China’s Legal System. Editor: Pan Guoping and Ma Limin. The Sinopedia Series Singapore: Cengage Learning, 2011.

Establishment and Improvement of the Civil and Commercial Legal System

The civil and commercial legal system includes civil and commercial laws that are used for the adjustment of the legal relationship between equal subjects, which may be referred to as private laws in comparison with public laws such as administrative and criminal laws. Civil laws are considered as a basic law and commercial laws are special laws that jointly form the civil and commercial legal system.

The civil and commercial laws are closely and inseparably related to economic and social development. Since 1979, China’s civil and commercial legislation has traveled a tortuous road and have been continuously tweaked to stay in line with China’s economic and social development and other changes in national policies. Civil and commercial legislations have accelerated their development since the 1990s and the systems for these have gradually been improved.

The civil and commercial laws were gradually established from 1978, and the promulgation of their first important legislation was carried out in 1979. It consisted of seven laws including the Law on Chinese-Foreign Equity Joint Ventures that emerged to satisfy the economic conditions. After some animated discussion and long-term preparation in the legal circle and other related interest groups, the General Principles of the Civil Law was promulgated in 1986 and the Opinions of the Supreme People’s Court on Relevant Issues Concerning the Implementation of the General Principles of the Civil Law was subsequently promulgated. These two legislations have closed up some of the gaps in China’s civil and commercial basic laws, and have provided basic legal principles and systems for the growing socialist market economy. They were also used for solving disputes related to civil matters delayed for years. The promulgation of the General Principles of the Civil Law marks the beginning of the systematization of China’s civil and commercial legislations, and also serves as an important milestone in the development of the civil and commercial legislation of China.

After the promulgation of the General Principles of the Civil Law and using it as a main reference, the Marriage Law, the Succession Law, the Economic Contract Law, the Foreign-related Economic Contract Law, and the Law on Chinese-Foreign Cooperative Joint Ventures and other separate laws were formulated and promulgated before and after the said promulgation. This thoroughly changed the previous scenario of no law being applicable in civil and commercial sectors. However, China has still not constituted a relatively sound civil and commercial legal system even until now. This is because the content of each specific regulation is relatively simplistic and the specific measures for the implementation of such regulations are still lacking.

The 1990s saw a blossoming in China’s civil and commercial legislation. In 1992, the 14th National Party Congress was convened and the key focus was the reform of China’s economic system by establishing a socialist market economy. This same target was written into the Amendments to the Constitution of the People’s Republic of China in 1993. The establishment of a socialist market economy system has facilitated the rapid development of civil and commercial legislations, lifting the construction of the civil and commercial legal system to a new level of development. Since then, China has focused on the confirmation, change, exercise, transfer, elimination, and protection rules of property rights as key areas of the civil and commercial law system. Such rules must work in accordance with and also uphold the newly established socialist market economy system. The achievements in the civil and commercial legal system have seen this legislation substantially supporting the market economy. So far, China has formed a comprehensive civil and commercial legislation system that is based on the General Principles of the Civil Law, which is separately adjusted by other individual laws such as the Contract Law, the Security Law, the Property Rights Law, the Company Law, the Marriage Law, and the Tort Liability Law. Such laws have established and improved the creditor’s rights system and the property rights system, which includes ownership, real rights for usufruct and real rights for security. The laws have also established the principle of freedom of contract and the principle for equal legal protection of the property rights of the state, the collective and the private owners, and the property rights of other obligees. Thus, a new pattern is developed where all sectors of the economy are legally said to exist, are equally able to compete with one another, and mutually help one another move forward.

China has built up a relatively sophisticated legal system for intellectual property rights protection by the formulation of these legislations and regulations:

• Patent Law;
• Trademark Law;
• Copyright Law;
• Law of the Peoples Republic of China against Competition by Inappropriate Means;
• Provisions on the Protection of Computer Software;
• Provisions on the Collective Administration of Copyright;
• Provisions on the Protection of the Right to Network Dissemination of Information; and
• Provisions on the Protection of New Varieties of Plants.

In 2008, the State Council listed intellectual property rights as a state development strategy in the National Intellectual Property Strategy Compendium. It aims to solve issues related to natural resources, energy, environment, and matters of socio-economic development, and the upgrade of the industry. China aims to build herself up as a sovereign nation with relatively high standards in the creation, utilization, protection, and administration of intellectual property rights. As to the protection of intellect property rights, China adopted a protection mechanism with the collaboration of two systems; the judicial trial system and the administrative and law enforcement system, of which judicial protection takes the leading role.

