I have written several articles on postings related to politics. A list of links have been provided at bottom of this article for your convenience. This article will, however address different aspects on these political events.

This is part one of a three part series. In this section I will discuss China’s aspiration for world domination and re-formation of the China Federation.

The Federal Republic of China is a proposed federal republic encompassing mainland China, Macau, Hong Kong and Taiwan. Another version envisages the Federal Republic to include China proper without Tibet, East Turkistan (Xinjiang), Hong Kong and Taiwan , which will return to the United Kingdom either as its constituent nation or British overseas territory.

This “Third Republic” (following on from the Republic of China and the People’s Republic of China) is proposed by supporters of the Tibet independence movement, although it would not in effect create an independent Tibet. Yan Jiaqi, writing for the Tibetan government in exile, has written that:

It would be a federation with the characteristics of a confederation. Federal China would consist of two kinds of republics: ‘loose republics’ such as Taiwan, Hong Kong, Macao, Tibet, Inner Mongolia and Xinjiang: and ‘close republics’ consisting the rest of China. They would differ from the existing federal countries in their defence, taxation and legal systems.

This model, however, in which the close republics would have an arrangement based on the United States of America, and the loose republics more on the European Union, is not agreed upon by all advocates of a Federal Republic.

Another concept similar to a Federal Republic of China is the concept of a United States of China. This usage was popularized after Jiang Zemin, General Secretary of the Communist Party of China, in 2001 made a comment that a united China can adopt a new national name and flag. Large economic ties between China and Taiwan have also motivated the occasional informal use of the term to describe a united China.

On June 4, 2020, a proposed New Federal State of China was announced, led by an exiled billionaire, Guo Wengui (a.k.a. Miles Kwok), and Steve Bannon.

Does the All-China Federation of Industry and Commerce Align Private Firms with the Goals of the People’s Republic of China’s Belt and Road Initiative?

The vision of the New Federal State of China…

On June 4, 2020, Xi Jinping stifled mourning and commemorations for victims of the 1989 Tiananmen Square events and refused to reassess the incident, reiterating the Communist Party of China (CPC)’s official stance. In this context, one day prior in New York City, a ceremony declaring the New Federal State of China was broadcast on YouTube for the whole world to see and hear about the idea of a Chinese Federation. Experts from 90 countries joined in expressing their opinions.

A surprise guest also commented at the ceremony: former White House chief strategist Steve Bannon. The man with sunglasses standing next to him is Guo Wengui, a businessman who has defected from China to the United States.

In his speech, Bannon said his pride of showing his new vision of a federal state for China to the public and affirmed his intention to contribute to the overthrowing of the CPC. Bannon served as chief strategist in the Trump administration but later resigned. He is a founding member and former Executive Chairman of Breitbart, a right-wing media outlet, and has consistently made the radical claim that the United States are at risk of becoming a vassal state of China.

Guo Wengui, on the other hand, is a businessman from China’s Shandong province who never went to high school and witnessed the 1989 Tiananmen Square massacre. In 1992, he was arrested and imprisoned for providing funds and goods to the demonstrators. After his release from prison, he was appointed as the chairman of Henan Grand Old Board Furniture Factory. He later became the owner of a real estate company and was involved in the development of a park for the Beijing Olympics.

Guo has an extensive network of contacts. But while developing this project, Beijing’s Vice-Mayor Liu Zhihua lost his position (the mayor of Beijing at the time was State Vice-President Wang Qishan). In December 2013, upon being called for questioning by the Central Commission for Discipline Inspection in connection with the suspected bribing of a former deputy director of the Ministry of State Security, Guo escaped via Hong Kong and is now living in the US.

The idea of a Chinese Federation is not new

In China, there is an ancient concept of Great Unity. The word great here is a verb meaning to give importance to and to respect, and unity means to make the lords and ladies of the world respectable. It is therefore to be understood as the unification of the Heavenly Children. In China, this grand unification ideology is dominant, and the idea of decentralization and federalism, even if not prevalent today, has long been discussed as a way to achieve this unity. A declaration adopted at the Second Congress of the Communist Party of China in July 1922 states that the idea of a certain degree of federalism had been proposed, with the following two points:

– overall, Chinese provinces (referring to all provinces, except those with ethnic minorities) would be ruled under a centralized system ;

– but Inner Mongolia, Tibet, and Xinjiang would be promoted as autonomous territories within a Federal Republic of China.

