Significant new laws and regulations are changing China's corporate culture. Our Beijing correspondent explores a new business landscape
By Clifford Coonan in Beijing
When discussing China as an investment destination, the business players usually lead off by canvassing the seemingly vast array of opportunities available in such a huge market.
There are the 1.3 billion potential buyers, cheap labour, a strong pro-business government and the kind of stability that may not yet be on offer elsewhere in the region.
However, the gloss can slide off the initial stellar business promises when the conversation turns to the regulatory environment.
It is not unusual to hear investors use words such as opaque, non-transparent, unclear, murky or non-existent when they express a sense of irritation with China's rules and regulations.
The Chinese powers-that-be, particularly in the reform-minded, pro-business lobby, are keenly aware of this shortfall and one of the stated aims in recent years has been to introduce the rule of law in all spheres of activity and not just in the business arena.
They see such reforms as being central to making China more attractive to not only foreign investors, but also to the domestic investors who are seeking clarity on how they can operate and who are looking for good reasons to stay in the country with their investment ideas. A solid legal foundation is essential.
China has long made impressive noises when it comes to the rule of law, but in the past couple of months, the outside world has seen an acceleration in the pace of change. The most significant milestones over the past two years include anti-trust legislation, which has major implications for mergers and acquisitions, laws guaranteeing labour rights and bankruptcy laws.
Even so, leading academics and commentators point out that many of China's new laws are experimental and will need to undergo a process of amendment before they can be considered suitable for the country's business climate.
Zhou Chunsheng, professor of finance at the Cheung Kong Graduate School of Business, who earned his PhD in economics from Princeton and has held professorships at many of China's top institutions, urges patience because of the 'quite experimental' nature of these laws.
'As a new emerging market, it is China's first time to introduce and implement many laws, such as the labour law, anti-monopoly law and bankruptcy law. I am sure that as time passes, facts will tell whether our laws are suitable for China. And it is certainly necessary for China to introduce or improve or amend some laws in future and make them practical for China's development,' Zhou says.
The anti-trust rules have been described as the 'constitution for China's market economy' for the way they seek to fight protectionism and to move against those that build up monopolies. It's been a long hard slog getting this rule introduced.
Not everyone is happy, as is to be expected with such a fundamental change.
'It has taken 14 years to get this 'anti-monopoly' law introduced, but it is geared towards bigger interests. If you look carefully enough, you will find that the 'anti-monopoly law' has immunity provisions for certain industries. Those industries have state protection,' writes one anonymous commentator on the internet.
It means that from the beginning of August 2008, companies were required to notify Chinese agencies of any planned mergers and acquisitions that meet designated thresholds for filings. Until they receive clearance to proceed, the deal cannot be completed.
The new law has been based on the European Union model. Any deals involving companies with a combined global turnover of US$1.5 billion and where at least two of the parties have a turnover in China of US$60 million, are expected to be caught up in the requirement to file for approval. The thresholds are complicated and it is unclear as to whether currently announced deals involving companies such as BHP Billiton, Microsoft and Yahoo, will fall within their ambit.
There is also concern that where a merger proposal sparks closer scrutiny, the process could be delayed for some time while the investigation is carried out.
Probably the most shocking change of all, when you consider that this is a Marxist-Leninist country where the mandate comes from a dictatorship of the proletarian, is the bankruptcy law. Combined with legislation guaranteeing the rights of private property, this marks a sea change.
'There has been a lot of change. Last year we had the change in the labour law and we also had the introduction of the bankruptcy law. These significant changes have an impact on the corporate culture in China,' says Derek KY Lai, national leader of reorganisation services at Deloitte.
'China is a communist country. How can they have a bankruptcy law? Everything belongs to the people, the government. So if a bank goes bankrupt, the people go bankrupt, right? It took over 10 years to draft the bankruptcy law, which is essentially market driven. China is a planned economy so it's very different,' says Lai.
The bankruptcy law took effect last year after 14 years of haggling and horse-trading. One major difference in this law from the previous system is that it covers all types of enterprises, including privately owned firms, listed and non-listed companies and financial institutions.
Previously, only state-owned firms could declare bankruptcy. The fact that Chinese companies can now go under if they are bad is a positive message. It allows talented people to excel, and is an efficient use of resources.
