INTRODUCTION

The goal of this chapter is to present to readers the most important structural and systematic information concerning internal political and economic arrangements in China. This combination is thought to introduce the subject in a way that would be useful for professionals, students and researchers. China will be analyzed as one of the most interesting examples of the development and implementation of political and economic thought in modern history.

The purpose of the chapter is not to judge or value those solutions, only to present and help to understand mechanisms and phenomena governing them. The positivist approach has no right to become more normative in this meaning. It will present the economic and political spheres separately, providing general principles and important details. Then, the effects of their mutual functioning in the People's Republic of China (PRC) will be summarized.

Readers must be aware that we are dealing with the second biggest economy in the world and the highest population in the world, a permanent member of the UN Security Council, nuclear superpower, the biggest industrial producer in the world and the longest lasting civilization in history. The chapter aims not only to describe a static state but tries to capture the dynamic nature of matters in the historical, cultural and social context. Aft er this Introduction it consists of two further sections. Section 2 introduces the Chinese political system, while section 3 presents Chinese economic issues. This dichotomous approach should provide readers with the basic terms and knowledge concerning China. The economic and political system of China is a result of Chinese history, culture, tradition, the perception of reality and, most of all, logic (by way of understanding the reality and the perception thereof). Without a proper understanding of Chinese perception and motives, communication with the “central state” 2 would be hard to establish. The framework for proper, mutual understanding and cooperation is a correct perception of reality which is reached only as a result of a correct research process.

HISTORY AND DEVELOPMENT OF CHINESE INTELLECTUAL PROPERTY LAW

HISTORY OF CHINESE INTELLECTUAL PROPERTY LAW

In China, the accepted definition of intellectual property law is the sum of regulations of social relations connected with intellectual achievements. It is a specific legal system for ensuring, protecting and utilizing copyright, industrial property and other exclusive rights related to intelligence.

The origins of intellectual property law in China may be derived from the Reform Movement of 1898 and attributable to the unequal treaties of the late Qing dynasty. In 1898, Emperor Guangxu formally issued the Regulation for Revitalizing and Rewarding Industrial Techniques, which is the first law for patents in Chinese history. Unfortunately, this law did not come into force. Some unequal treaties with foreign counties were forced followed: there were special articles for protecting foreign intellectual property written into the Sino-British Commercial Treaty of Renewal of Subscription of 1902, the Sino-America Matters Arising Treaty of Commerce and Navigation of 1903 and the Sino-Japan Matters Arising Treaty of Commerce and Navigation of 1903. Thereafter, under trade pressure from foreign powers and the eagerness for prosperity through reform, the Qing feudal government initiated the establishment of a modern regulation system. In 1910, the government issued the Qing Copyright Law, which is the first copyright law in Chinese history, yet the law did not enter into force since the Qing dynasty perished the following year. Even so, the early laws of the Qing dynasty had a big impact on the later legislation of the Provisional Government of The Republic of China, the Beiyang Government and Nationalist Party Government.

After the People's Republic of China was established in 1949, intellectual property legislation was laid aside owing to some complicated reasons. China did not emphasize protecting innovation and wisdom achievements with property law until the Reform and Opening-up Policy carried out in 1979. China issued a succession of intellectual property regulations as follows: the Standing Committee of the National People's Congress (NPC) discussed and adopted the Trademark Law on August 23, 1982 (amended in 1993, 2001 and 2013), the Patent Law on March 12, 1984 (amended in 1992, 2000 and 2008) and the Anti-unfair Competition Law on September 2, 1993.

