A recent survey of Canadian businesses in China conducted by the Asia Pacific Foundation of Canada (APFC) reveals continuing concerns with the legal and regulatory environment – particularly inconsistency in interpretation and enforcement.
One underlying reason for this is that law in China operates primarily as an instrument by which the party/state pursues its policy goals. Yet these policy priorities are often subject to ongoing debate, particularly in different locales around the country, which leads, in turn, to apparent inconsistencies in interpretation and implementation.
For example, the State Council’s recent Opinion on using foreign investment contains a lengthy defence of China’s foreign investment policies, which reflects the extent of debate within policy and political circles as to the relative benefits for China of a continued open-door policy on foreign investment.
Policy debates over such issues as tax preferences, environmental and labour standards and securities investments bring to light political tensions over the relative treatment of foreign and domestic business and affect implementation of law and regulation at the local level.
These debates have an impact on perspectives and decisions by local regulatory officials.
Foreign businesses in China face significant challenges in identifying and responding to the content and consequences of policy and political debates. Nonetheless, the party and government often offer important clues as to policy priorities, which, in turn, can help foreign businesses shape business strategies.
For example, the 2010 Government Work Report approved by the National People’s Congress suggests policy priorities in the areas of employment and environmental protection. This provides guidance for legislative enactments by people’s congresses at the provincial level and people’s governments at the municipal level and will be reflected in the project approval decisions being made by local officials.
The State Council’s April 2010 Opinion on using foreign investment identifies a range of policy priorities that have particular relevance for foreign business. Use of the term “utilization” (liyong) expresses the instrumentalist context for China’s laws on foreign business – foreign investment is treated primarily as something to be used for the benefit of China’s development. In the words of the Opinion, “Utilizing foreign capital is the important content in China’s basic state policy of opening up to the outside world.”
Directing foreign investment toward China’s development priorities, the State Council Opinion encourages foreign investment projects in “high-end manufacturing, high- and new-tech industry, modern-service industry, new energy and energy-saving and environmental-protection industry.”
On the other hand, the Opinion provides that “[h]igh-polluting, high-energy-consuming and resource-dependent” projects will be restricted. The Opinion also encourages transnational companies to set “regional headquarters, R&D centers, purchase centers, finance management centers, settlement centers and cost and profit calculation centers within China.”
Policy decisions at national congresses of the Communist Party of China are vitally important for identifying policies that will affect foreign business. The recent Communiqué of the 5th Plenum of the 17th Party Congress (October 2010) stresses the importance of development as the “top priority” of the party and government, which in turn is reflected in “proper and forceful macroeconomic regulation.”
The Communiqué goes on to encourage “building a resource-saving and environment-friendly society,” and the need for “upgrading the manufacturing sector, developing strategic emerging industries and accelerating the growth of the service sector.”
Each of these statements reveals the policy priorities that will guide the content of law and regulation on foreign investment generally as well as affecting regulatory decisions concerning specific projects.
Official statements on foreign investment from the legislative, executive and party leadership systems in China reveal policy priorities that will affect treatment of foreign investment projects by local regulators.
While challenges of regulatory inconsistency remain, as indicated in the APFC survey, close scrutiny of official statements on China’s development can provide important indicators of the policy priorities. Identifying and responding to these indicators can bring greater certainty to foreign business planning.
Pitman Potter is Hong Kong Bank chair in Asian research at UBC’s Institute of Asian Research. He serves as a consultant to Borden Ladner Gervais LLP, with a focus on Chinese law – particularly trade, investment, intellectual property and dispute resolution.