Transparency of the Regulatory System
The World Bank assessed China’s regulatory governance by providing a composite score of 2 out 6 points. The World Bank attributes the relatively low score to the futility of foreign companies appealing administrative authorities’ decisions, given impartial courts, not having laws and regulations in one accessible place that is updated regularly, the lack of impact assessments conducted prior to issuing a new law, and other concerns about public comments and transparency.
World Bank Rule Making Information:
U.S. businesses consistently rank arbitrary legal enforcement and the lack of regulatory transparency among the top challenges of doing business in China. China’s legal and regulatory systems are complex and allow regulators and government authorities broad discretion to enforce regulations, rules, and other regulatory guidelines in an inconsistent and impartial manner. Government-controlled trade organizations, business associations, and regulatory bodies set industry standards that often are inconsistent with international norms and best practices and directly benefit Chinese competitors, while simultaneously allowing regulators to ignore Chinese transgressors but strictly enforce regulations targeting foreign companies. In addition to central and provincial-level rules and guidelines that impact foreign businesses and investors, there are also administrative rules and enforcement guidelines, which are not necessarily part of the legal code or even published. The complex regulatory system and unpublished enforcement guidelines overly burden foreign investors and foreign companies that must confront a regulatory system rife with contradictions and inconsistencies. A lack of confidence in the regulatory system and overall confusion is a common complaint of U.S. businesses operating in the local Chinese business environment.
To comply with China’s WTO accession commitments, the State Council’s Legislative Affairs Office (SCLAO) has issued instructions to Chinese agencies to publish all foreign trade and investment-related laws, regulations, rules, and policy measures in the MOFCOM Gazette. The State Council also issued Interim Measures on Public Comment Solicitation of Laws and Regulations and the Circular on Public Comment Solicitation of Department Rules, which require government agencies to post proposed trade and economic-related administrative regulations and departmental rules on the official SCLAO website for a 30-day public comment period. Despite these commitments, Chinese agencies often do not meet the WTO commitments. Chinese ministries under the State Council continue to post only some of the draft administrative regulations and departmental rules on the SCLAO website; even when drafts are published, they often are available for comment for less than the required 30 days.
The State Council and the ministries under the State Council also issue “normative documents” (opinions, circulars, notices, etc.), which are quasi-regulations used to implement applicable rules, laws, and regulations and to address legal specificity problems or situations where there is no governing law. These documents typically are not available for public comment and sometimes are not even published, yet the U.S. business community reports that Chinese ministries impose requirements on companies by referencing these normative documents.
Proposed draft regulations are often drafted without using scientific studies or quantitative analysis to assess the regulation’s impact. When Chinese officials claim an assessment was made, the methodology of the study and the results are not made available to the public. When draft regulations are available for public comment, it is unclear what impact third-party comments have on the final regulation. The lack of transparency in regulation drafting only adds to foreign investor perceptions that industrial policy goals and other anti-competitive factors are the driving forces behind China’s regulatory regime.
The inability to separate the relationships between the CCP, the Chinese government, Chinese businesses, and other stakeholders in the domestic economy makes it impossible to determine the motivating factors behind state actions. As a result, many foreign-invested companies perceive that Chinese government officials prioritize political goals, industrial policies, and a desire to protect social stability at the expense of foreign investors. An example of these blurred lines is evident with Chinese Self-Regulatory Organizations (SROs) that are responsible for licensing decisions. For instance, a Chinese financial institution may be a voting member, and can exert tremendous influence upon, the same SRO that adjudicates the license application of a foreign competitor. To protect one’s market share and competitive position, a Chinese company has incentive to disapprove the license application. The licensing procedures, because of the blurred lines, are non-transparent, discriminatory, and erode the rule of law.
Access to foreign online resources – including news, cloud-based business services, and virtual private networks (VPNs) – are increasingly restricted without official acknowledgement or explanation. Foreign-invested companies have also reported threats of retaliation by government regulators for actions taken by the United States and other foreign governments at the WTO or other legal forums.