The Property Rights Law was adopted at the Fifth Session of the 10th NPC with no dissenting vote on March 16, 2007. It was considered as one of the greatest events in the field of civil legislation in China. The Property Rights Law is an important and integral part of civil laws and an important and indispensable law in the legal system of China. It was deliberated and examined eight times, having gone through many discussions and covered a time span of 13 years before its final promulgation. The Property Rights Law makes preliminary conclusions on relevant legislation from the past and provides a relatively sound property rights system. It explicitly declares that public and private property enjoy equal legal protection, which is a significant point in the regulation and maintenance of China’s market economy and helps to stimulate creative public enterprise. Meanwhile, it also includes relatively high requirements for Chinese people, so as to establish and maintain the new concept of property rights. The promulgation of the Property Rights Law marks a key step in the formulation of the civil code of China.

The Tort Liability Law was adopted at the end of 2009. It aimed to protect the legitimate rights and interests of civil subjects, define and determine tort liability, take precautions against and sanction torts, and promote social harmony and stability. It is another important law in China’s civil legislations, following the promulgation of the Contract Law and the Property Rights Law. The Tort Liability Law explicitly stipulates that, where the personal rights and interests of a person are infringed upon and where such infringements cause severe mental and emotional damage to the said person, the infringed person may demand compensation for mental damage. This is the first time that current laws explicitly provide compensation for mental damage, which fully reflects China’s constitutional principle of respecting and guaranteeing human rights.

Presently, China’s civil law is undergoing a transition to a modern civil law centering on the two relevant legislations, the General Principles of the Civil Law and the civil code that is still being drafted.

The road for constructing China’s civil and commercial legal system is similar to the one taken toward the legal governance of China. The final establishment of the socialist market economy has laid a solid foundation for the full development of the market economy’s legal system represented by the civil and commercial laws. The civil and commercial legal system of China has been gradually established and there are laws to abide by for nearly all fields thereof. The civil and commercial legal system has been specifically regulated to strongly support the health and orderly development of China’s market economy.

Basic Formation of the Economic Law System

Since the implementation of the reform and opening up in 1978, China has successfully completed her systematic transformation from a planned economy to a planned commodity economy and thence to a socialist market economy, with its overall national strength noticeably increasing. The legislation, enforcement, and judicial activities of China’s economic laws have been moving in step with this transformation process. The solid achievements in the field of economic law provide a reliable legal guarantee for consolidating the success of the economic system reform of China and maintaining and regulating the market economy. In some ways, the 30 years of reform and opening up also reflects the 30 years of the basic formation of China’s economic laws.

The Economic Contract Law was formulated in 1981 was the first economic law in China that was used for all aspects of economic activity. Its promulgation marked China’s gradual abandoning of the mechanism of central planning and control. Previously, for the purposes of attracting foreign investments, China specially formulated the Law on Chinese-Foreign Equity Joint Ventures and implemented its rules in 1979. Subsequently, some relevant laws were formulated to grant preferential treatment such as tax exemption for foreign-funded enterprises and joint ventures that are encouraged or required development. The increased permutation of permissible models of foreign-funded enterprises have greatly improved the investment climate and further stimulated China’s market dynamics.

The 1998 promulgation of the Law of Industrial Enterprises Owned by the People demonstrated that the reform of state-owned enterprises (SOEs) had become a key growth sector in the legal incorporation of enterprises. The 1992 promulgation of the Regulation on the Transformation of the Operational Mechanism of Industrial Enterprises Owned by the People had a profound effect on promoting those enterprises owned by the Chinese people to move into the markets, hence enhancing the dynamics of enterprises and promoting China’s market economy transformation.

Upon the establishment of China’s socialist market economy mechanism in the early 1990s, reforming the economic administrative mechanism and establishing a supported market economy legal system have become key tasks for the realization of legal governance of the economy. With respect to legislations governing the market players, several important laws, such as the Township Enterprise Law, the Partnership Law, the Sole Proprietorship Law, the Commercial Banks Law, and the Law on Specialized Farmers’ Cooperatives were successively promulgated after the promulgation of the Company Law in 1993. This was carried out to enable the enterprise legislations to further adapt to international development trends so that the modern enterprise legal system of China could be systematically established. These laws confirmed the legal status of all kinds of market players and guaranteed the fair competition and participation in the markets for all players. For example, the Company Law established the fundamental systems for limited liabilities companies and companies limited by shares. Accordingly, the Enterprise Bankruptcy Law established the bankruptcy system for regulations concerning the exit of market players. In addition, China has established large numbers of market service organizations with respect to the fields of law, finance, and information consultancy, and improved the legal systems for market intermediary organizations.

