China comes into view

Financial, Fiscal and Enterprise Affairs Directorate (DAF)

China’s business environment has become far more transparent since Deng Xiaoping began his programme of reforming and opening up the Chinese economy at the end of 1978, but the authorities’ way of dealing with private enterprises is still largely characterised by relationship-based rather than rule-based decision-making.

Laws such as the Joint Venture Law were put in place hurriedly to accommodate new forms of business enterprise. At first these were sketchy, often amounting to no more than a few pages of general stipulations. Business legislation has since become increasingly complex and precise. Law courts, which had virtually ceased to function by the 1970s as a result of the total politicisation of law, began to develop in the 1980s as lawyers and judges were trained and appointed. However, the application of law in China remains under the control of communist party leaders at all levels and is better described as rule by law rather than the rule of law.

Regulations governing inward FDI exemplify this problem. Local authorities such as the Special Economic Zones in south China and the other open coastal areas have the power to approve the establishment of foreign-invested enterprises up to established maximal values, but the process of approval is not always wholly transparent. In the 1980s it was often necessary for a foreign company to spend several years building relationships with local officials before securing such approval, though this practice has (at least in the more developed regions) become less necessary in recent years. The line between central and local approval powers has also been more blurred in practice than the regulations suggest.

Secrecy has been replaced by openness, but although information is more widely available, it is not wholly reliable. Before reforms began, most of the country was closed to foreigners and economic statistics were largely classified top secret. The whole territory (with some exceptions) is now open to all, and the National Bureau of Statistics has been publishing heavy yearbooks replete with socio-economic statistics for two decades. Serious problems, however, beset major series such as annual GDP growth, unemployment and non-performing loan ratios.

China’s entry into the World Trade Organization (WTO) in December 2001 has increased the pressure for transparency, initially regarding laws and regulations specifically related to commitments to the country’s WTO partners, but eventually extending inevitably to all matters pertaining to business done by foreign entities in China. Leaders like the prime minister, Zhu Rongji, who are determined to use foreign competition as a weapon in reforming the inefficient state-owned enterprises, will strive to ensure such transparency.

Ranged against them are protectionist voices arguing in favour of developing “national champions”, or merely defending the living standards of those employed in over-manned sectors. Local officials, pressed by central government to remit a larger share of their tax revenue to the centre, often support such protectionism (much of it regional as well as national), and prefer to maintain freedom of action in, for example, levying local charges.

For more on China and FDI, contact Kenneth.Davies@oecd.org

©OECD Observer No 234, October 2002




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