For accounting standards, Chinese companies must use the Chinese Accounting Standards for Business Enterprises (ASBE) for all financial reporting within mainland China. Companies listed overseas (including in Hong Kong) may choose to use ASBE, the International Financial Reporting Standards, or Hong Kong Financial Reporting Standards.
International Regulatory Considerations
China has been a member of the WTO since 2001. As part of its accession agreement, China agreed to notify the WTO Committee on Technical Barriers to Trade of all draft technical regulations. Compliance with this WTO commitment is something Chinese officials have promised in previous dialogues with U.S. government officials.
Legal System and Judicial Independence
The Chinese legal system is based on a civil law model that borrowed heavily from the legal systems of Germany and France, but retains local Chinese legal characteristics. The rules governing commercial activities are present in various laws, regulations, and judicial interpretations, including China’s civil law, contract law, partnership enterprises law, security law, insurance law, enterprises bankruptcy law, labor law, and Supreme People’s Court (SPC) Interpretation on Several Issues Regarding the Application of the Contract Law. While China does not have specialized commercial courts, in 2014, three IP courts were established in Beijing, Guangzhou, and Shanghai.
While China’s Constitution and various laws provide a legal basis for court independence, or the exercise of adjudicative power free from interference by administrative organs, public organizations, and/or powerful individuals, in practice, courts are heavily influence by Chinese regulators and the CCP. The Chinese Constitution also emphasizes the “leadership of the Communist Party,” which has only been strengthened by consolidation of political power by China’s senior-most leaders at the end of 2017. The reasons for interference may include:
- Courts fall under the jurisdiction of local governments;
- Court budgets are appropriated by local administrative authorities;
- Judges in China have administrative ranks and are managed as administrative officials;
- The CCP is in charge of the appointment, dismissal, transfer, and promotion of administrative officials;
- China’s Constitution stipulates that local legislatures appoint and supervise the courts; and
- Corruption may also influence local court decisions.
The U.S. business community consistently reports that Chinese courts, particularly at lower levels, are susceptible to outside political influence (particularly from local governments), lack the sophistication to understand complex commercial disputes, and operate without transparency. U.S. companies often avoid challenging administrative decisions or bringing commercial disputes before a local court for fear of future retaliation.
Reports of business disputes involving violence, death threats, hostage-taking, and travel bans involving Americans continue to be prevalent, although American citizens and foreigners in general do not appear to be more likely than Chinese nationals to be subject to this treatment. Police are often reluctant to intervene in what they consider internal contract disputes.
Laws and Regulations on Foreign Direct Investment
China’s foreign direct investment legal and regulatory frameworks have more across-the-board foreign investment restrictions and less transparency than developed countries, including the United States. Broad investment restrictions at both the central and local level lead to inconsistent enforcement of foreign investment laws and add to the difficulty of gaining necessary approvals from different agencies and localities. In turn, all of this adds to a feeling among U.S. investors that the Chinese legal system discriminates against them.
China’s central-level foreign investment regime consists of three laws: the China-Foreign Equity Joint Venture Enterprise Law, the China-Foreign Cooperative Joint Venture Enterprise Law, and the Foreign-Invested Enterprise (FIE) Law. In addition, there are multiple administrative regulations and regulatory documents issued by the State Council that are directly derived from these three laws, including:
- Implementation Regulations of the China-Foreign Equity Joint Venture Enterprises Law;
- Implementation Regulations of the China-Foreign Cooperative Joint Venture Enterprise Law;
- Implementation Regulations of the FIE Law;
- State Council Provisions on Encouraging Foreign Investment;
- Provisions on Guiding the Direction of Foreign Investment; and
- Administrative Provisions on Foreign Investment to Telecom Enterprises.