In the process of establishing and improving the market economy, laws governing the regulation and maintenance of market order are key to building an economic legal system. In 1993, China’s formulation of a series of important economic laws, such as the Product Quality Law, the Law of the People’s Republic of China against Competition by Inappropriate Means, and the Law on the Protection of Consumer Rights and Interests has laid an important basis for the healthy development of the market economy. The Foreign Trade Law was promulgated in 1994, which established the uniform foreign trade legal system so as to maintain a fair and free foreign trade structure. It was revised in 2004 to further accommodate new trends in economic globalization and accession to the WTO. This is so that China could continue to participate in international technological cooperation and competition on a larger scale, in a larger area, and at a higher level.

These legal systems concerning market administration are important and integral parts of China’s economic legal system. The Anti-Monopoly Law and the Law of the People’s Republic of China against Competition by Inappropriate Means have regulated market competition, promoted the reform of monopolized industries, strengthened government supervision and social surveillance, and accordingly established the legal remedy system containing civil compensation and administrative compensation. The Law on the Protection of Consumer Rights and Interests of Consumers and the Product Quality Law have established these legal systems to protect the rights and interests of consumers and acts as a guarantee for product quality. The Law on Urban Real Estate Administration has established a system favorable to urban real estate administration, conducive to maintaining real estate market order, and guaranteeing the legitimate rights and interests of obligees to real estate. The Insurance Law, the Securities Law, the Banking Supervision Law, and Foreign Exchange Regulations, among other laws and regulations, have established an industry supervision and administration system, taking openness, fairness, and justice as its value orientation so as to effectively take precautions against and defuse financial risks. The Regulations for the Administration of Direct Sales and the Regulations for the Administration of Commercial Franchising Management and other regulations have effectively regulated those market activities in question.

Among this group of laws, the Anti-Monopoly Law was promulgated in 2007. It is an important law for protecting the market’s free competition and giving full play to the fundamental market function of allocating resources. It is also called the Economic Constitution. In March 2009, China’s Ministry of Commerce rejected Coca-Cola Company’s acquisition of China Huiyuan. This was the first time that the Ministry of Commerce had referred to the Anti-Monopoly Law for an award. This case attracted considerable concern and brought up much heated debates among the Chinese people and even in international legal circles.

The reform of the financial system is also an integral part of the improvement of China’s economic law system. For the purposes of meeting the needs of establishing a socialist market economy mechanism and promoting the continuous, rapid, and healthy development of the economy, by end 1993, the State Council decided to reform the industrial and commercial taxation system by adopting a tax-sharing system with a financial administration mechanism in all provinces, autonomous regions, and municipalities directly under the central government, and cities specifically designated in the state plan as of January 1, 1994. The main purport of this reform is to insist on unifying the taxation law, fair taxation, simplifying the taxation system, and the reasonable separation of powers, rationalize the distribution relationship, and the guarantee of financial income. This reform is the largest in scale, most extensive in scope, and the most profound taxation system reform since 1949. Since then, China’s taxation laws and regulations system are made up of the new Enterprise Income Tax Law, the Individual Income Tax Law, and the Law on Administration and the Collection of Tax. The relevant financial legislation, such as the Budget Law and the Government Procurement Law have also been gradually improved.

1995 is known as China’s financial legislation year because it was then that China successively promulgated a series of financial laws such as the Law on the People’s Bank of China, the Commercial Banks Law, the Law on Negotiable Instruments, and the Insurance Law. Thereafter, the Securities Law was promulgated in 1998 and the Trusts Law in 2001. In 2003, the Banking Supervision Law was promulgated, and the Law on the People’s Bank of China and the Commercial Banks Law were revised. The Anti-Money Laundering Law was promulgated and implemented in 2006. Thus, the framework of the financial legal system of China has been principally established, and the financial industry of China is moving steadily toward legalized and standardized development. The promulgation and implementation of such financial laws provide specific applicable laws with well-defined governance for the establishment, change, termination, and business operations of all financial institutions. This will help to build up a legal basis for separating financial operations and supervision.

The application of legal measures to control the macro-economy of China is one of the major characteristics of her socialist market economy. Provisions for such controls on the relevant fields have been made in the Budget Law, the Audit Law, the Government Procurement Law, the Price Law, the Individual Income Tax Law, the Enterprise Income Tax Law, and the Law on the Promotion of Small and Medium-sized Enterprises, among other laws. The Law of the People’s Bank of China and other laws have provided a systematic guarantee for maintaining currency stability, defusing financial risks and guaranteeing financial security. The Statistics Law has provided the legal basis for the scientific decision of national economic and social development.

The financial meltdown induced by the subprime mortgages broke out in the United States in 2007 and spread unceasingly, dragging the global financial system into the biggest crisis since 1929, with its influence still felt today in some areas. This crisis made people realize time and again, the importance and significance of proper financial legal governance. China’s preliminary financial legal systems underwent this test and exposed its shortcomings. China then focused on how to further strengthen her financial legislation, improve her financial laws, revise and improve relevant laws such as the Bankruptcy Law and the Law on Negotiable Instruments, so as to guarantee the security of finance as a legal governance issue.