INTRODUCTION

When investing and running a foreign business in China, the Chinese law needs to be followed. This chapter explains the Chinese domestic law relating to the Foreign Direct Investment (FDI) when China is the host country. To comprehensively understand the FDI law in China, section 2 guides the reader to understand the concept of Chinese FDI, journal relation relevant to FDI, and legal framework covering the Chinese FDI. Section 3 introduces the FDI law's historical development in China as well as international treaties relevant to FDI issues. Subsequently, section 4 introduces the legal forms to set up a FDI enterprise in China, and section 5 introduces the detailed rules on the market access stage and the business operation stage of the Chinese FDI. Notably, law in the title of this chapter refers to a set of regulations, and it may have a specific title in the different laws, administrative regulations or other forms of legal documents hereinafter. In addition, the chapter mainly aims to present Chinese inward FDI regulations and involves relevant international laws and principles that China follows. It provides a starting point for students studying Chinese FDI law and may also provide fundamental knowledge for foreign investors starting enterprises in China.

EXPLANATION ON SOME THEORIES REGARDING CHINESE FDI LAW

CONCEPT OF CHINESE FDI

A Chinese FDI usually is made by a foreign natural person, foreign legal entity or other forms of foreign economic entity. The aim of the investment is to operate an ongoing business rather than be a purely capital investment. Therefore to achieve the goal of establishing and operating the business, the foreign investor needs to hold or partially hold the right of control of the invested enterprise.

A definition, given by the Organization for Economic Co-operation and Development (OECD) in its Benchmark Definition of Foreign Direct Investment (FDI), states that FDI: is a category of cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct invest.

INTRODUCTION

What is a company? In the modern economic context, this question is almost equal with the question “what is a person”. A company is legally endowed with a special structure, a full legal ability. According to the Company Law of the People's Republic of China (2004), a company specifically means “a limited liability company or a joint stock company which is established within the territory of the People's Republic of China”. That is to say, when a foreign businessman wants to invest in China, there are two direct paths. The first is to establish a company (or subsidiary company). The second is to set up a branch office (or company representative office) in China. However, these two choices lead to different applicable laws, namely the Foreign Investment Law or the Foreign- Capital Enterprises Law and other related laws. But when comes to structure and management, any type of foreign company (including foreign-joint venture or wholly foreign-owned enterprises) may make reference to the provisions of the Company Law. Th us when a foreigner wants to perform business in the Chinese market, whether to establish a company or simply to become a shareholder in a Chinese company, he/she should have some knowledge of Chinese company law. This chapter will first provide an overview of the sources of company law in China, and then analyze the general principles of Chinese company law. In the Section 4, we will explain the types of companies in China. Finally, we will concentrate on Chinese company law for foreigners.

SOURCES OF COMPANY LAW IN CHINA

THE INTERFERING CONSTITUTIONAL PROVISIONS AND WARRANTIES ON CHINESE COMPANY LAW

The constitution, as the “Mother Law” in the Chinese legal system, provides the substantive rules and power sources to the other normative rules on basic social economic and political systems, including company law. Generally speaking, in what position does a company (in the broad sense) find itself in the internal economics of China? China's internal economics can be roughly divided into two parts, public sector and non-public sector.

With the global financial crisis of 2008 and 2009, the world economy has been trapped in the deepest recession since the 1930s. Its subsequent influence and the slow recovery have again stimulated the mood of anti-globalization, not only in the field of international trade, but also in the performance of foreign investment. “After a strong rise in 2015, global FDI flows lost its growth momentum in 2016, showing that the road to recovery remains bumpy.” However, as a developing country and emerging economy, China is sticking to the multilateral regime and promoting trade and investment facilitation, which was emphasized during the nineteenth National Congress of the Communist Party in 2017.

Contrary to the conservative unilateralism upheld by the US President Donald Trump, China's Belt and Road Initiative and the Asian Infrastructure Investment Bank should hopefully bring about regional and trans-regional prosperity. Meanwhile, the continuing Opening Policy and the evolution of China's legal framework should provide more opportunities for the development of international transactions between China and other countries.

The reason why China is showing more self-confidence and dynamism to fulfill its international responsibilities is that, after several decades of economic reform, it has found a unique road to success, known as the socialist market mechanism with Chinese characteristics. As analyzed in Evolution of the Chinese Economic Model and Its International Implications, with “a steady balancing of two forces: state intervention and free market forces” (Rafal Ulatowski), the current Chinese model is formed from the economic reform starting from 1978 and the second wave of globalization. It is coordinated with the Opening Policy, which has been boosting international trade and foreign direct investment. In addition to these economic elements including the innovated socialist market economy and the continuing growth of FDI and trade, China's stable political system is also illustrated in Domestic Political and Economic System of China (Łukasz Gołota). The information contained in this chapter provides the context for anyone who is interested in doing transactions with the Chinese or invest in China.

