Enterprise reform in China : the evolving legal framework

Polloy Reewoh WORKING 4APERS Transhion and Macro-Adjustment Legal Department The World Bank September 1993 WPS 1198 Enterprise Reform in China The Evolving Legal Framework Natalie Lichtenstein How far legal reform has gone, and where it needs to go, to support enterprise reforn and provide the legal environment needed for China's transition to a "socialist market economy." Policy Reserch Working Papas disseminate the findings of work in progreu and encouage the exchange of ideas among Bank suff and all others interested in development issues. These papers, distributed by the Research Advisory Staff, carry the names ofthe authoms, reflect only theirviews, and should beucd and cited accordingly. he findings, interpreutions, and conclusions aretheauthors'own. Tney should na be attributed to the World Bank, its Board of Directors, its managemnent, or any of its member countries.  Tastnand Manmo Adjust.nent WPS 1198 This paper- a product of the Legal Department - is the first in a series of staff publications intended to provide information and analysis of legal issues relevant to development. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Malini Rangarajan, room MC6-367, extension 81710 (September 1993, 39 pages). Enterprise reform in China since 1979 has been place in a market-dniven system rather than supported by accelerated reform of China's legal through a planning mechanism. framework. In the transition to a "socialist market economy," state enterprises will operate e Laws governing land use, mortgagefinanc- independently of the government, may no longer ing, and pension and social security systems, to be fully owned or controlled by the state, avid separate employee housing znd pension and will deal with the state and other legal entities social security systems from enterpAise obliga- through market-based transactions. The number tions and henceforth to provide housing, pen- of collective (township and village) enterprises sions, and social security through altemative has grown rapidly, and in recent years so has the m!ans. number of private enterprises. C Lontract law, to protect the legal rights of Th.is level of economic change requires a enterprises and allow economic transactions commensurate level of legal change. between paries to replace administrative con- Lichtenstein describes the legal framework trols, and to ensure that the court system and needed for enterprise reform in the world's most dispute resolution processes function credibly populous country. and reliably, thereby making all other reforms enforceable. First, it is essential to define the enterprise and its rights and obligations. To define and To make these reforms meaningful, property broaden the autonomy of enterprises, enterprise rights must also be better defined. China's civil law and company law and regulations must be code currently offers only a limited definition of reformed. For state and collective enterprises, a the rights of ownership and of an enterprise's goal of legal reform is also to effect the separa- rights to sell, transfer, or otherwise dispose of tion of ownership and management. To create a property. legal environment in which all enterprises - including state enterprises - panicipate as Lichtenstein catalogs these pieces of the independent economic actors, reformn is also legal framnework, suggesting where further needed in the following areas: reform is needed to support enterprise reform. She focuses on the reform of state Lnterprises but Bankruptcy and competition law, to promote also discussus the reforn of nonstate enterprises. fair, effective competition among autonomous She touches only lightly on the role of foreign enterprises and to ensure the continiued protec- investment but does not address the developing tion of the public interest even without direct framework of patent, trademark, and copyright state management of enterprises. laws. * Financial laws, including securities luws and regulations, so enterprise financing can take IThe Policy Research Working Paper Series disseminates the findings of work under way in the Bank. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent offikial Bank policy. Produced by the Policy Research D;ssemination Center  ENTERPRISE REFORM IN CHINA: THE EVOLVING LEGAL FRAMEWORK Natalie G. Lichtenstein Legal Department The World Bank  Preface This is the first in a series of staff publications by the World Bank's Legal Department which are intended to provide information and analysis of legal issues relevant to the Bank's development mandate. While the publication of these papers will constitute a resource for the staff of the Bank and the borrowing countries concerned, it could obviously have wider benefits and serve to enhance public awareness of the linkage between legal reform and development in general and the relevance of such reform to private sector development in particular. Natalie Lichtenstein's paper describes the legal framework for enterprise reform in the world's most populous country. It provides an overview of the legal reforms introduced to date and of the areas where further reforms are needed to help China in its impressive economic and social devel)pment. As the Banl's lawyer most familiar with the Chinese legal system and language, Ms. Lichtenstein is particularly qualified to address these subjects. Outside scholars of Chinese law have reviewed this paper and found it to be a concise overview of the legal framework which is both comprehcnsive and accurate. It provides a model to be followed by the other papers contemplated in this series. Ibrahim F.I. Shihata Vice President and General Counsel The World Bank  CONTENTS I. INTRODUCTION .......................................................... 1 II. DEFINING THE ENTERPRISE AND ITS LEGAL RIGHTS AND OBLIGATIONS .......... 3 A. STATE ENTERPRISE AUTONOMY.. 3 B. STATE ENTERPRISE GOVERNANCE.. 6 C. NON-STATE FNTERPRISES.. . 8 1. Collective Entarprises.. ..... . .8 2. Private Enterprises. . . 