By Eugene Matos and Audrey Beaulieu.
The Gee-Gee is the first horse out of the race gate; it’s an eyecatcher for gamblers. Usual to the racing scene, for those with little chance of success, the dark horse became a target of doping accusations. These allegations were disproportionately more common than the doping itself, especially when thousands were at stake.
As a first-of-its-type economic tank, China is the 21st century Gee-Gee. To illustrate, in terms of GDP, China is the largest economy, with a GDP (PPP) of $25.27 trillion. Furthermore, hosting 129 headquarters out of the 500 biggest companies, China has the world’s largest foreign-exchange reserves worth $3.1 trillion. Its success has been largely due to liberal economic, social, legal and political reforms instituted since 1980. Yet, naysayers believe that China’s success is based on a unique third-way political and economic paradigm that occupies a space somewhere in between capitalism and socialism.
Nonetheless, China’s economic prowess is not due to the state’s active interventionism in the Chinese economy. Difficult to understand the direction of Chinese economic policies due to the overshadowed politicized narratives by the current trade war with the US. Those who are interested in forecasting the reception of the China model in the global market, should distance themselves from the volatile political rhetoric. A rational legal approach abstained from political bias could dismantle the sino skepticism, confirm that China’s economic success is linked directly to the Chinese style neoliberal reforms put in place by CPC and simply unveil the arrival of a new player in a competitive liberal economy.
It is the type of policies we choose to apply that defines our market and its compatibility with others. We cannot contest that the international market follows neoliberalist economic principles, and alternative markets are pressured to reconsider their approach and reform. What concerns normative western economies are the principles that applaud free markets efficiency, growth and innovation, and discourage interventionism.
Neoliberalists seek to transfer the control of the market from the public to the private sector, steering away from government spending, regulations and public enterprises. Based on the proposition above, we can find policies such as; the deregulation of industry and the elimination of government oversight on competition control and regulation; the privatization of state-owned organizations and enterprises to provide goods and services; the reduction of trade barriers to gain productivity and benefit from market accessibility; the reduction of government spending, as a mechanism to influence a market economy, and finally; monetarism, emphasizing on the government control of money supply in circulation which influences the price levels in the market.
Before 1978, China’s private sector was virtually non-existent. China’s desire to expand its economy was expressed with gradual contained experiments mirroring liberal economies, and gradual policy efforts to give greater protection and freedom to private enterprises. Contrary to popular thought, the first changes were not exclusively party-led but also spearheaded by peasant-led initiatives which resulted in the abolishment of the private farming ban in 1982. Subsequently, the ripple effect of the success of grassroot initiatives drove a spiked increase of small-scale businesses in different sectors. This wave of entrepreneurship influenced a system where business only thrived under the patronage of the state.
In reality, the first formalized liberal experiments were the entry of the Special Economic Zones (SEZs) created in 1980 in the southeastern Chinese cities of Shenzhen, Zhuhai, Shantou and Xiamen. In these cities, opening-up and reform were carried out. The relaxation and deregulation have attracted millions, subsequently boosting the SEZs. Case in point, Shenzhen’s population went from 30,000 in 1980 to over 12.5 million by 2018.
By 1992, the Communist Party of China claimed, in their 14th congress, the acceptance of the market economy and the relaxation of several foreign direct investment (FDI) restrictions. Notably, the switching from an approval business list based to a strictly denied based system allowing for most investments to proceed without the government’s mandatory approval. FDI deregulation coincided with the early 2000s thriving global economy with investment opportunities enjoying the global surplus in investment capital, increased competitiveness, lowered transaction costs, reduced red tape, and letting investors earn increased returns.
More recently, encouraged by their market results, China’s ambitions for better market access, and interest in trading partners with the WTO repositioned the country higher in the globalized world. By ratifying the WTO agreement in 2001, trade facilitation increased with blanket reforms and standardized the Pan-China liberal future. The entry to the WTO was a check and balance for China. Case in point, the Foreign Investment Law adopted by the National People’s Congress in 2019 assigned the Ministry of Commerce, National Development and Reform Commission to protect and promote foreign investments, and the abolishment of FDI expropriation, except under special circumstances and with reasonable compensation.
To summarize, China has encouraged voluntary exchanges with less intervention, allowing the law of supply and demand to take a greater role in their market economy. They ensured that FDI policies promote the investment of entrepreneurial activities by giving subsidies, grants, tax breaks, and loans, to increase greater profitability. Without a doubt, China’s openness through export-friendly policies, such as regional and international trade agreements encourage the feasibility of the market for both internal and foreign consumers.
A law expert from Chinese Embassy in the Hague points out that the 19th CPC National Congress has been an occasion to insist on the importance of giving “full play to the decisive role of the market in resource allocation, [optimizing] the role of the government, fully implement the new development concept, focus on the supply-side structural reform, and accelerate the construction of a modern economic system”. He also specifies that the institutional obstacles obstructing the way to a high-quality development “require further liberated thinking, deepening market-oriented reforms [and] high-level opening up”. From 1980 when China owned less than 1% of the global share to 12% or $4.6 trillion by 2018 in global trade. The Chinese economy grew eighth fold, and over 400 million people in China were relieved out of absolute poverty of less than $1.90 per day. Trade with the US increases from $8 billion to $578 billion in 2016 alone. Needless to say, FDI policies have an upscale battle to dismantle years of failed manufacturing investors who have hit walls of high startup costs, heavy legal exposure, and compliance issues.