From these points of view, it is evident that the thinking of the CPC in the early days of its founding had federation in mind, effectively opening the way for the creation and maintaining of a system based on decentralization of power.

Is there a roadmap to a New Federal State of China?

Based on this, two scenarios present themselves: (1) a single state moving to federalism, or (2) divided nations uniting to form a federation.

If China were to move to a federal system today, which scenario would apply? The answer is a tricky one, as neither scenario is a perfect fit. China has many provincial capitals, each of which lacks a tradition of self-government because the country was unable (or unwilling) to establish an autonomous foundation for a federal system. Besides, China’s history has been riddled with rivalries and has not had the peaceful environment necessary to form a federation. Incidentally, Belgium is the only country that became a federal state with the second form above. The fact that the Kingdom of Belgium was able to transition to the Belgian Confederation was due to the fact that the religious and linguistic divisions were made in a peaceful environment.

In light of this, how should we view the New Federal State of China project? The following is a summary of this author’s own observations based on non-publicly available information.

Chinese funds are supporting Mr. Bannon’s Federal China push, while elements within the Trump camp may be manufacturing one side of the current US-China clash.
The anti-Xi Jinping faction is casting a shadow over the CPC, and regime reformers are making themselves more visible. Given the new directions given at the latest National People’s Congress, the deterioration in China-US relations around the time of the Beidaihe Conference, as well as the resistance of the free Hong Kong movement, a move to un-sit Xi Jinping may very well be seen as the best way to get out of the current deadlock.
There is a possibility that Chinese elements are staging the current Hong Kong riots, in an effort to divide China. The question being: who is contributing the funds?

In short, the ensemble cast involved in the idea of a New Federal State of China shows the significant influence of that very idea. The following statement by the Himalaya Supervisory Organization non-government organization gives us a hint as to the next specific actions they might take:

“ The Mission of the Himalaya Supervisory Organization – At the time of the announcement of the establishment of the New Federal State of China, the Himalaya Supervisory Organization hereby solemnly pledges: in view of the fact that the CPC still holds the state power to exercise various methods of extreme control over the people, the Himalaya Supervisory Organization will make all preparations for the formation of the New Federal State of China with outreach efforts. It will actively liaise with various countries, political parties, associations and international friends supporting the establishment of the New Federal State of China and coordinate relationships with the interim government. It will guide and assist the preparation of the new government, and ensure the smooth, effective, and steady progress of the preparation of the New Federal State of China. The Himalaya Supervisory Organization will collaborate with international supervisory organizations to oversee the operations of the New Federal State of China according to law. The Himalaya Supervisory Organization complies with both international law and laws made by the New Federal State of China and accepts strict supervision from relevant international legal institutions. (Source: A Declaration of The New Federal State of China)

To organize this Himalaya Supervisory Organization for ensuring rule of law, democracy, and freedom in the new China can clearly be seen as a direct response to China’s pushing for new national security legislation in Hong Kong.

Looking at the recent developments in the United States, China, and Hong Kong, including the concept of the New Federation State of China, it appears that the idea of “Pax Japonica” championed by this author’s Institute for International Strategy and Information Analysis (IISIA) is steadily making progress…

All-China Federation of Industry and Commerce

The All-China Federation of Industry and Commerce (ACFIC; simplified Chinese: ; traditional Chinese:; pinyin: Zhōnghuá Quánguó Gōngshāngyè Liánhéhuì) is a non-governmental chamber of commerce, established in 1953 as a successor to the chambers of commerce that were first founded during the Qing dynasty. Today, it consists of Chinese industrialists and business people under the leadership of the United Front Work Department of the Chinese Communist Party (CCP), as well as being a constituent organization of the National Committee of the Chinese People’s Political Consultative Conference and the holder of a number of seats in the National People’s Congress. The organization assists the government in managing China’s private sector economy and acts as a bridge between the private sector entities and the government.

