Foreign companies wishing to licence technology to a Chinese partner are often put in a difficult position. According to Chinese law, they must ascertain that their technology is "complete, without error, effective, and able to achieve the goal set forth in the contract." Providing such a warranty is mandatory. Given the appeal of China's market, it's no surprise that most foreign companies in the end agree to sign.
In recent years, China has promulgated an astounding amount of new legislation. Since the start of this year alone, 110 new laws came into effect. All these new laws make China, at least formally, more like other countries; but this body of law masks a different understanding of the law.
Chinese law can be best described as 'aspirational'. Legislation does not reflect, as in the case of common law, existing practice. Rather, legislation puts forth a vision of what reality should be. Implied in this approach is an acknowledgement that reality doesn't yet conform to the letter of the law.
Many developing countries also take this view, with their lofty-sounding constitutions, often juxtaposed against very different realities, being the primary example. This view of the law seems to have grown popular after the Second World War.
The United Nations Declaration of Human Rights, for example, is very much an aspirational legal document -- a moving one (I remember reading it as a child in Ceausescu's Romania, on the wall of the UN mission in Bucharest), but still devoid of much practical significance.
Detached from messy reality, aspirational law is easier to apply, and perhaps this flexibility has contributed to East Asia's economic success. Rather than set in stone, legal obligations, including taxation, are negotiable.
But this room for flexibility can also be frightening because, by allowing a space for interpretation, the authorities reserve the right to provide the correct answer. Thus, despite the large body of legislation China has put into place, we shouldn't assume that it forms a complete, self-functioning system.
The system is still incomplete and in need of exogenous intervention in order to function properly. Economically, this room for negotiation may be a lubricant; but when it comes to politics, one may prefer one's rights in crisp black and white.
The gap between law and reality is not only a space of negotiation between the individual or enterprise and the state; it is also a space where personal considerations are bound to become important.
Although it is to a degree true in all cultures, personal considerations are arguably more important in environments such as China (including Hong Kong and Taiwan), where they often override the law. While the official goal is to move toward 'rule of law', in practice it is often a case of 'rule by man'.
In an important article in The New York Review of Books a few years ago, the Sinologist Perry Link proposed a distinction between governments, which work according to formal rules and governments which prefer to operate in a more haphazard way. The distinction is not, surprisingly, one between democratic and dictatorial systems.
The Soviet government was authoritarian, even totalitarian, but it tended to operate in an above-the-board, transparent fashion. Its censorship rules clearly listed off-limit topics for the benefit of reporters and editors.
Singapore too is remarkably upfront about some of its more unpopular policies. Political authority in China works in much more mysterious ways -- its power is the power of 'the anaconda in the chandelier,' to use Link's memorable phrase.
According to Link, this approach internalises authority and is more menacing precisely because of that. Instead of taking full responsibility, such an agency 'lends out' a portion of its authority to those whom it seeks to control.
It says: "You have not only failed the law or this government. You have failed yourself and the onus for making the necessary changes, or any reparations, is on you. What will you do?" Failure under such a system is less a failure of action and more a failure at being. When arrests are made in China, for example, the crime is often not specified. Prisoners are told they know what they did wrong.
Such a legal system increases transaction costs and makes business more difficult. But, its defenders are quick to say, it's the same in France! It is all a question of civil versus common law. There is some truth to this, and common law does not apply easily to a fast-developing country.
After all, common law reflects custom. But what is custom in a country like China, which has been through major upheavals every generation for the past century? Common law may have emerged in China during the millennia of imperial rule, when stable custom existed, but not in modern times.
There is also a cultural origin to how law is conceived of and applied in China. Confucius and his followers did not believe in specific injunctions but in broad moralistic tenets.
Legalism, Confucianism's archrival, took the opposite approach, promoting strict regulation. Legalism was defeated in the marketplace of ideas, though its spirit survived in practice. China's choice of civil law in modern times would reinforce its earlier Confucian-Legalist tradition.
One litmus test for any system of law must be whether business can work within it. The difficulties of civil law are well known: think of derivative instruments, an area where market practice leads and regulation usually follows.
The need for prior positive permission is a tough requirement: it makes more sense, and life easier, to spell out what's not allowed, rather than list all the possible things that are allowed.
This is not an abstract, theoretical issue: In January, a leading Chinese legal scholar told Hong Kong that if the territory's Basic Law had meant to allow for universal suffrage in 2007, it would have specifically mentioned it. No positive mention means no intent for permission.
And yet companies flock to China, undeterred. The issues I have discussed here do not affect all market participants equally. Newcomers are disadvantaged versus incumbents, and smaller companies in relation to larger ones.
Companies long present in China have found ways, often after painful histories, to tackle local regulatory challenges. And large companies do not necessarily dislike the 'rule by man' element in Chinese law. It means they can get things done quickly by knowing the right people.
In the process, they often benefit from privileged 'guest' status. But even the big players are caught in a quandary: In the short-term, they see the immediate benefits of operating according to flexible local standards. In the long-term, they, like the smaller market participants, also prefer a uniform and unbiased regulatory regime.
This, then, is the paradox. China's legal system is a work in progress and yet China is the world's most popular foreign direct investment destination. Clearly, the country is doing something right.
Is it the formal legal system China has been putting in place, or is it the practice that hasn't yet been captured into law? Perhaps it is both: China combines a trend toward rules with flexibility in implementation. Indeed, China benefits from other such dual identities: it is a relatively rich, as well as a very poor, country.
It is a champion of the developing world as well as a superpower. Somehow, China seems to get the best of both worlds. That is a rare skill indeed.Powered by 
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