'The law will help attract foreign investors, it's very positive,' Lai says. China's bankruptcy law is generally considered a modest success since it came into force in June 2007, encompassing various pieces of legislation already in place and taking its lead from European Union legislation.
However, headaches remain. It is feared that the law is difficult to enforce, because the judiciary is not experienced in this area. The official bankruptcy statistics, which may be understated, show that more than 67,000 small and mid-sized businesses shut their doors in the first half of this year, putting millions of people out of work. This makes the new legislation politically difficult. It could also put the bankruptcy law into conflict with another new area of legislation that is still bedding down, the labour law.
These new rules guarantee employees their unpaid wages before the claims of suppliers. The law also entitles employees of at least 10 years' standing to sign labour contracts with no fixed termination dates, effectively guaranteeing the 'iron rice bowl' principle, or guaranteed job security such as in the civil service,which companies coming to China thought died out with the pre-reform era communists, but which seems to be back in strength.
Jiang Peng, assistant professor of Business Law at Tsinghua University says there has been a lot of discussion since the introduction of the labour law. 'I think it's still too early to judge, we need to be patient and wait to see the law's effects and see whether it can effectively solve the problems in a wide range of real cases.'
The legislation was needed in the face of some routine bad practices, employers often extending working hours beyond statutory limits and without paying overtime. Payment of wages can be delayed, or working conditions may be unsafe. In some cases, an employer would retain a worker's ID card to stop them leaving. Combined with mass layoffs from state-owned firms, the ruling Communist Party needed to do something to ensure workers did not become restive.
The new law includes provision for training, confidentiality, and terms of contract termination and gives a good basis for reform in China, say the pundits. The rules have made labour more expensive but may ultimately prove helpful to Western manufacturers keen to show their corporate social responsibility credentials, which is a major factor for internationally listed companies.
For instance, look at what happened to shares in companies like Apple when there were reports that one of its suppliers was making iPod components in 'sweatshop' conditions. But, implementation will not be easy. Around 200 million farmers in China have gone to work in building and manufacturing in the cities, many of them in unregulated areas.
'The new labour law is good. You can see the government wants to protect employees and create better working conditions for them. But I think before the implementation of new labour law, China should do some experiments somewhere to make sure as to whether this law is suitable and practical for all Chinese enterprises,' says Lang Xianping, a professor of economics at The Chinese University of Hong Kong.
Deloitte's Lai says a more sophisticated labour force and good implementation of the rules can help to offset the costs of the labour law.
At the same time, foreign corporates will be able to reap the benefits of China's solid infrastructure, something that regional rivals such as Vietnam still lack.
'The legislative technique needs improvement. The law needs to be more serviceable. In the last 30 years a lot of progress has been made, but there are still parts of the labour law that are not clear enough. Every year there are new laws but China's legislation has a long way to go,' Peng says.
Zhou sees the labour law as essential for stability.
'The new labour law, which was controversial on its introduction, has increased the burden on medium and small-sized, privately-run enterprises.
'But the Chinese government tries to explain the law to show that its aim is to stabilise our economy and meet the requirements of economic development,' says Zhou.
However, Lai points to how such legislation will change Western impressions of China.
'China is always perceived as a low-cost labour country. This new law means labour costs will increase and that will change impressions of China.
'It will have the opposite effect to the bankruptcy law. It means a lot of foreign companies say they won't locate in China because it could mean a 30 or 40 per cent increase in labour costs.'
Jiang sees the new legislation as part of an enormous reform project, and says that some teething troubles can be expected.
'The re-establishment of China's legal system has taken only 30 years, during which period China's society and economy have experienced many significant changes,' Jiang says. 'The value of laws is that they solve problems that exist in reality, so to judge whether a law is good or bad depends on its ability to solve real world problems. Commercial laws are no exception.'
What will decide the success or failure of the reforms will be how they are implemented, and how existing legislation is improved, and also what comes next in areas where China is seriously lagging internationally, such as in the development of a social welfare system.
Deloitte's Lai sees both positives and negatives, but says the broader drive of reform has transformed China.
'These are all intangibles. The bankruptcy law is positive for business in China. The labour law is good for labour, but negative for companies.
'But it does give protection for labour in China. A lot of people in mainland China are very poor and this will help improve living standards,' says Lai.
'The culture is very important, China needs to improve the status of accountants and improve the corporate governance culture and that can help to attract foreign investors,' says Lai.
'China will be a big country, and not just in terms of the number of people.'