Core functions

The core responsibilities of the ACFIC are to:^[2]

Increase communications between the government and the private economy;
Assist the government in managing the private economy;
Participate in political consultation of national policies and strategies in politics, economy and social affairs;
Help its members in technological innovation, management and culture for increased competitiveness and in achieving sustainable development;
Represent the legitimate rights of its members and to extend their proposals and requirements to government;
Provide members with services in training, financing, technology, legal consultation and information, and to resolve the difficulties and problems they are facing;
Build closer relationships with foreign commercial and industrial entities;
Help members to go overseas for business opportunities and contribute to China’s economic reforms.

Structure

The agency is structured into the following departments:

General Office
Department of Research
Department of Membership
Department of Publicity and Education
Department of Economic Service
Department of Poverty Relief and Social Service
Department of International Liaison
Department of Legal Affairs
Department of Human Resources

Leadership

Since November 2002 to 2012, the ACFIC had been led by Chairman Huang Mengfu, who, like his predecessors, was also a vice chairman of the Chinese People’s Political Consultative Conference National Committee, ranking as a national leader of China. His predecessor was Jing Shuping, founder of the first private bank in modern China and the son of a well-known entrepreneur of the later Qing Dynasty.

First vice-chairman of the ACFIC is Quan Zhezhu (Jeon Cheol-su), a deputy minister of the United Front Department originally from Jilin. ACFIC has another 23 vice-chairpersons, most of them private entrepreneurs.

Regional federations

More than 3,000 regional federations of industry and commerce (FIC) have been established in all provinces and prefectures and most counties of China. As of 2009, they listed a combined membership of 2.6 million private enterprises. The relationship between ACFIC and the regional FIC is described as a role of guidance, but the statute of ACFIC is also valid for the regional federations.

In September 2020, the CCP announced that it would establish more party committees in regional FICs, and would arrange a special liaison between them and the CCP.

2020 Investment Climate Statements: China

EXECUTIVE SUMMARY

The People’s Republic of China (PRC) is the top global Foreign Direct Investment (FDI) destination after the United States due to its large consumer base and integrated supply chains. In 2019, China made some modest openings in the financial sector and passed key pieces of legislation, including a new Foreign Investment Law (FIL). China remains, however, a relatively restrictive investment environment for foreign investors due to restrictions in key economic sectors. Obstacles to investment include ownership caps and requirements to form joint venture partnerships with local Chinese firms, industrial policies such as Made in China 2025 (MIC 2025), as well as pressures on U.S. firms to transfer technology as a prerequisite to gaining market access. These restrictions shield Chinese enterprises – especially state-owned enterprises (SOEs) and other enterprises deemed “national champions” – from competition with foreign companies.

The Chinese Communist Party (CCP) in 2019 marked the 70th anniversary of its rule, amidst a wave of Hong Kong protests and international concerns regarding forced labor camps in Xinjiang. Since the CCP 19th Party Congress in 2017, CCP leadership has underscored Chairman Xi Jinping’s leadership and expanded the role of the party in all facets of Chinese life:  cultural, social, military, and economic. An increasingly assertive CCP has caused concern among the foreign business community about the ability of future foreign investors to make decisions based on commercial and profit considerations, rather than CCP political dictates.

Key investment announcements and new developments in 2019 included:

On March 17, 2019, the National People’s Congress passed the new FIL that effectively replaced previous laws governing foreign investment.
On June 30, 2019, the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) jointly announced the release of China’s three “lists” to guide FDI.  Two “negative lists” identify the industries and economic sectors from which foreign investment is restricted or prohibited based on location, and the third list identifies sectors in which foreign investments are encouraged.  In 2019, some substantial openings were made in China’s financial services sector.
The State Council also approved the Regulation on Optimizing the Business Environment and Opinions on Further Improving the Utilization of Foreign Investment, which were intended to assuage foreign investors’ mounting concerns with the pace of economic reforms.