9 D. STRUCTURING ENTERPRISES AS COMPANIES . . .11 1. Current State of Legislation ...11 2. Types of Companies . . .13 III. A COMPETITIVE ENVIRONMFNT ............................................. 17 A. BANKRUPTCY LAW .................................................. 17 B. COMPETITION LAW ................................................. 18 IV. FINANCIAL LAWS ........................................................ 21 V. REMOVING THE SOCIAL BURDENS OF THE ENTERPRISE ......................... 23 A. HOUSING: LAND USE AND MORTGAGE LAW .. 23 B. SOCIAL WELFARE RIGHTS ........................................... 24 VI. PROTECTING THE LEGAL RIGHTS OF THE ENTERPRISE ........................ 26 A. CONTRACT LAW ................... 26 B. COURTS AND DISPUTE RESOLUTION PROCESSES . . 27 C. LEGAL INSTITUTIONS ............................................. 28 VII. CONCLUSIONS .....................,,,,,,,,........ 29 Annex 1 (Table of Legislation) .............................................. 30 Annex 2 (Basic Forms of Shareholding Enterprise) ............................ 36 The author wishes to acknowledge the helpful comments made on previous versions by William Alford, James Feinerman, Susan Finder, Peter Fox, Peter Harrold, Sherif Hassan, Tariq Hassan and Nena Manley.  ENTERPRISE REFORM IN CHINA; THE EVOLVING LEGAL FRAMEWORX I. INTRODUCTION 1. Enterprise reform in China since 1979 has been supported by an accelerating evolution in accompanying reform of the legal framework. State enterprises are in a transition to a "socialist market economy", in which they will operate independently of the government and may no longer be fully owned or controlled by the state, and will deal with both the state and other legal entities through market-based transactions. Collective enterprises have grown rapidly, in the form of township and village enterprises; in more recent years, private enterprises have also developed in increasing numbers. Thus, the legal framework iecessary for enterprise reform is comprehensive as the economic reform of enterprises requirea changes in many areas of economic behiavior. 2. Defining the enterprise and its rights and obligations is at the core of the legal framework i:or enterprise reform through reforms of enterprise law and :ompanv law and reaulaticns necessary to define and broaden enterprise autonomy. For state and collective enterprises, the legal reforms also seek to effect the separation of ownership and management. These core reforms must be accompanied by other reforms which aLe needed to create a legal environment in which all enterprises, including state enterprises, participate as independent economic actors. (a) development of a competitive environment through reforms in bankruptcy and competitior. law, promoting fair and effective competition among autonomous enterprises and ensuring thot the public interest continues to be protected even without direct state management of en.terprises; (b) reforms in financial laws, such as securities law and securities regulation, r ,cessary for enterprise finincing to take place through a market-driven system rather than through a planning mechanism; (c) separating employee housing and pension and social security systems from the obligations of the enterprise, with reforms in the laws aoverninq land use. mortgaae financing, and rension and social security systems necessary t.j ensure alternative means of providing housing, pensions and social security; and (d) protecting the legal rights of the enterprise through reforms in the  2 laws on contracts to allow economic transactions between parties to replace adminintrative controls and to ensuro that the court svstem and dispute resolution Processes function credibly and reliably, making all of these other reforms enforceable. For all these legal reforms to be fully meaningful, s~.eater definition of property rights will also be needed. Currently, the Civil Code offers only a limited definition of the rights of ownership and of the property rights (disposition, transfer, sale) of enterprises. 3. In most if nct all of these areas, the legal framework is beginning to emerge, as legislation is enacted (if not perfect). This paper attempts to catalogue these pieces of the legal framework, and to sut'est where further developments are required to support full-fledged enterprise reform. While this paper focusses primarily on state enterprise reform, the reform of non-state enterprises is also discussed. The role of foreign investment in enterprise reform, while important, is considered here only briefly, since much has been written elsewhere on China's foreign investment legislation. Similarly, intellectual property laws are not addressed, although the developing framework of patent, trademark and copyright laws will have some impact on enterprise development.  3 II. DEFINING THE ENTERPRISE AND ITS LEGAL RIGHTS AND OBLIGAT N5S 4. The laws relating to enterprise formation and operation and companies have been developed slowly over the reform period. Several importAnt areas have been addressed in increasingly detailed fashion: operational autonomy and governance (including internal enterprise management) for state enterprises, the rise of collect.ve and private enterprises and, in parallel, adoption of corporate form. State, collective and private enterprises are discussed separately in this section, because the current legal framework has different legal rules for enterprises urder these differer4t categcries cf ownership. However, full-fledged enterprise reform would lead to a consolidation of the legal rules, applied equally to enterprises regardless of ownership. A. STATE ENTERPRISE AUTONOMY 5. Early in the reform process, in 1983, provisional rules were enacted governing the rights and duties of state industrial enterprises, and providing for a limited sphere of autonomy for their operation. Under the 1983 State Industrial Enterprise Provisional Rules, state enterprises were first obliged to ensure that the planned tasks set down by the supervisory unit were fulfilled; only then were they allowed to determine their supplemental production, and within the scope of state regulations, select and purchase goods, sell products, determine prices, utilize enterpris, funds and determine wages and bonuses for workers. The supervisory unit approved the enterprise's annual production plan, technical transformation program, investment budget and product orientation. State Council regulations promulgated in 1984 provided some additional flexibility, permitting enterprises to retain seventy per cent of depreciation funds and dispose freely of some other enterprise funds, produce and sell a broader range of products, set prices within twenty per cent of state prices and exercise greater decision-making in hiring and promotion of workers. 