Also, different kinds of experiences are useful for different laws at different stages. Early in the drafting process, it is useful to consult other countries’ laws (in translation, if possible) and comparative law experts, in order to see different systems and decide which, if any, are most suited to China’s circumstances. Later, as drafters encounter difficulties in adapting or resolving issues in specific areas, more specialized expertise in the actual implementation of foreign laws may be of use.

While improving access is important, two caveats are needed. First, foreign laws and lawmaking processes can offer negative examples as well as positive ones—and both are helpful. Second, some officials may expect that access to foreign texts will speed up China’s drafting because appropriate provisions can be copied. Experience elsewhere shows that this is rarely the case, because provisions cannot usually be copied without making significant changes to account for the difference in legal and economic systems. The benefit of foreign experience lies more in seeing the types of problems that require legislative solutions in a market system and evaluating the potential of these solutions for China.

Naturally, the type of laws at issue will affect the relevance of other countries’ laws. In an area such as financial transactions, the rules for documentation and liabilities in the event of fraud would need less adaptation to reflect local conditions and traditions than would rules for property law where culture and ideology are key. It is also important in this process to remain aware of China’s civil law traditions and the areas in which common law examples must be adapted.

Implementation of the New Legal Framework

It was previously suggested that enactment of laws and regulations to provide the rights, obligations, and procedures appropriate for the operation of a market economy is necessary for the development of a full-fledged market economy in China. However, enactment of legislation alone is not sufficient to bring about economic changes. It is also essential that these laws be implemented, in order to give a concrete reality to the legal rights, obligations, and procedures that the laws prescribe. A number of concerns about implementation are receiving and should continue to receive increasing attention as part of the reform process.

Training a Cadre of Lawyers

Chinese officials, including the Minister of Justice, have been commenting of late on the need to develop a cadre of lawyers to implement the new laws. This drive will have to surmount a number of problems, including lawyers who have legal training that is impractical or out of date; lawyers who have not received formal legal training; and government legal personnel who do not have adequate training in the specialized areas that they administer. A multifaceted approach will be needed to address these problems. Formal and informal general legal training should be given to those already in the profession who lack it. Also, training packages should be designed for wide application to educate lawyers, government officials, and business people about the rights and obligations under the newly enacted laws.

Renovating Legal Education

The flood of new legislation and new topics legislated will have an obvious impact on the legal education curriculum in the formal educational structure, as well as on the less formal (nondegree) training referred to above. Moreover, China’s legal education sector will also have to adapt not only to changes in the laws that are taught, but also to changes in the legal profession. As more graduates become practitioners, for instance, they will need greater clinical training in lawyering. This general need for reform comes at a time when it is increasingly difficult to retain professors and to attract graduates into teaching, as the opportunities for careers practicing law are increasingly attractive, both professionally and financially. (This attraction of what is called elsewhere “the private practice of law” is an essential element of market behavior, but it has also affected the ability of government legal departments to retain experienced staff. Of course, neither phenomenon is limited to China.)

Strengthening the Court System

The need for judges and court personnel to have access to training in the new laws and the fields of economic activity that they seek to regulate was noted above. In addition to the need for training, at least two other aspects of the judicial system are essential to consider. Can it handle the increased load, or will additional personnel be needed (and where will these new judges come from if private practice is so attractive)? Is the system perceived as fair, both in adjudicating between parties to a particular dispute and in general?

Behavioral Changes

The legal skills needed to implement laws in a market economy are also somewhat different. Transactional lawyers need to be able to identify and resolve practical issues, mindful of their client’s business interest; advocacy skills are also important in the dispute resolution process. Focusing some training efforts in this area will be increasingly important. Moreover, there is a need to develop a code of ethics for the legal profession. Conflict-of-interest issues and the appearance of impropriety are but two types of constraints on lawyers’ behavior elsewhere that have relevance for China. To what extent can lawyers handle cases for competing clients? What are the sanctions for revealing confidential information? These are the kinds of issues that, in the U.S. system, for example, the lawyers’ association has addressed in a code of professional responsibility.12 Law students are required to study it, and lawyers are bound to uphold it. As China faces increasing concerns over corruption in the economy, the need for these kinds of ethical norms becomes apparent—both for lawyers and others.

Conclusion

These remarks highlight some of the problems that the passage and implementation of banking laws in China (noted in the preceding chapter) are likely to face in the coming years. Debates and differences may complicate the legislative process, although a more open process may lead to a result reflecting a wider variety of viewpoints. Lack of experience with corporate structures is likely to affect the “corporatization” of commercial banks, and the development of commercial laws is likely to affect these banks’ commercialization. Also, regional differences could easily affect the implementation of central supervisory responsibilities.

[Author’s Note: This comment was presented in 1994 and does not reflect fully the passage of numerous economic laws in China since that time, such as the banking law, central banking law, labor law, and guarantee law.]

    Other Resources Citing This Publication