The recent adoption of the first Chinese civil code, was a long-awaited deal China had with its investors. In March 2017 the General Provisions were adopted, in August 2018, six drafts went under review, in December 2019, following public solicitations, and appraisal activities, a complete 84-chapter draft civil code was unveiled, and it will come into force on January 1, 2021. The code is a significant legal reform delivered in China. Composed of 1260 articles and divided into seven chapters, the latter will cover several legal aspects, some of which are largely related to the management of private companies, such as contracts and property rights.
China gathered public wisdom in the course of compiling the draft civil code, 1.02 million pieces of advice had been solicited from around 425,000 people, it reflected the needs of a contemporary economy. According to Chinese Embassy, “the [new] Civil Code [will show] more respect to the basic principles of private law autonomy, restrict public sector’s improper interference in the field of private rights of natural and legal persons [and] strengthen the protection of private rights of natural and legal persons by public authority”. For example, the new Code will establish a “ special legal person” which reflects the freedom of transaction, emphasizes the spirit of contract, and creates a legalized environment favorable to business”.
The first codification of the law in a country is synonymous to several changes. Initially, this will allow easier access to the law for the population, resulting in greater respect and trust in the legal system, but also in political decisions and organization. Moreover, due to its concise and intelligible form and its ease of access, the Civil Code will allow greater efficiency and better coherence within the judicial branch. Indeed, especially in the case of China, bringing together various legislations under a single law will help avoiding contradictions, from stand-alone regulations and increasing the speed of judicial processes since all professionals can rely on the same steady legal basis. Finally, the adoption of a civil code offers the needed stability for private investment reflects a modern China and the will of Chinese public institutions to comply with the rule of law, a well-acknowledged principle on the international scene.
The demand for greater democracy, justice and protection of private property has to coincide with an era of diversified incomes, fast technological changes, and innovation. In doing so, the code applies groundbreaking modern ICT legal approach protects online information, email addresses, and virtual assets. It handles cyberspace tort in response to the demand of big data researchers and other AI ICT advancements, with new rules on protection of personal information. This also includes regulations on property protection, business secrets on scientific studies, and rules on handling patenting.
Private investments in China have dramatically slowed during the 2019-2020. To the worry of Chinese officials went from more than 20% growth to single digits in 2020. Private investments fell another 13% during the coronavirus-battered first four month of this year, compared with a 7% decline for SOE. This April in a meeting chaired by Xi, declared that the Civil Code ahead would increase the support to the private economy and development of small and medium-sized firms and restore confidence of private business owners and to help prop up economic growth. That said, the intensification of the protection of entrepreneurs and local and foreign investors’ rights is undoubtedly an incentive to further develop the private sector.
On that matter, Chinese Embassy mentions that the new code will “further [improve] the basic legal system and rules of conduct in domestic civil and commercial fields, [provide] basic guidance for various civil and commercial activities [and give] a more specific legal basis for foreign investors to invest and establish enterprises in China, which [will encourage] their enthusiasm and creativity, [safeguard] transaction security, and [maintain] market order”. In the same vein, the new code will also clarify the boundary between public and private institutions. For example, the new code plans to tighten property rights by restricting the concept of public interest so that it will now be more difficult to expropriate usufructuaries without justification. Consequently, the application of the new code will result in the submission of the state to a system of law, thereby reducing its place in the economic sphere as liberalists would suggest.
The civil code is, without a doubt, the “third-way theory’s” last straw. In fact, as we have demonstrated, the reforms taken show that the gradual liberalization provides evidence of a liberalized market and reduced Chinese state intervention. Indeed, the state is still present, yet it is clear that the trend of controlled, gradual and experimental decline in the state’s role in the market has been a continuance of a transformation which began in the 1980s. China underwent unique great social changes and moved away from the hammer and sickle limitation of their agricultural, and production of staples towards a more dynamic manufacturing activities.
With the implementation of SEZ, FDI regulations and the new Civil Code, foreign investments became a stakeholder to Chinese infrastructure needs. Moreover, the rising curve of the accumulation of capital and entrepreneurial spirit, uncontestably correlates with the advancement of human wellbeing, search for happiness, prosperity. The maximization of capacity in China will soon be completed with the ascension of greater property and individual rights. As suggested the Civil Code and laws on FDI have led to a more law-based and effective and market-friendly governance atmosphere in China. Therefore, we should not believe that China has discovered a third paradigm by simply mixing capitalism with substantial influence of the state, China’s success was due to a discovery of development route that best suited to its national conditions through prtactice and reform, with the state and market both playing a more coordinated, efficient and balanced role,
About the authors:
Besides their current studies at the University of Ottawa Law faculty, as well as the Global Studies and International Development faculty, both authors do research with the Geneva Desk for Cooperation and work as legal and geo political analysts with the International Institute for Middle East and Balkan Studies in Vienna.
Beaulieu, is well versed and continuously collaborating in several projects relevant to public and private International law, international development and global politics with IFIMES and GDCOO.
Matos De Lara, is a former litigation manager and legal researcher at United Tech Corporation, and the International Water Association. Currently senior member of the International Public Diplomacy Council and serves as a Canadian Armour Officer. He holds a degree in Political Science, Public Administration, law, Public Policy and Diplomacy.