6. Further legal specification of state enterprise operating rights came with the enactment of the 1988 State Industrial Enterprise Law. The enterprise's right, under the Law, to hold, use and legally dispose of assets the state authorizes it to manage does not differ from the Provisional Rules, nor for that matter from the relevant provisions of the Civil Code General Princip.es enact'd in 1986. As under the Provisional Rules, the enterprise may lease out or "transfer for compensation" its fixed assets, but governmental department approval is required where these assets are neither idle nor excess. Several new  4 enterprise rights are explicitly included in the Law, such as the right to plan production of goods or provision of services needed by society, the right to use its foreign exchar.ge portion, the right to invest in cther enterprises and the -ight to issue bonds. Other rights are similar to those under the Provisional Rules, although generally more clearly and sometimes more broadly stated, such as the rights to market its goods choose suppliers, st price, and utilize its capital. 7. Nonetheless, it is important to note that most -f the rights are subject to 'regulations by the State Council" and, in practice, enterprise enjoyment of these rights has ni.t necessarily followed their legal definition. From a legal perspective, if enterprise rights have not been exercised to the fullest, some of the cause may lie in the vagueness with whi-h they have been granted. Qualifying each right with reference to separate regulations means, ag a legal matter, that the enterprise lacks the certainty as well as the ilarity that is necessary for any economic player to play its role fully. S. The legal vagueness surrounding enterprise rights has been substantially alleviated with the most recent regulations, the Regulations on Transforming the Management Mechanisms of State-Owned Industrial Enterprises. The main thrust of the 1992 Regulations was to strengthen and broaden the operating autonomy of state enterprises by specifying fourteen managemient rights which would henceforth be exercised by the enterprises themselves rather than the government departments concerned. Those manaSoment rights are: (a) production and management decision-making powers; (b) the right to decide prices of products and services; (c) the right to sell products; (d) the right to purchase goods and materials; (e) import and export rights; (f) the right to make investment decisions; (g) the right to determine application of reserve funds; (h) the right to dispose of assets; (i) the right to operate joint ventures or undertake mergers; (j) the right to hire workers; (k) the right to determine personnel management; (1) the right to determine distribution of wages and bonuses; (m) the right to decide the organization of internal units; and (n) the right to refuse proration (demand for resources from government departments). These rights are described in greater detail than under the Law, though the scope  5 of autonomy is still qualified in certain respects. For example, the rt.ht to decide prices does not apply to individual products whose price. are controlled by the price departments of the State Council, nor to prices of the means of production included in the lists issued by those departments and their local counterparte, nor to those products and labor services whose prices are governed by law. Prices for processing, maintenance, technical assistance and other labor services are decided by the enterprise themsel,'es. Thi illustrates the improvement over the vaguer provision in the Enterprise Law, since at least the particular scope and limits of prices subject to state regulation are spelled out. Moreover, tnere are no limits on service prices, except as stated in particular laws. 9. Similarly, the import and export rights extended to an enterprise include the right to select foreign trade agencies from any nart of the country to undertake import and export business, to utilize freely fo-eign exchange earnings (in compliance with foreign exchange control provisions), t.o undertake projects and provide services abroad and to import equipment, goods and materials foz enterprise use (in compliance with import regulations). However, the Regulations still reserve the right to engage directly in import-export activities for enterprises that have favorable conditions and approval by the relevant government departments; in practice, national and local state trading corporations continue to play a role. 10. The same kind of broad definition of rights with limited exceptions, clearly spelled out, applies to most of the other rights as well. As a result, the 1992 Regulations can be viewed as giving needed content to the ubiquitous phrase in the 1988 Law, "in accordance with state regulations". These Regulations demonstrate a reasonable attempt to balance the need for clarity and certainty to bring enterprise autonomy fully into play with the current policy decision to retain government control of parts of the economy and certain economic decisions. Moreover, more detailed local provisions implementing the Regulations are being drafted in jurisdictions such as Shanghai. It remains to be seen in practice whether the actual devolution of authority from the state to the entorprises will follow the legal provisions providing for it. 11. The importance of the new operating mechanism is evidenced by the 1993 amendments to the Constitution, which better reflect the economic structure of the country and the coming socialist market economy. All references to state- run enterprises are changed throughout to state-owned enterprises, and wording more consistent with the new operating mechanisms is used to describe their relationship to the state. More generally, the amendments make minor adjustments in wording to add reform and the socialist market economy to the economic  6 principles referred to in the Constitution, a,.