While Chinese pronouncements of greater market access and fair treatment of foreign investment are welcome, details and effective implementation are needed to improve the investment environment and restore investors’ confidence.  As China’s economic growth continues to slow, officially declining to 6.1% in 2019 – the slowest growth rate in nearly three decades – the CCP will need to deepen its economic reforms and implementation.  Moreover, the emergence of the Coronavirus (COVID-19) pandemic in Wuhan, China in December 2019, will place further strain on China’s economic growth and global supply chains.

Measure	Year	Index/Rank	Website Address
Transparency International’s Corruption Perceptions Index	2019	137 of 180	http://www.transparency.org/ research/cpi/overview
World Bank’s Doing Business Report	2019	31 of 190	http://www.doingbusiness.org/ en/rankings
Global Innovation Index	2019	14 of 126	https://www.globalinnovationindex.org/ analysis-indicator
U.S. FDI in partner country ($M USD, stock positions)	2018	USD116,518	https://apps.bea.gov/international/ factsheet/
World Bank GNI per capita	2018	USD9,460	http://data.worldbank.org/indicator/ NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

China continues to be one of the largest recipients of global FDI due to a relatively high economic growth rate and an expanding consumer base that demands diverse, high-quality products. FDI has historically played an essential role in China’s economic development. However, due to recent stagnant FDI growth and gaps in China’s domestic technology and labor capabilities, Chinese government officials have prioritized promoting relatively friendly FDI policies promising market access expansion and non-discriminatory, “national treatment” for foreign enterprises through general improvements to the business environment. They also have made efforts to strengthen China’s regulatory framework to enhance broader market-based competition.

In 2019, China issued an updated nationwide “negative list” that made some modest openings to foreign investment, most notably in the financial sector, and promised future improvements to the investment climate through the implementation of China’s new FIL. MOFCOM reported that FDI flows to China grew by 5.8 percent year-on-year in 2019, reaching USD137 billion.  In 2019, U.S. businesses expressed concern over China’s weak protection and enforcement of intellectual property rights (IPR); corruption; discriminatory and non-transparent anti-monopoly enforcement that forces foreign companies to license technology at below-market prices; excessive cyber security and personal data-related requirements; increased emphasis on the role of CCP cells in foreign enterprises, and an unreliable legal system lacking in both transparency and the rule of law.

China seeks to support inbound FDI through the “Invest in China” website, where MOFCOM publishes laws, statistics, and other relevant information about investing in China.  Further, each province has a provincial-level investment promotion agency that operates under the guidance of local-level commerce departments.  See:  MOFCOM’s Investment Promotion Website

Limits on Foreign Control and Right to Private Ownership and Establishment

Entry into the Chinese market is regulated by the country’s “negative lists,” which identify the sectors in which foreign investment is restricted or prohibited, and a catalogue for encouraged foreign investment, which identifies the sectors the government encourages foreign investment to be allocated to.

The Special Administrative Measures for Foreign Investment Access (̈the “Nationwide Negative List”);
The Special Administrative Measures for Foreign Investment Access to Pilot Free Trade Zones (the “FTZ Negative List”) used in China’s 18 FTZs
The Industry Catalogue for Encouraged Foreign Investment (also known as the “FIC”). The central government has used the FIC to encourage FDI inflows to key sectors – in particular semiconductors and other high-tech industries that would help China achieve MIC 2025 objectives. The FIC is subdivided into a cross-sector nationwide catalogue and a separate catalogue for western and central regions, China’s least developed regions.

In addition to the above lists, MOFCOM and NDRC also release the annual Market Access Negative List to guide investments. This negative list – unlike the nationwide negative list that applies only to foreign investors – defines prohibitions and restrictions for all investors, foreign and domestic. Launched in 2016, this negative list attempted to unify guidance on allowable investments previously found in piecemeal laws and regulations. This list also highlights what economic sectors are only open to state-owned investors.

In restricted industries, foreign investors face equity caps or joint venture requirements to ensure control is maintained by a Chinese national and enterprise. These requirements are often used to compel foreign investors to transfer technology in order to participate in China’s market. Foreign companies have reported these dictates and decisions are often made behind closed doors and are thus difficult to attribute as official Chinese government policy. Foreign investors report fearing government retaliation if they publicly raise instances of technology coercion.