INTRODUCTION

Nowadays, EU-China trade relations are perceived as a potential source of economic growth for China as well as for EU countries. For a long time, these relations were treated as a source of profit mainly for China. Recently, this situation has changed as now access to the Chinese market is also a source of significant profit for EU entrepreneurs. Despite struggles faced in the high level trade and economic dialogue, China and EU have become more and more important trade partners to each other in recent years. Th us undertaking and conducting commercial activity by Chinese investors in the EU and EU investors in China are the most important factor to sustain the important role which the EU plays for China as a source of technology and China plays for the EU as a source of increasing foreign investments. Chinese investments in the EU, especially purchasing by Chinese investors of bonds issued by the EU Member States, is considered as an important factor in solving problems which have occurred as a result of the European crisis. At the end of 2012 China had almost 2,000 companies directly investing in the EU which provided around 42,000 jobs for local employees. Over the years different groups of EU Member States have been key recipients of Chinese FDI. For example in 2012, France was the biggest destination of Chinese investments in Europe. A total 21 % of Chinese investments in Europe were located in France. Another important investment destination for Chinese investors was Hungary. Nevertheless, one may say that there has been a general tendency in this field, since 2008, that in particular years the Big Th ree (France, Germany and UK) or Southern Europe (Croatia, Cyprus, Greece, Italy, Malta, Portugal, Slovenia, and Spain) were the key recipients of Chinese FDI, with an exception in 2010 when the key recipient of Chinese FDI was Northern Europe (Estonia, Denmark, Finland, Ireland, Latvia, Lithuania, and Sweden). In the EU-China 2020 Strategic Agenda for Cooperation investments are perceived as a major engine driving both parties'respective economic development and innovation. The high importance of investments in EU-China relations led to negotiations for the Investment Agreement starting in 2013.

INTRODUCTION

China's financial sector has been undergoing continuous and dramatic changes as part of its transition from a planned economy to a'socialist market economy ‘. Roughly two decades ago, China's entire banking system was on the edge of technical insolvency as a result of rampant lending to local governments for projects that turned sour. The Chinese government had to overhaul the entire state-owned banking sector. Banking and insurance institutions have been diversified and have made great progress towards commercialization and marketization, and, along with China's accession to the World Trade Organization (WTO) in 2001, the banking and insurance markets have been gradually further opened up to foreign investment. More fundamentally, the banking regulatory regime has been substantially reformed and legalized even though it is in the flux of modernization.

When the financial crisis emerged in 2008, the Chinese banking sector was in a relatively good shape. Improvements had been made in the structure, transparency and oversight of financial institutions after years of governmentled transition towards a market-oriented banking system. In the global economic downturn, compared to counterparts in Western countries, Chinese banks have cemented their position as the most highly valued financial institutions in the world, taking four of the top five slots in a ranking of banks'share prices as a multiple of their book values. China Merchants Bank (with the price-to-book ratio at 4.3), China Citic (3.4), Industrial and Commercial Bank of China (ICBC) (3.1) and China Construction Bank (3.1) became the leading banks in the priceto- book league table in 2009, all with a price-to-book multiple of more than three while the average price-to-book value of the biggest 50 banks has halved from two to one in the past six years. Bank of Communications and Bank of China are also in the high rankings. Based on the benchmark of 80 global banks, Chinese banks averaged 20% return on equity while those in America averaged 13 %, those in Europe, the Middle East and Africa averaged 11%, those in the rest of Asia-Pacific averaged 12 % in the first quarter of 2011.