- corr6st ref3rences to such economic forms as rural people's com.munes which are r.o longer relevant. These changes can be seen to reflect a consensas at the highest level for the transformation to a socialist market economy. Moreovf ,, the fact that the leadership considers it necessary to change the country's basic legal instrument in order to provide a firm base for the refor.ns reflects, a heightened -crncern for the use of legal instruments to effect reform. B. STATE ENTERPRISE OOVLRNANCE 12. Under the 1983 Rules, the dec.sions of an enterprise could not conflict with those of the supervisory -nit, and while the enterprise could raise suggestions, the supervisory unit's final decision was binding. The 1988 Law appears to have been inr.ended to remedy that situation, by providing that Relevant government departments (and social groups) shall not violate enterprises' legal autonomny. They shall not request tupport from enterprises in terms of manpower or material and financial resources. They shall not request an enterprise to set up a certain organ or determine the size of its staff. If a relevant government department violates these restrictions, the enterprise has the option to request compliance, and then to petition the next higher level government organ to adjudicate. If the enterprise is dissatisfied with that organ's ruling, it may appeal to the people's court. It would be interesting to know whether these provisions have ever been tested in arbitration or litigation. 13. The 1992 Regulations also addressed the evolving relationship between the government and the enterprise, in three main ways: (a) First, the Regulations include a chapter on enterprise responsibility for profit and loss, which details certain standards to be met (restraining and supervising distribution, limits or tained wages as enterprise wage reserve fund, profit delivery prerequisites for cash awards to managers and employees, to name a few). This chapter gives some meaning to the oft-s.ated "responsibility for profit and loss" while introducing some administrative mechanisms to protect against losses {which the state, as owner of state enterprises, has every right to do). (b) Second, the role of the government under the transformation of management rights is desc:ribed in a separate chapter, which specifies the  7 functions of government departments in exercising ownership righta lx the enterprises, in strengtlhening macroeconomic regulation, in developing a market system and in providing social services to enterprises. This now role for government differs markedly from the kind of control exercised by the government supervisory department in the planning model, and will require substantial rostructuring and rb'orientiv.g in the transition. (c) Finally, if the government infringes on the legal autonomy of an enterprise, it would be held legally liab!e. Indeed, the Administrative Lit,gation Law now offers a mechanism for enterprises to seek remedies for government infringement. This kind of distinction between the governmen6 as owner and the government as regulator, separated from the enterprise management, ib exactly the kind of structure that has been the focus of previous policy discussions con state enterprise reform. While the precise formulation of each provision may merit further review, the structure and drafting of the Regulations does represent a meaningful step forward in state enterprise legal reform. 14. As for internal enterprise management, the autonomy of enterprise managers has been a focus of the reform program and has been strengthened under the legislation. Under tho 1983 Rulei the factory director was designated the legal representative and the leading administrator of the firm, but operating under Party Committee leadership. With the introduction of the 1986 Factory Director Rules, the factory director not only is the legal representative of the enterprise but also has the central leadership and overall responsibility for production, operation and management. The factory director is encouraged to seek advice on a number of specified issues from an advisory group, thc management committee, composed cf the factory director, deputy directors, chief engineer, chief accountant, secretary of the party committee, trade union presider:t, secretary of the communist youth league and workers' representatives. Tha managemant committee lacks any legal decision making power, as evidenced by the provision that, when matters discussed by the management comnittee require approval by government authorities or review by the workers' congress, the factory director makes the appropriate report or resolution. Where the factory director and the management committee (acting by a majority) differ on the important matters, the right of final decision rests with the factory director. 