Legal Implementation in the People’s Republic of China:

The Case of the Company Law

By John Balzano[i]

Submitted for the Virtual Academy of the Congressional-Executive Commission on China

In the People’s Republic of China (PRC), lawmaking and implementing power is allocated by the Constitution, the Legislation Law, local legislation provisions,[ii] and the Organic Law on Local People’s Congresses and Governments.  These laws employ a decentralization strategy that accounts for traditional levels of local autonomy (the provinces), practical needs for local autonomy based on population density (major cities and nationally administered municipalities), economic development (special economic zones), and ethnic differences (semi-autonomous regions, counties, and districts).  The practical necessity for heavier decentralization that would fuel economic development in the post-Mao era[iii] has led to the creation of more extensive discretionary powers over legal implementation at the lower levels of the system mentioned above.  More specifically, the localities, including local people’s governments and local people’s congresses, have some flexibility in drafting local administrative legislation to adapt central laws and administrative legislation to the circumstances in any particular locality.

Using the PRC Company Law as an example, this paper illustrates how laws are implemented in the PRC.  The discussion examines how the local administrative and legislative machinery works to adapt national laws such as the Company Law to local circumstances by enacting administrative law and implementation provisions that tell PRC agencies what to do, when, and how.  This analysis proceeds from the top levels of the legislative apparatus in the national government to the lowest levels of the system, which are charged with promulgating regulations and administrative rules.

The Standing Committee of the 8^th National People’s Congress enacted the PRC Company Law in July 1994.[iv]   The Law regulates incorporation and various corporate governance matters.  More simply, the Company Law regulates who can establish what kind of company in the PRC and under what circumstances.  The Company Law sets forth three types of corporate models: the limited liability company, the limited stock company, and the state-owned enterprise.[v]  But Chinese corporate law is much more refined than just the basic standards that are set forth in the Company Law itself.[vi]  In fact, describing the Company Law as a “law” may be misleading; it might be better described as a “corporate code,” to which other laws and regulations can add and refine.  In essence, the Company Law sets corporate standards and unifies all the corporate legislation that has multiplied in the PRC since the beginning of the reform era.[vii] 

The Company Law is a kind of general legislation (dafa) that the National People’s Congress (NPC) enacts (or the State Council enacts if the NPC has not yet spoken on the subject).   In addition to this type of generalized legislation, more specific laws and regulations exist at every level of the system.  Chinese lawyers refer to these laws and regulations as “specialized law” (tiebie fa).   In the context of the Company Law, several specialized laws deal with foreign investment, providing more specific requirements for foreign and Chinese companies seeking to engage in joint, cooperative, and wholly foreign-owned ventures.[viii]  When a conflict between the laws arises, the specialized legislation will trump the generalized legislation if, for example, both are laws or at the same level of legal authority. [ix]  When two specialized laws conflict, the new law trumps the older law.[x]  If the provisions of a newer general law conflict with the provisions of an older specialized law, however, then the Standing Committee of the National People’s Congress acts to resolve the issue.[xi]  Thus, the provisions of the Sino-Foreign Joint Venture Law could trump the provisions of the Company Law if directly in  conflict.  In addition, because the Company Law is a newer general law, the specific law would not automatically trump the general law.  Presumably, the Standing Committee would have to decide the case.[xii]

Beneath the laws that the national legislature enacts are the administrative regulations that the State Council (the executive) adopts, either to implement a law or to regulate a matter on which the NPC has not spoken.  Implementation regulations (shishi xize) are regulations that the State Council enacts to distribute responsibility for implementation to various parts of the national and local bureaucracies. In some cases, the State Council adopts these regulations to create more detailed rules for practitioners and local officials.  PRC lawyers often refer to these implementation regulations as “the bread and butter of Chinese law.”  The Chinese public often does not give much credence or attention to new laws until the State Council or local governments adopt such implementing provisions to make the law workable at the lower levels of the system.  But not every law will have separate sets of implementation provisions.  For example, unlike in the Sino-Foreign Joint Venture Law, no single comprehensive set of implementation provisions for the Company Law exist.[xiii]  Instead, with respect to the Company Law, various bureaucratic actors have adopted regulations that implement specific parts of the Company Law without articulating a comprehensive set of regulations that unify all aspects of the Law.[xiv] 

As a side note, although the State Council has final approval over these types of implementation regulations,[xv] the drafting often will take place within specific ministries or commissions responsible for that specific area of administration.  For example, the State-owned Asset Supervisory and Administrative Commission is in charge of drafting laws, regulations, and administrative rules for state-owned enterprises.[xvi]  If a regulation or law requires the expertise of more than one entity within the State Council, as such legislation often does, then multiple ministries will work together to draft the required legislation.[xvii]  Thus, even though the State Council as a whole promulgates the regulations, the ministry or commission with the most expertise has input and perhaps even control over the content.