China’s economic laws came into effect from the country’s reform and opening up in 1978. The laws moved forward in step with the reform of the market economy mechanism, and effectively guaranteed smooth progress during the reform. As such, the process of development and evolution of the economic legal governance and the basic formation of the economic legal system forms part of the history of the reform and opening up of China.

A Steady Improvement of the Legal Governance on Foreign Trade

Since 1949, the country has experienced various ordeals in foreign trade practices. Before 1978, such practices and activities were relatively simple and on a small scale. However, since the implementation of reform and opening-up policies at the end of the 1970s, China has started to build up the foreign trade and economic legal system.

Beginning from the formulation of the Law on Chinese-Foreign Equity Joint Ventures in 1979, China has successively formulated and promulgated a large number of laws and regulations, including the Law on Chinese-Foreign Cooperative Joint Ventures and the Law on Enterprises with Foreign Investment, to provide many modes of investment in China for foreign investors. Thus, this guaranteed the legitimate rights and interests of foreign investors who invest in China and facilitate trading and economic activities. Meanwhile, China was also the signatory of some economic and trade treaties and pacts with other countries. In addition, China has begun large-scale participation in international economic organizations and international economic legislative activities. So far, China has grown into a more mature and major participant and promoter of international economic legislations. By end 2007, the Chinese government has taken part in more than 50 international economic organizations, executed and approved more than 130 treaties with respect to international economy and trade, and entered into bilateral economic agreements with respect to trade, investment, and taxation with more than 100 countries. Such moves would appear to be unimaginable for the Chinese people who lived through the 1970s.

In 1994, the first basic law governing the foreign trade relationship of China, the Law on Foreign Trade, was officially formulated and implemented. This meant that the foreign trade law system of China had been basically established and that the foreign trade legal governance construction had matured. The foreign trade legal governance of China has undergone a tremendously rapid development within the period from the promulgation of the said law to 2001, when China finally joined the WTO. A multiplicity of foreign economic laws and regulations covering almost all fields governed by international economic laws have been formulated, promulgated, and implemented in the same period, such as

• Foreign investment;
• Import/export trade;
• Intellectual property rights;
• Foreign exchange management;
• Finance and insurance;
• Maritime business;
• Aerospace and transportation;
• International taxation;
• Anti-dumping;
• International arbitration; and
• Judicial assistance.

China is also playing an increasingly important role in major international economic organizations such as the United Nations (UN), the WTO, the International Monetary Fund (IMF), and the World Bank.

Accession to the WTO is the most important legal initiative in the international economic strategy of the Chinese government. The Agreement for Establishing the World Trade Organization and the relevant agreements it thus covered; the Protocol on the Accession of China, and the Report of the Working Party on the Accession of China have constituted the international economic legal documents that are binding upon and inure China within the organization. Through its amendments to the Law on Foreign Trade, China has further regulated the rights and obligations of foreign trade operators, improved systems for the administration of import/export of goods, import/export of technologies and international services and trades, established its foreign trade investigation system and foreign trade promotion regime, and in accordance with WTO rules, improved the trade remedy system and the system on customs supervision and inspection and quarantine of import/export commodities, as well as establishing a unified and transparent foreign trade system.

Concerning its accession to the WTO and pursuant to the demands of a socialist market economy and its WTO commitments, China has carried out a full-scale check-up on, revision on, and improvement of domestic legislation, administrative measures, and administration regimes. China has spent six years checking nearly 900 departmental rules and other normative documents in the fields of foreign trade and economics, and has finally cemented the interconnection of relevant legal systems of China with the principles and rules of WTO’s organizational laws. The foreign trade and economic legal governance activities as mentioned above, have taken China’s legal structure to new heights. China’s legislations on intellectual property rights, anti-dumping, and countervailing seem to have helped the country take its place in the world’s foremost ranks.

The Standing Committee of the NPC revised the Law on Foreign Trade in 2004, of which the amendment summarized the experience accumulated in the past 10 years since the promulgation of the law, and drew on the successful experience in foreign trade legislation of countries all over the world. It also reflects the basic concepts in China’s foreign trade administration with the precondition of adhering to WTO rules. The revised law also marks China’s increased improvement in foreign trade and economic legal governance and serves as the basic legal document on foreign trade and economic relationships at the present time and in time to come.

Civil, commercial, and economic laws including laws and regulations governing foreign trade and economics are legislative fields most closely related and affinitive to the socialist market economic practice of China. The development of improved legal governance through the legal system that consists of civil, commercial, and economic laws, among other laws governing foreign trade and economics, has not only been a witness to the wonders of the reform and opening up and the emergence of the socialist market economy, but is also an important and integral part of the splendid achievements of China’s legal governance structure.