15. While the 1986 Factory Director Rules have yet to be updated to conform fully to the 1988 Law, the 1988 Law does enhance the role of the factory director in several ways. First, the Law provides that the factory director is legally responsible for the enterprise's operations in all areas and enjoys legal  8 protection in the exercise of the director's powers, within the scope of autonomy granted to the enterprise. Furthermore, the factory director is no longer under the Party Committee's leadership; rather, the Law provides that the Party Committee supports the director in discharging his or her authority according to law. This seems to offer more autonomy to the factory director than the 1986 Rules, although it is unlikely that the situation will have changed everywhere in practice. The Law, like the Rules, establishes a management committee, but, unlike the Rules, it does not require Party participation. The Law also provides fr .Afferent methods of factory director appointment and different responsibility. The 1992 Regulations do not address this aspect. C. NON-STATE ENTERPRISES 1. Collective Enterprises 16. Collective enterprises had been protected under the Constitution for decades, and provisions for their registration as legal persons had existed even before the General Principles of the Civil Code and the Enterprise Legal Person Registration Regulations. It was not until 1990, however, that the legal framework for the structure and governance of collective enterprises gained definition under the Regulations for Rural Collective Enterprises. These were followed in 1991 by the Regulations for Urban Collective Enterprises. These Regulations provide for the establishment, registration, management and operation and termination of rural collective enterprises (those run by township and village peasants' collectives) and urban collectives (those run by mass labor collectives in urban areas). Both sets of Regulations attempt to clarify the legal ownership rights and autonomy of collective enterprises, providing that the enterprises are legal persons which enjoy protection under the law. 17. The Urban Collective Enterprise Regulations provide somewhat more clearly for ownership rights to be exercised by the workers assembly, which selects the enterprise management, as well as for managemer- functions and relationship with government. The Rural Collective Enterprises Regulations are briefer (45 articles, rather than 70 articles) and are less clearly drafted. For example, these Regulations speak of the property of the enterprise being owned by the entire peasants' collective, with the proprietary rights exercised by the peasants' congress or collective economic organization representing all peasants. Again, confusion is introduced by the subsequent references to the rights and obligations of the owner of the enterprise, such as determining the enterprise's orientation, business line, manager (or method of selecting the manger) and distribution of after-tax profit. One would assume that references to the owner must mean the collective which exercises proprietary rights, but there is no clear connection between the provisions.  9 18. In any event, the provisions on the separation of management are clear, specifv_ng the qualifications and rights of enterprise managers, as are the provisions specifying the autonomy of the enterprise in operation, such as setting prices for non-controlled goods, hiring employees, entering into economic contracts and undertaking external trade. Moreover, the collective nature of the rural collective enterprise is preserved in several ways. For one, collective enterprises may attract investment from other investors "so long as the nature of the enterprise does not change." In addition, the Regulation. specify that at least 60% of the after-tax profit snould be retained by the enterprise, whether for reinvestment, technological transformation or bonuses, while the balance should be used for agricultural infrastructure and renewal and development of other enterprises. 19. These Regulations take the legal framework for collective enterprises one step forward, by giving some contours to their legal status, rights and obligations. In light of the new operating mechanisms recently introduced for state enterprises, though, it may be opportune to revise the legal framework for collective enterprises to enjoy the same scope of operational autonomy as now offered to state enterprises. Pt the same time, it would be helpful to consolidate legal framework for all collective enterprises, whether or not they meet current definitions of urban and rural. 2. Private Enterprises 20. Unlike collective enterprises which have been part of the economy since the beginning of the People's Republic, private enterprises were dismantled in the 1950s and only re-emerged during the reform period of the 1980s. Individuals were permitted to establish enterprises, which became known as individual households (getihu) under the 1982 Constitution and the Civil Code. Under various regulations the number of employees working in such households or other private entities was limited at times to 7, but in practice private enterprises with many more employees sprang up. It was not until 1988 that the Constitution was amended to permit private enterprises to be established and enjoy legal protection from the state. Shortly thereafter, the Private Enterprise Regulations and related tax provisions and implementing measures were ,enacted to provide a more comprehensive legal framework for private enterprises. 21. The Regulations gave structure to a defined category of private enterprises, namely those which are profit seeking economic organizations employing 8 or more persons whose property is privately owned. Private enterprises can be organLzed in one of three forms: sole proprietorship, partnership and limited liability company. The forms differ in number of owners,  10 their liability and their legal status. sole proprietorships have only one owner who bears unlimited liability for the obligations of the enterprise; partnerships have two or more owners under a written agreement, each of whom assumes joint and unlimited liability for the obligations of the enterprise. Limited liability companies have two to thirty owners (an exception for a higher number can be requested), each of whose liability is limited to his or her investment. The Regulations specifically provide that private enterprises in the form of limited liability companies are legal persons; for sole proprietorships and partnerships, only the legal representative of the enterprise is specified. 