While much legislating in China takes place in the central government bureaucracy and NPC, these top-level organs of government often defer to some degree to local governments for further implementation of laws and regulations.  The PRC Legislation Law defines the scope and procedures of local legislation.  After the NPC enacted this law, provinces, semiautonomous regions, and municipalities under the central government drafted their own implementation regulations for it, further defining their responsibilities as legislative bodies.[xviii]  The Guangdong People’s Congress lays out the following legislative responsibilities for itself:

"The local provincial congress has the power to enact local regulations over the following matters:

i.)especially significant provincial matters;
ii.)the procedures of the provincial people’s congress and its standing committee;
iii.)substantive regulations for the province’s statutory responsibilities and legislative matters; and
iv.)other matters for which it is necessary to enact local regulations."[xix]

For the most part, these responsibilities seem relatively simple and easy to coordinate with central law and policy.  Other smaller local entities, such as the people’s governments of smaller cities, have also enacted similar legislative provisions, which organize the legislative work that the Constitution and national law permit major cities and special economic zones (both of which are found in Guangdong) to engage in.[xx] 

The law entrusts similar legislative responsibilities (i.e., administrative rulemaking) to the people’s governments of provinces, major cities, and sometimes other entities that the central government determines should exercise a greater degree of local autonomy (such as semi-autonomous regions, counties, and districts).[xxi]  The authority of the administrative rules (guizhang)that the people’s governments produce is about the same as that of the administrative rules drafted and enacted by the ministries or commissions of the State Council.  Some departments of local people’s governments are branches of State Council ministries, but these local departments have ties of varying strength to the ministries of the State Council, depending on financial and personnel allocations.   

The purpose of local legislation is to adapt central policy to the individual economic circumstances of each province, major city, or other locality, expanding local authority to spur the economic reforms that began in the late 1970s.  This dynamic is particularly evident in the case of the Company Law.  For example, in August 2003, the Guangzhou city government promulgated “Several Regulations on Further Relaxing Restrictions for Market Entry in order to Accelerate Economic Development,”[xxii] which lightened and streamlined the requirements for different companies operating in Guangzhou.  These Regulations allow for enterprises to establish themselves with only a percentage of the capital that the Company Law requires, paying the rest in later.  In this way, the Guangzhou city government seeks to advertise and market itself to small and medium-sized businesses.  But the Guangzhou city government is not relaxing the restrictions of the Company Law itself, but rather lowering the amount of liquid capital that a company must have on hand when it registers.  The remaining capital can be paid in later.  As a result, the amount of registered capital that the central law and regulations require is kept intact, while the local government maximizes the benefits to itself under such laws by encouraging companies to establish themselves in Guangzhou.[xxiii]

The Guangzhou City Government’s regulations on delegating the examination and approval procedures for foreign-funded enterprises are another example of local implementation of the Company Law.[xxiv]  These regulations show how local regulations can control local procedures and administration.  The Guangzhou regulations dictate the procedures and requirements for delegating the examination and approval of foreign-funded enterprises to lower administrative levels in the various districts of Guangzhou city.[xxv]  The government delegates this type of authority throughout the administrative chain of command.  For example, the State Council, which enacted the implementation regulations for the Sino-foreign joint and cooperative venture laws, delegated tasks to local governments.[xxvi]  The central implementation regulations specified which local departments should be responsible for examination and approval of foreign applications to incorporate in the PRC.  Within their authority to determine procedures governing such matters on a local level,[xxvii] the local units may further delegate this authority to a yet lower level.  In this case, the Guangzhou local regulations implement the “Sino-Foreign Joint Venture Law Implementation Regulations” promulgated by the State Council.   The State Council implementation regulations are also themselves implementing the “Sino-Foreign Joint Venture Law,” a specialized law relating to the Company Law.  The example above demonstrates vividly how government institutions delegate authority from the highest ranks (the central government) to the lowest ranks (regions of a major city) through administrative and local regulations.[xxviii]   

As the examples above illustrate, legal implementation in the PRC is a highly complex process in which, in some cases such as the Company Law, a number of different central government organs (e.g., the State Council and its ministries) and various levels of local government determine how specific localities administer very general legal provisions.  The de jure authority of each organ to act on the law gradually diminishes as implementation of a law filters down through the different levels of the system.  The study of how legal implementation works, however, involves more than just the analysis presented above.  It involves themes such as local protectionism, local politics, bureaucratic politics, elite politics, government-party relations, intra-governmental relations and politics, and other issues.  To understand how the PRC’s legal system truly works, each of these themes deserves a more profound analysis, to show how its dynamics affect legal implementation.