There are also over 1,000 rules and regulatory documents related to foreign investment in China and issued by government ministries, including:
- the FIC;
- Provisions on Mergers & Acquisition of Domestic Enterprises by Foreign Investors;
- Administrative Provisions on Foreign Investment in Road Transportation Industry;
- Interim Provisions on Foreign Investment in Cinemas;
- Administrative Measures on Foreign Investment in Commercial Areas;
- Administrative Measures on Ratification of Foreign Invested Projects;
- Administrative Measures on Foreign Investment in Distribution Enterprises of Books, Newspapers, and Periodicals;
- Provision on the Establishment of Investment Companies by Foreign Investors; and
- Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors.
Local legislatures and governments also enact their own regulations, rules, and guidelines that directly impact foreign investment in their geographical area. Examples include the Wuhan Administration Regulation on Foreign-Invested Enterprises and Shanghai’s Municipal Administration Measures on Land Usage of Foreign-Invested Enterprises.
A Chinese language list of Chinese laws and regulations, at both the central and local levels: http://www.gov.cn/zhengce/ .
FDI Laws on Investment Approvals
Foreign investments in industries and economic sectors that are not listed in the “restricted” or “prohibited” sections of the FIC are not subject to MOFCOM pre-approval, but only require notification of the proposed investment. However, wanting to invest in a category that is not restricted or prohibited does not guarantee approval, as other steps and approvals are required in order to proceed, including, for example, receiving land rights, business licenses, and other necessary permits. In some industries, such as telecommunications, foreign investors will also need to receive approval from regulators like the Ministry of Industry and Information Technology (MIIT).
In July 2004, the State Council issued the Decision on Investment Regime Reform and the Catalogue of Investment Projects subject to Government Ratification (Ratification Catalogue). According to the Ratification Catalogue, all proposed foreign investment projects in China must be submitted for “review and ratification” by the NDRC, or provincial or local Development and Reform Commissions (DRCs), depending on the sector and value of the investment. In 2013, however, the government issued a new catalogue to narrow the scope of foreign investment projects subject to NDRC ratification. Per the updated guidance, an “encouraged” investment under the FIC that does not require a Chinese controlling interest, and is in a sector not listed on the Ratification Catalogue, only needs to be “filed for record” with the local DRC office. This policy shift marked a positive step toward easing bureaucratic barriers to foreign investment.
In November 2014, China released an updated edition of the Ratification Catalogue, which eliminated NDRC ratification requirements for 15 new sectors and delegated ratification authority to local governments in 23 additional sectors. In several new sectors, the new Ratification Catalogue also raised the threshold of foreign ownership that would trigger the requirement for NDRC approval. When announcing the reforms, NDRC stated the goal of the latest revision to the Ratification Catalogue was to limit ratification to projects relating to “national and ecological security, geographic and resource development,” and the “public interest.” NDRC estimates that revisions made to the Ratification Catalogue over the past several years will reduce the number of projects requiring ratification from central government authorities by 76 percent.
The NDRC approval process for foreign investment projects also includes assessing the project’s compliance with China’s laws and regulations; its compliance with the FIC and industrial policy; its national security, environmental safety, and public interest implications; its use of resources and energy; and its economic development ramifications. In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and “consulting agencies,” which may include industry associations that represent Chinese domestic firms. This presents potential conflicts of interest that can disadvantage foreign investors seeking to receive project approval. The State Council may also weigh in on high-value projects in “restricted” sectors.
After receiving NDRC approval for the investment project and either notifying or applying for approval for an investment from MOFCOM, investors next apply for a business license with the SAIC. Once a license is obtained, the investor registers with China’s tax and foreign exchange agencies. Greenfield investment projects must also seek approval from China’s Environmental Protection Ministry and its Ministry of Land Resources. The specific approvals process may vary from case to case, depending on the details of a particular investment proposal and local rules and practices.
For investments made via merger or acquisition with a Chinese domestic enterprise, an anti-monopoly review and national security review may be required by MOFCOM if there are concerns about the foreign transaction. The anti-monopoly review is detailed in a later section of this report, on competition policy.
