Twofish's Blog

January 1, 2007

Notes on the NPCSC Decision on the Property Law

Filed under: china, finance, law — twofish @ 2:54 am

This is an interesting political formula that illustrates some curious
interactions between economics and the law.  The basic economic dispute is
over whether or not privatization is essential for China to develop an
efficient corporate infrastructure (I’d argue that it isn’t,  Yasheng Huang
is one of the people that argue very strongly otherwise.)

By using the formula that “market subjects are equal” what the NPCSC is
basically doing is letting the market decide the dispute.  If it *is* the
case that private ownership is required for efficient corporations then what
will happen is that private corporations will out compete state owned ones,
and lacking state favoritism, corporations will be pushed to privatize.  On
the other hand, if you believe that private ownership *isn’t* required for
efficient corporations, then what will happen is that the state-owned sector
will be able to hold its own against private corporations (and it’s my belief
that the latter will be true).

There are three interesting implications of the idea of “market equality.”

1) First, there are very strong reasons for state-owned enterprises to support
the idea of market equality.  Although, market equality means that SOE’s
don’t get subsidies, it also means that SOE’s also have reasons not to put up
with state interference in management activities, and I suspect that many
SOE’s will use the idea of “market equality” to argue against state
restrictions which they will argue will put them at a disadvantage with
respect to private enterprises.

2) If things are equal, then they can in principle be interchangable, and I
think that the future of Chinese corporations is that they will become
hybrids with mixed private and public capital.  The contrast here is with
foreign and domestic capital which aren’t “equal” which creates an entire
body of law which regulates and restricts how foreign and domestic capital
can be combined.  The “equality” of private and public capital means that the
combinations of private and public will be decided on a case by case basis
with no restrictions and no body of law regulating how they can be mixed,
which I think will create some pretty diverse legal and ownership structures.
This can be thought of as the “hundred flowers” system of Chinese corporate
finance.

3) Finally, since there does now seem to be a consensus in favor of “market
equality” the next set of screaming will be to determine what is
exactly “equal.”  It’s not hard to come up with dozens of scenarios where
there is legitimate disagreement over whether or not a situation respects
market equality.

The last point is particularly significant for Chinese constitutional and
legal development.  Once a (rather vague) principle has been stated, there is
now the need for a mechanism to determine how it works in a specific
situation,  I’ve been doing a lot of reading on the history of US corporate
and securities law, and the striking thing about it is how passive Congress
has been, and how the major decisions and laws come out of case law from the
Courts and SEC actions.  Securities Exchange Act of 1934 section 10(b) (one
paragraph) gives rise to SEC Rule 10(b)-5 (three paragraphs) which gives rise
the the entire structure of US Securities Law.

It will be interesting to see how this process occurs in the PRC.  The two
models that I can see is that there will eventually be something in the NPCSC
which is akin to Judicial Committee of the House of Lords or French Court of
Cassation, an administrative law system coming out of the State Council which
will resemble the French Council of State or the US system of Article I
administrative law judges, or having the People’s Courts develop a system of
precedent with respect to securities and corporate law, or most likely an odd
combination of all three.

The development of corporate and securities law in the PRC is also important,
because that is one area in which the “democratic deficit” isn’t a major
handicap.  Most of the time, there is very little public interest in
corporate and securities law, and when there is interest it is in response to
a crisis or scandal in which the legislature is pressured to “do something”
without too many restrictions on what that something is.  In some ways the
fact that the NPCSC is insulated from popular pressure makes it easier for it
to act as a “House of Lords” rather than as a deliberative popular assembly.

It would be interesting to see how this all turns out.

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