22. The Regulations do not limit the size or capital of enterprises but rather limit the types of individuals who may establish them. These individuals must fall in the following categories: rural residents, unemployed individudla ir cities and townships, operators of individual and commercial households, employees who have resigned or been discharged and others leaving or retiring from their positions, as further defined in the implementing measures. The business lines available for private enterprise are limited, however, to seven basic trades: industry; construction; communications and transport; commerce; food and beverage; service and repair; and -ecrhnological consultancy. 23. Certain other restrictions on private enterprise can be seen as manifestations of the desire to control the potential for excess. For example, the salary of the director of a private enterprise is stipulated not to exceed ten times the average staff wages. The enterprise is required to retain at least 50% of after-tax profit in the production development fund. Further retention of profits in lieu of distribution to individual owr.ers is encouraged by the exemption from the 40% tax on after-tax profit distributable to owners for additional amounts retained in the production development fund. Social concerns are noticeable in the requirement of an 8-hour day and prohibition of child labor, a level of detailed management that is not specified for state and collective enterprises. Enforcement of the regulations is also addressed: first, by specifying the State Administration for Industry and Commerce to administer the Regulations, and second, by providing the private owner with the right to request administrative reconsideration and to go to court if dissatisfied. 24. Private enterprises are also granted rights and obligations similar to those of collective enterprises. Among other things, they can operate autonomously, recruit workers, enter into contracts (including mandatory labor contracts), work out prices and apply for patents and trademarks. If a private enterprise is "bankrupt," it is required to liquidate its assets and pay its obligations. These rights must be balanced against the limitations noted above,  11 in assessing the scope for autonomy in operations offered .)y the legal framework. Fuller enterprise reform would lead to reduction or reinoval of these limitations; so far, the policies supporting the development of private enterprises have fluctuated in the period since the Regulations were enacted. D. STRUCTURING ENTERPRISES AS COMPANIES 1. Current State of Legislation 25. companv law. One important area in which the legal framework for enterprises has been lacking is in the establishment of organizational forms. Throughout the reform period, enterprises have almost interchangeably called themselves companies and enterprises. State enterprises, at least, were given a basic definition in the 1988 Enterprise Law, but the term "company" had no lagal definition in Chinese law. Indeed, at one stage (1985), there were separate registration requirements for companies (including capitalization requirements) even though there was no separate legal status for companies. Subsequently, the 1988 Enterprise Legal Person Registration Regulations repealed previous rules and combined the registration requirements for all enterprise legal persons. 26. One limited exception to the lack of company law noted was the introduction in 1990 of the limited liability company form for private enterprises, although the provisions of the Private Enterprise Regulations for such companies do not address much of the corporate legal framework normally found in company law. Moreover, there is a process of "chartering" enterprises in which specific powers and duties are set out in a charter issued by the supervisory department, and the charter is required for registration as an enterprise legal person. However, these charters frequently do not clarify the legal powers and corporate structure of the enterprise to the same extent that even the current shareholdirig legislation would provide. 27. Notwithstanding the lack of a proper legal framework, shareholding companies (also translated as joint stock companies) have been springing up all over China for about five years now. The only two areas in which the "shareholding experiment" was officially sanctioned were in Shanghai and Shenzhen. Both municipalities also established securities exchanges for the trading of share in these companies in 1990, although shares had been actively traded in the financial markets before the exchanges were established. Yet, it was not until the enactment of the Shenzhen provisional company regulations in March 1992 and the Shanghai provisional company regulations came into effect in June 1992 that there was a legally discernlble and enforceable definition of the rights carried by the shares being traded. Thus, from the point of view of establishing a proper legal definition of rights and duties, the Shanghai and  12 Shenzhen regulations constitute an important part of the legal framework for companies. (The limited liability companies under the Private Enterprise Regulations are not permitted to issue shares to the public.) 28. It is recognized, however, that a national legal framework for companies is also necessary. Not only is it desirable to spread nationwide the benefits of the corporate form (limitation of shareholder liability and enforced separation of the government as owner of shares from the management of the enterprise), but a single set of rules for corporate organization would facilitate interprovincial operations of companies and sales of shares. For instance, a buyer in Liaoning could know whether the president or the chairman of the board of the selling company in Shanghai had to sign a contract before the buyer could rely on it--without having to consult various provincial laws on the subject. Thus, a company law of naticnwide applicability remains an important goal. 29. There is yet no national company law, although a draft company law, revised from last August, was considered by the 30th session of the Standing Committee of the National People's Congress in February 1993. Unlike the August version, which only covered limited liability companies, this version reportedly includes limited liability companies, limited share companies, Chinese branches of foreign companies, joint companies and single-owner companies (an important category for state enterprise reform). So far, it apparently does not cover partnerships or unlimited companies. The revised draft is expected to be approved at the August 1993 session of the Standing Committee. 