Article 12 of MOFCOM’s Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investment stipulates that parties are required to report a transaction to MOFCOM if:
- Foreign investors obtain actual control, via merger or acquisition, of a domestic enterprise in a key industry;
- The merger or acquisition affects or may affect “national economic security”; or
- The merger or acquisition would cause the transfer of actual control of a domestic enterprise with a famous trademark or a Chinese time-honored brand.
If MOFCOM determines the parties did not report a merger or acquisition that affects or could affect national economic security, it may, together with other government agencies, require the parties to terminate the transaction or adopt other measures to eliminate the impact on national economic security. In February 2011, China released the State Council Notice Regarding the Establishment of a Security Review Mechanism for Foreign Investors Acquiring Domestic Enterprises. The notice established an interagency Joint Conference, led by NDRC and MOFCOM, with authority to block foreign M&As of domestic firms that it believes may impact national security. The Joint Conference is instructed to consider not just national security, but also “national economic security” and “social order” when reviewing transactions. China has not disclosed any instances in which it invoked this formal review mechanism.
Local commerce departments are responsible for flagging transactions that require a national security review when they review them in an early stage of China’s foreign investment approval process. Some provincial and municipal departments of commerce have published online a Security Review Industry Table listing non-defense industries where transactions may trigger a national security review, but MOFCOM has declined to confirm whether these lists reflect official policy. In addition, third parties such as other governmental agencies, industry associations, and companies in the same industry can seek MOFCOM’s review of transactions, which can pose conflicts of interest that disadvantage foreign investors. Investors may also voluntarily file for a national security review.
U.S. Chamber of Commerce report on Approval Process for Inbound Foreign Direct Investment:
Draft Foreign Investment Law
In January 2015, MOFCOM issued for public comment a new Foreign Investment Law. This law, if enacted, would unify and supersede the three governing foreign investment laws established by the State Council. It also would abolish the case-by-case approval system for foreign investment and replace it with a system that gives foreign investors “national treatment,” or treats foreign investors the same as domestic investors, except in the limited number of industries enumerated on the “negative list.” The draft law called for streamlining the approval process for foreign investment in some sectors, but contains a number of troubling provisions – e.g., broadening the definition of foreign investor, expanding the role of the national security review mechanism, increasing reporting requirements, and threatening the structure of variable interest entities (VIEs) – that could facilitate discriminatory treatment against foreign investment. In addition to transforming the current foreign investment regime, the aforementioned MOFCOM draft Foreign Investment Law would also establish a broad and potentially intrusive national security review mechanism. As it is currently envisaged, the national security review could be used to hinder market access and increase the financial burden of foreign investment in China. While Chinese officials have noted future plans for a unified foreign investment law, the timeline and the content of the new law is unclear.
China also issued in 2015 the Interim Measures on the National Security Review of Foreign Investment in Free Trade Zones. The definition of “national security” is broad, implicating investments in military, national defense, agriculture, energy, infrastructure, transportation, culture, information technology products and services, key technology, and manufacturing.
In addition, MOFCOM issued the Administrative Measures for the Record-Filing of Foreign Investment in Free Trade Zones, outlining the streamlined process that foreign investors need to follow to register investments in the FTZs.
Competition and Anti-Trust Laws
China uses a complex system of laws, regulations, and agency specific guidelines at both the central and provincial levels that impacts an economic sector’s makeup, sometimes as a monopoly, near-monopoly, or authorized oligopoly. These measures are particularly common in resource-intensive sectors such as electricity and transportation, as well as in industries seeking unified national coverage like fixed-line telephony and postal services. The measures also target sectors the government deems vital to national security and economic stability, including defense, energy, and banking. Examples of such laws and regulations include the Law on Electricity (1996), Civil Aviation Law (1995), Regulations on Telecommunication (2000), Postal Law (amended in 2009), Railroad Law (1991), and Commercial Bank Law (amended in 2003), among others.