INTRODUCTION

Contracts are used in transactions. Some foreign commentators highlight the main differences between China and Western countries in how contracts are valued. In the recent years Chinese companies have paid increasing attention to conclude a well-written contract with their business counterparts. They will try their best to perform their obligations in accordance with the contract. However, no transaction can be perfect; sometimes disagreements may occur between commercial parties. Th us, there is no doubt that the parties should carefully consider how disputes are to be resolved. Chinese law allows parties to a contract with a foreign element and may choose the law to be applied in the handling of contractual disputes. But in the practice, the parties oft en prefer Chinese law to apply, especially if possible disputes are to be adjudged or arbitrated in China. It is therefore important for foreign businessmen and lawyers to know the fundamental principles of the People's Republic of China's (PRC's) contract law when dealing with Chinese companies. This chapter will first provide an overview of the historical development of contract law in China, and also explain the contract law that is in force today. It will then analyze the sources and key concepts of Chinese contract law.

A BRIEF HISTORY OF CHINA'S CONTRACT LAW

Modern contract law requires equal status and party autonomy. Traditionally China lacked these concepts. China's first civil code was compiled in the early twentieth century. The section on contract law was draft ed by a Japanese jurist, Y.M. Matuoka. It is a pity that this civil code was never enacted due to the collapse of the Qing dynasty in 1911. However, it copied the model of the German civil code and was influenced by the Japanese civil law. It represents a major government attempt to establish a civil legal system modeled on modern European codes, by introducing Continental European countries'contract law principles, theories and reasoning to China. The first draft contract law paved the way for traditional Chinese contract law to transform into modern contract law legislation.

INTRODUCTION

As early as December 1978, the monumental economic reform started, accompanied by the significant progress of rebuilding a credible set of laws and legal institutions in mainland China, especially in formalizing its civil justice system. The past three decades of reform and opening up have witnessed the Chinese judicial system reform following the basic path from reconstruction of the judicature to reform of Trial Modes and then to reform of the judicial system. China's program of legal construction has grown at an even greater rate as China entered the World Trade Organization, whose membership is contingent on greater transparency in the lawmaking process, more effective and formal procedures for challenging administrative action and greater judicial independence.

The Chinese tradition of pursuing objective or individualized justice has created a de facto limit on the lawmaking power of the courts. One of the fundamental tasks of civil procedure is to ensure the courts establish the truth based on fact. To achieve this end, Chinese law allows judges to play a more active role in adjudication than the US Federal Court System permits. The courts view their role as applying the law to resolve private disputes rather than issuing normative decisions to settle difficult social questions. Until now, the judicial reform has enriched Chinese legal culture with a new ingredient, including expanding judicial openness, enhancing judicial democracy, standardizing judicial acts, etc. It is a natural trend of the civil judicial reform to introduce some mechanisms into the procedure, which is becoming a prominent measure in the dispute resolution system, including playing down the judge's involvement in the trail, strengthening the people's assessor's work, establishing small claim procedures, public interest lawsuits, improving online disclosure of civil judgment and reinforcing the burden of proof system.

In recent years, Chinese courts, with a mandate from the Supreme People's Court, have implemented a variety of reforms in the civil litigation system and passed several revisions of the Civil Procedure Law. China promulgated the Civil Procedure Law in 1982, which was replaced by the Civil Procedure Law of the People's Republic of China (CPL) in 1991.

Chinese economic growth has impressed observers during the last three decades and opened a question about its sources. This discussion concentrates on the Chinese economic model, labeled as a Beijing Consensus in the early twenty-first century, and on the international implications of Chinese growth.

The aim of this chapter is to evaluate the sources and characteristics of this model as well as to analyze the international consequences of Chinese growth. I will argue that the Chinese economic model is inspired by the development models of other East Asian countries. Its emergence was possible by the global political and economic conditions. China has developed its own original economic model that fits local conditions and answers the requirements of the Chinese foreign policy strategy based on geo-economic principles.