30. The Shareholding Experiment. While enactment of the company law is hoped for in 1993, in the spring of 1992 several parts of the corporate legal framework were established, which can be thought of as a functional substitute for a company law in the interim. On May 15, 1992, five agencies under the State Council (but not the State Council itself) issued the Measures on Enterprises' Shareholding System Experiment --State Commission for Restructturing the Economic System (SRC), State Planning Commission (SPC), Ministry of Finance (MOF), People's Bank of China (PBC) and the State Council Production Commission (now known as the State Economic and Trade Commission). While the Measures do not themselves set out the provisions of a company law, they permit the establishment of shareholding companies throughout China, and they require that these companies be established as either limited share companies or limited liability companies. Most importantly, the Measures mandate that all shareholding companies follow strictly the provisions of two relevant documents issued by SRC, also on May 15, 1992: the Views on Standards for Limited Share Companies and the Views on Standards for Limited Liability Companies. These two  13 documents, the Limited Share Company Standards and the Limited Liability Company Standards, are in the form of guidance from SRC, but they are structured as if they were laws (which they are not). The measures themselves are unusual, but probably binding; by requiring companies to follow the standards, this gives the Standards legal force. 31. This issuance of directives by several agencies coupled with guiding directives from one agency is not a substitute under Chinese law for the enactment of regulations (by the State Council) or laws (by the National People's Congress or its Standing Committee), under Chinese law. It is essentially a stop-gap measure to provide some legal basis in advance of formal enactment of legislation. However, the two Standards were subsequently supplemented with regulations from various agencies on relevant aspects of shareholding companies, enacted under normal administrative procedures. These reguiations cover financial management (MOF, SRC); accounting (MOF, SRC); registration and management of state assets (State Assets Management Bureau, MOF and State Administraticn for Industry and Commerce); taxation (State Taxation Bureau, SRC); labor and wages (Ministry of Labor, SRC); macro-economic control (SPC, SRC); auditing (State Audit Administration, SRC) and land administration (State Land Administration Bureau, SRC).1 While these regulations apply cnly to the so- called experimental shareholding enterprises. they could eventually form the basis for regulations to apply to all companies, once a nationwide company law is 8nacted. 2. Types of Companies 32. Based on the shareholding regulations, it is also clear that China is likely to have several types of companies established under nationwide company law, whether in one or several pieces of legislation. The Measures and the Standards provide for two basic types of companies, limited share companies and limited liability -ompanies. Drait legislation in the past several years has also beer divided into limited share companies and limited liability companies, largely because, as noted below, limited liability companies do not touch upon the notion of public ownership of shares. However, it appears that the company law draft (noted in para. 29 above) is likely to include various types of companies. 33. Both types of shareholding company under the current legislation limit the liability of shareholders to the amount of contribution. Limited ' A list of titles and dates can be found in the list of legislation in Annex 1.  14 liability companies have a limited number of shareholders (2-30), transferability of shares is limited and "stock" is not issued. Limited share companies have equal shares with no limit on the number of shares, "stock" can be issued, with approval, to the public, and shares can be transferred. As currently structared, neither of these corporate forms can be used for a state enterprise with only one shareholder. However, with two shareholders (possibly two state enterprises or government departments), a limited liability company can be formed, and a large state enterprise can, with approval, be a sole incorporator in some types of limited share company. Either form would permit cross-ownership of enterprises, while direct individual employee ownership of shares is only permitted in limited share companies. 34. Within the category of limited share companies, the legislation currently provides for several sub-categories: (a) "incorporator-held", in which funds can only be raised from incorporators and transferred among legal persons; (b) "fixed-channel fund-raising", in which funds can be raised from shares sold to incorporators, other legal persons, and, with approval, to company employees (not exceeding 20%), and can only be traded among those classes, with incorporators holding at least 35% of the shares; and (c) "public fund-raising", in which funds can be raised from the public as well as incorporators, transferability is not restricted, and incorporators hold at least 35% of the shares, the public at least 25%, and employees not more than 10% of publicly-held shares. There are many more distinctions, which are illustrated in the chart in Annex 2. Whether such complex classifications are needed to achieve particular policy goals at this juncture in the development of shareholding companies in China is another area for further analysis. 