China’s Anti-Monopoly Law (AML) went into effect on August 1, 2008. The AML delegates antitrust enforcement to three agencies: MOFCOM to review concentrations (M&As); the NDRC to review cartel agreements, abuse of dominant position, and abuse of administrative powers centered on product pricing; and the SAIC to review the same types of activities as NDRC when those activities are not directly price-related. In addition, the AML established the Anti-Monopoly Commission to provide oversight, expertise, and coordination among different stakeholders and enforcement agencies. After the AML was enacted, the need to clarify parts of the law became apparent, leading MOFCOM, NDRC, SAIC, and other Chinese government ministries and agencies to formulate implementing guidelines, departmental rules, and other measures. Generally, the AML enforcement agencies have sought public comment on proposed measures and guidelines, although comment periods can be less than 30 days.
During the National People’s Congress (NPC) in March 2018, the CCP announced that the three AML agencies would be consolidated under the newly-established State Administration for Market Regulation (SAMR). Details and timelines for this new announcement have not yet been provided.
In 2016, the three AML enforcement agencies drafted guidelines on six enforcement areas: anti-monopoly guidelines for the automobile industry, guidelines on determining illegal incomes and fines, guidelines on the “leniency” system in horizontal monopoly agreements, guidelines on AML settlement cases, guidelines for IP abuse, and guidelines on monopolistic agreement exemptions. While these guidelines may provide greater clarity and business predictability for foreign investment, they have yet to be finalized by the State Council.
In addition, the State Council in June 2016 issued guidelines for the Fair Competition Review Mechanism that targets administrative monopolies created by government agents, primarily at the local level. The mechanism not only requires government agencies to conduct a fair competition review prior to issuing new laws, regulations, and guidelines, to certify that proposed measures do not inhibit competition, but also requires government agencies to conduct a review of all existing rules, regulations, and guidelines, to eliminate existing laws and regulations that are competition inhibiting. In October 2017, the State Council, SCLAO, Ministry of Finance, and three AML agencies issued implementation rules for the fair competition review system to strengthen review procedures, provide review criteria, enhance coordination among government entities, and improve overall competition-based supervision in new laws and regulations. While it is too early to estimate the impact of the mechanism on competition and in breaking up administrative monopolies, Chinese academics in particular are optimistic that this development signals a more prominent role for competition in future economic decisions.
While procedural developments such as those outlined above are seen as generally positive, the actual enforcement of competition laws and regulations is uneven. Inconsistent central and provincial enforcement of antitrust law often exacerbates local protectionism by restricting inter-provincial trade, limiting market access for certain imported products, using measures that raise production costs, and limiting opportunities for foreign investment. Government authorities at all levels in China may also restrict competition to insulate favored firms from competition through various forms of regulations and industrial policies. The ultimate benefactor of such policies is often unclear; however, foreign companies have expressed concern that the central government’s use of AML enforcement is often selectively used to target foreign companies, becoming an extension of other industrial policies that favor SOEs and Chinese companies deemed potential “national champions.”
MOFCOM currently is responsible for M&A review. However, with the reorganization of AML enforcement now under SAMR, a new division within SAMR will take over M&A review in 2018. Since the AML went into effect, the number of M&A transactions MOFCOM has reviewed each year has continued to grow. U.S. companies and other observers have expressed concerns that MOFCOM needs to consult with other agencies when reviewing a potential transaction and that other agencies can raise concerns that are not related to competition to either block, delay, or force one or more of the parties to comply with a condition in order to receive MOFCOM approval. There is also suspicion that Chinese regulators rarely approve “on condition” transactions involving two Chinese companies, thus signaling an inherent AML bias against foreign enterprises.