There are three approaches of analysis of the transformation from the statedominated to private-dominated economy. With the first approach scholars deal with the question of the right speed of the reforms. The second approach deals with the institutions. The proponents of this approach concentrate their studies around the question of institutional development that favor economic growth and allow the coexistence of different forms of ownership. The third approach is developed by scholars dealing with comparison studies. Especially interesting is the work of King and Schel é nyi who have described three forms of emergence of capitalistic structures in post-socialist countries. The first of these is capitalism from above, where the party and state elites try, through privatization of biggest enterprises, to construct a new market structure prescribed by neoliberal concepts. A classical example for this form of capitalism formation is Russia. The second is capitalism from without. The previous power elites cannot transform themselves into economic ones and the key role in economy is taken by foreign investors. An example is Hungary. The third form is capitalism from below. This is formed by a new class of entrepreneurs that emerged during the transition. An example is China. The new capitalistic elite does not question the old party position.

Economic and trade relations between Europe and China have developed for a long time. The two sides have conducted goods exchange for over two thousand years. The clearest proof of this is the Silk Road, which dates back to the Han Dynasty (B.C. 202 – A.C. 8) stretching from Chang'an (currently Xi'an) to Ancient Rome. This chapter discusses bilateral economic and trade relations after the EEC, and later the EU after its formation in 1993, and China established their official diplomatic relations in 1975.

START AND FIRST DEVELOPMENT OF EEC/EU-CHINA RELATIONS

On 4 May 1975, the Vice-President of the European Commission, Christopher Soames, visited China and met Chinese Premier, Zhou Enlai. At that time, China made a decision to accredit an ambassador from the European Economic Community (EEC). On 16 September 1975 the EEC and China established official relations, opening a new chapter of bilateral relations.

The EEC and China established diplomatic relations in the Cold War era. At that time, the USA considered China as an “enemy ”, but European countries continued trading with China. Furthermore, a number of European countries established formal diplomatic relations with China even before 1975, e.g. Italy (1970), Belgium (1971), the Federal Republic of Germany (1972) and Luxemburg (1972). The EEC and China established their diplomatic relations in the Cold War era mainly because they desired to develop economic cooperation and anticipated economic and political mutual benefits. From this point of view, we can see EEC-China relations were pragmatic from the very beginning.

Notwithstanding the establishment of diplomatic relations, trade between the EEC and China did not see significant changes in the first three years, from 1975 to 1977 (see Figure 3. 1).

Trade volume had small increase in 1976 but declined in 1977. Generally speaking, there was not significant stable growth in trade. The USA and European countries restricted relations with China. The USA did not even establish official diplomatic relations with the People's Republic of China. Furthermore, there was the Cultural Revolution in China so the state's emphasis was on the class struggle rather than economic development and trade cooperation.

In the European media, China is present in daily reporting. Yet, a decade ago, it merely merited an occasional glance for its rapid economic change and expansion. Today, it is a central player in the international economic order. Indeed, according to some estimates, it is the biggest player in the international economic order. Economic relations between China and the European Union have grown in importance, yet a comprehensive new trade agreement is not in sight. This is a symptom of the unease of the international economic governance system where China's rise is resisted by organizations, structures and diplomatic and legal cultures emanating from a world order that has been dominated by the United States since the Second World War. Yet, this era is over. Not as Fukuyama has proclaimed with a confirmation of the American model as the sole successful model but through the emergence of an expected plurality of actors and variety of models that defies the comfortable realities of international organizations dominated by the interests of a small group of states led by the United States.

This book contributes to the debate and understanding on China by offering insights and perspectives from both Chinese and European scholars on themes related to business and economic aff airs. The double perspective avoids the familiarity paradox of a Chinese system that has drawn on European experiences in organizing and regulating its economic system since the 1970s when China relied on legal transplants from Europe to overhaul its legal system. Chinese civil and commercial law is largely inspired by, based on or completely copied from European legal systems. As such, these rules in themselves are neither Chinese nor socialist. However, in the interpretation, usage and development, these rules – ostensibly familiar – have become part and parcel of a governance system and an economic system that is Chinese and is socialist with Chinese characteristics. The blackletter laws are hence different from the law in reality and as it is applied. The same rules in Europe and in China create different legal and economic realities.