35. A full analysis of the provisions of the two Standards and the supplementary regulations is outside the scope of this paper. A preliminary overview of the Standards, however, reveals that much improvement could be introduced by making changes in two fundamental thrusts of the legialation. Firs:, there are numerous references to "relevant government departments" and to the need for approvals by and notices to them. To make the most of the economic opportunities, companies need to make economic decisions with certainty about their legal rights and enough speed not to lose those opportunities. If the legislation requires a company to get approvals from unnamed government departments, the company has no certainty about when it has gotten all the necessary approvals and is always subject to interference from another agency  15 which may decide that it is "relevant". Reducing the number of such approvals to the minimum necessary to protect '-he public interest in sound corporate organization and specifying eithier in the Regulations or in a separate document the relevant agencies would help to ameliorate this pervasive problem. 36. The second major area in which the Standards could be made more "market-friendly" to take full advantage of the benefits of the corporate for.n would be to restate the requirements for companies to "safeguard the interests of the State and the public interest". The corporate model succeeds elsewhere because there is the clarity of a single corporate purpose: to generate profits for the shareholders. If the company is wholly or partially government owned, then the government as the shareholder of the compa -' can provide in the company's charter and operation for protection of the public interest if that is its purpose. The public interst is safeguarded by the company's respect of applicable laws and regulations. Similarly, there are requirements for government approvals of company decisions (capital increase, merger, termination, etc.) which limit the ability of shareholding companies to make decisions about their financing, investment and operations. In addition to these two major concerns, there is also considerable scope for improvement in the detailed provisions, with a view towards making the corporate form in China as useful a vehicle for economic development as it has been elsewhere. 37. Neither the Standards nor the regulations offer extensive legal provisions governing two frequently-mentioned vehicles for enterprise combinations, holding companies and enterprise groups. The Limited Liability Company Standards do, for the first time, clarify that the subsidiaries of a holding company are independent companies whose shares are held by the parent whereas branch companies are separating operating entities but not separate legal entities. Beyond that, more regulation of holding companies would be expected to be found either in a company law or in separate legislation. 38. Similarly, the enterprise group phenomenon, in which several enterprises are linked in some amorphous and possibly contractual way into an enterprise group, would also benefit from the clarity and scope of legal rules that company law could offer. There is a State Council policy document of 1991 on the formation of large enterprise groups. However, the only formal legal provisions are found in the Provisional Implementing Rules for Enterprise Group Registration, issued by the State Administration for Industry and Commerce (SAIC), SPC, SRC and the Production Office in May 1992. These Rules provide certain basic formation requirements for "state trial enterprise groups". State trial enterprise groups must have a strong core enterprise linked to at least three enterprises in close association through control of assets, and other  16 enterprises in semi-close or loose association, through "ties of assets". The core enterprise should be either a large state enterprise or a company controlled by state-owned shares: (a) An enterprise in close association is linked to the core enterprise in one of four ways: (1) the core enterprise has a controlling share of investment in the "close enterprise"; (2) the "close enterprise" is contracted or leased by the core enterprise on a long-term basis; (3) the "close enterprise" is a state enterprise approved for management by the core enterprise; or (4) the state asset management department has approved the transfer of the "close enterprise" assets to management of the core enterprise. (b) An enterprise in semi-close association should either be an enterprise in which the core enterprise holds a non-controlling share or an enterprise whose shares are wholly owned or controlled by a "close enterprise". (c) An enterprise of loose association is not tied to the core enterprise through assets, but either has a stable business relationship with the core enterprise or has part of its shares held by a close or semi-close enterprise. (d) A non-productive institution can become a member of an enterprise group. All enterprises in an enterprise group remain as separate legal entities, and the enterprise group itself acquires legal personality upon registration. 39. While these basic provisions provide a framework for the organization of enterprise groups, they raise numerous questions of definition and interpretation. Moreover, these registration rules do not govern the operations and legal relationships of enterprise groups. By requiring an enterprise group charter to specify such matters as the internal governance processes, the rights and obligations of group members and the entry and exit rules, though, the registration rules do reach beyond registration to move enterprise group regulation towards a more coherent legal basis. Enterprise groups will also need to follow the restrictions in the Standards on crossholding of shares, since a company with mo