The NDRC has made some procedural progress in AML enforcement on price-related cases by releasing aggregate data on investigations and publicizing case decisions. However, many U.S. companies complain that NDRC discourages companies from having legal representation during informal discussions or formal investigations and that the investigative process lacks transparency or specific guidance on evidence gathering or other practices. Observers also worry about future “dawn raids” and express concerns that NDRC regulators, along with the other AML regulators, can at any time use competition law to promote China’s industrial policy goals by targeting foreign firms to limit competition. Observers further worry that despite commitments by Chinese officials to protect commercial secrets obtained during an AML investigation, access to secret and proprietary information could nevertheless be given to a Chinese competitor.
In bilateral dialogues, China continues to express its commitment to protect and enforce IPR across a wide range of industry sectors. While U.S. companies see this as a positive development, there is growing concern on how China handles IPR protection that intersects with antitrust concerns. Enforcement practice, along with the draft guidelines that Chinese officials have issued for public comment on IP abuse, disproportionately impact foreign firms by requiring a company to license IP technology to local competitors, at a “fair price” that does not abuse the company’s “dominant market position.” Foreign companies have long complained that such a view of antitrust serves industrial policy goals to force technology transfer to local competitors under the guise of the AML.
Another consistent area of concern from foreign companies is how the AML applies to SOEs and other government monopolies permitted in some industries. All three AML enforcement agencies have provided assurance that AML enforcement applies to SOEs, and there have been some AML punitive actions taken by NDRC and SAIC against provincial-level SOEs in recent years. However, the AML explicitly protects the lawful operations of SOEs and government monopolies in industries deemed nationally important. While SOEs have not been entirely immune from AML investigations, when considering the number of SOE investigations compared to the role SOEs play in China’s economy, the numbers are not commensurate. The CCP’s proactive orchestration of mergers and consolidation of SOEs in industries like rail, marine shipping, metals, and other strategic sectors, which in most instances only further insulates SOEs from both private and foreign competition, signals that enforcement against SOEs will remain limited despite potential negative impacts on consumer welfare.
Expropriation and Compensation
Chinese law prohibits nationalization of foreign-invested enterprises, except under “special circumstances.” Chinese officials have said these circumstances may include when there is a national security component or when an investment presents an obstacle to achieving a large civil engineering project. However, Chinese law does not define what special circumstances would lead to nationalization of a foreign investment. Chinese law, while requiring compensation of expropriated foreign investments, does not say what method or formula to use to calculate the value of the foreign investment. The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.
ICSID Convention and New York Convention
China is a contracting State to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The domestic legislation that provides for enforcement of foreign arbitral awards related to these two Conventions includes the Arbitration Law adopted in 1994, the Civil Procedure Law adopted in 1991 (later amended in 2012), the Law on Chinese-Foreign Equity Joint Ventures adopted in 1979 (amended most recently in 2001), and a number of other laws with similar provisions. China’s Arbitration Law has embraced many of the fundamental principles of The United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration.
International Commercial Disputes and the Chinese Legal System
Chinese officials typically urge private parties to resolve commercial disputes through informal conciliation. If formal mediation is necessary, Chinese parties and the authorities typically promote arbitration over litigation. Many contract disputes require arbitration by the Beijing-based China International Economic and Trade Arbitration Commission (CIETAC). Established by the State Council in 1956 under the auspices of the China Council for the Promotion of International Trade (CCPIT), CIETAC is China’s most widely-utilized arbitral body for foreign-related disputes. Some foreign parties have obtained favorable rulings from CIETAC, while others question CIETAC’s fairness and effectiveness.
CIETAC also had four sub-commissions located in Shanghai, Shenzhen, Tianjin, and Chongqing. In 2012, CCPIT, under the authority of the State Council, issued new arbitration rules that granted CIETAC headquarters significantly more authority to hear cases than the sub-commissions; CIETAC Shanghai and CIETAC Shenzhen then declared their independence from the Beijing authority and issued their own rules and changed their name. As a result, CIETAC disqualified its former Shanghai and Shenzhen affiliates from administering arbitration disputes. This jurisdictional dispute between CIETAC in Beijing and the former sub-commissions raised serious concerns among the U.S. business and legal communities, particularly regarding the validity of arbitration agreements specifying particular arbitration procedures and the enforceability of arbitral awards issued by the sub-commissions. In 2013, the SPC issued a notice clarifying that any lower court that hears a case arising out of the CIETAC split must report the case to the SPC before making a decision. However, the SPC notice is brief and lacks detail on certain issues, including the timeframe for the lower court’s decision to reach the SPC and for the SPC to issue its opinion.
There are also many provincial and municipal arbitration commissions, like the Beijing Arbitration Commission and the Shanghai Arbitration Commission, that have emerged as serious domestic competitors to CIETAC. A foreign party may seek arbitration from an offshore commission. Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies. In these instances, foreign investors may appeal to higher courts in such cases.
The Chinese government and judicial bodies do not maintain a public record of investment disputes. The SPC maintains a count of the annual number of cases involving foreigners tried in China, but does not specify the types of cases, identify civil or commercial disputes, or note foreign investment disputes. Rulings in some cases are open to the public.
International Commercial Arbitration and Foreign Courts
The recognition and enforcement of judgments issued by foreign courts in the Chinese court system is governed by Articles 281 and 282 of the Civil Procedural Law. The law states that a Chinese court must review China’s treaty obligations, reciprocity principles, basic Chinese law, Chinese sovereignty, Chinese social and public interests, and national security before determining if the validity of a judgment from a foreign court should be recognized. As a result, there are few examples of a Chinese court recognizing and enforcing a foreign court judgment, and China’s recognition of U.S. court judgments has been inconsistent, according to anecdotal reports. China has concluded 27 bilateral agreements on the recognition and enforcement of foreign court judgments, but none with the United States.
Article 270 of China’s Civil Procedure Law states that time limits in civil cases do not apply to cases involving foreign investment. According to the 2012 CIETAC Arbitration Rules, in an ordinary procedure case, the arbitral tribunal shall render an arbitral award within six months (in foreign-related cases) from the date on which the arbitral tribunal is formed. In a summary procedure case, the arbitral tribunal shall make an award within three months from the date on which the arbitral tribunal is formed.
China’s primary bankruptcy legislation is the Enterprise Bankruptcy Law, which was promulgated on August 27, 2006, and took effect on June 1, 2007. The 2007 law applies to all companies incorporated under Chinese laws and regulations, including private companies, public companies, SOEs, foreign invested enterprises (FIEs), and financial institutions. It is commensurate with developed countries’ bankruptcy laws and provides for potential reorganization or restructuring, rather than liquidation. Due to uncertainty about authorities and procedures, lack of implementation guidelines, and the limited number of cases providing precedent, the law has never been fully enforced, and most corporate debt disputes are settled through negotiations led by local governments. Companies are disincentivized from pursing bankruptcy because of the potential of local government interference and fear of losing control. Chinese courts lack capacity to handle bankruptcy cases, and bankruptcy administrators, clerks, and judges all lack experience.
In the October 2016 State Council Guiding Opinion on Reducing Enterprises’ Leverage Ratio, bankruptcy was identified as a tool to manage China’s corporate debt problems. This was consistent with increased government rhetoric throughout the year in support of bankruptcy. For example, in June 2016, the SPC issued a notice to establish bankruptcy divisions at intermediate courts and to increase the number of judges and support staff to handle liquidation and bankruptcy issues. On August 1, the SPC also launched a new bankruptcy and reorganization electronic information platform: http://pccz.court.gov.cn/pcajxxw/index/xxwsy .
The number of bankruptcy cases has continued to grow since 2015. The SPC reported that in 2017, 9,542 bankruptcy cases were accepted by the Chinese courts, representing a 68.4 percent year-on-year increase from 2016, and 6,257 cases were closed, representing a 73.7 percent year-on-year increase from 2016. The SPC has continued to issue clarifications and new implementing measures to improve bankruptcy procedures.