Below are a few examples of industries where these sorts of investment restrictions apply:

Preschool, general high school, and higher education institutes require a Chinese partner.
Establishment of medical institutions also require a Chinese JV partner.

Examples of foreign investment sectors requiring Chinese control include:

Selective breeding and seed production for new varieties of wheat and corn.
Basic telecommunication services.
Radio and television listenership and viewership market research.

Examples of foreign investment equity caps include:

50 percent in automobile manufacturing (except special and new energy vehicles);
50 percent in value-added telecom services (except e-commerce domestic multiparty communications, storage and forwarding, call center services);
50 percent in manufacturing of commercial and passenger vehicles.

The 2019 editions of the nationwide and FTZ negative lists and the FIC for foreign investment came into effect July 30, 2019. The central government updated the Market Access Negative List in October 2019. The 2019 foreign investment negative lists made minor modifications to some industries, reducing the number of restrictions and prohibitions from 48 to 40 in the nationwide negative list, and from 45 to 37 in China’s pilot FTZs. Notable changes included openings in the oil and gas sector, telecommunications, and shipping of marine products. On July 2, 2019, Premier Li Keqiang announced new openings in the financial sector, including lifting foreign equity caps for futures by January 2020, fund management by April, and securities by December. While U.S. businesses welcomed market openings, many foreign investors remained underwhelmed and disappointed by Chinese government’s lack of ambition and refusal to provide more significant liberalization. Foreign investors noted these announced measures occurred mainly in industries that domestic Chinese companies already dominate.

2. Bilateral Investment and Taxation Treaties

China has 109 bilateral investment treaties (BITs) in force and multiple free trade agreements (FTAs) with investment chapters.  China has negotiated 20 FTAs with trade and investment partners, is currently negotiating 13 FTAs and FTA upgrades, and is considering eight further potential FTA and FTA-upgrade negotiations.  China’s existing FTA partners are Maldives, Georgia, ASEAN, Republic of Korea, Pakistan, Australia, Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Hong Kong, Macao, and Taiwan.  In general, these agreements cover topics like expropriation, most-favored-nation treatment, repatriation of investment proceeds, and investment arbitration mechanisms.  Relative to U.S.-equivalent agreements, Chinese agreements generally offer fewer protections to foreign investors. For a list of China’s signed BITs/FTAs, please click here .

The United States and China last held BIT negotiations in 2017, but fell short of concluding an agreement. The two countries concluded a “Phase One” trade agreement on January 15, 2020.  Under the Phase One agreement, China committed to making substantial purchases of U.S. goods and services and to establishing a strong bilateral dispute resolution mechanism to ensure prompt and effective implementation and enforcement. The Phase One agreement also commits China to reforms in its intellectual property regime and prohibits the forcing or pressuring of companies to transfer technology as a condition for market access, administrative approvals, or receipt of any advantages.

The United States and China concluded a bilateral taxation treaty in 1984.

3. Legal Regime

Transparency of the Regulatory System

One of China’s WTO accession commitments was to establish an official journal dedicated to the publication of laws, regulations, and other measures pertaining to or affecting trade in goods, services, trade related aspects of intellectual property rights (TRIPS), and the control of foreign exchange.  Despite mandatory 30-day public comment periods, Chinese ministries continue to post only some draft administrative regulations and departmental rules online, often with a public comment period of less than 30 days.  U.S. businesses operating in China consistently cite arbitrary legal enforcement and the lack of regulatory transparency among the top challenges of doing business in China.  Government agencies often do not make available for public comment and proceed to publish “normative documents” (opinions, circulars, notices, etc.) or other quasi-legal measures to address situations where there is no explicit law or administrative regulation in place.  When Chinese officials claim an assessment or study was made for a law, the methodology of the study and the results are not made available to the public.  As a result, foreign investors face a regulatory system rife with inconsistencies.

In China’s state-dominated economic system, the relationships are often blurred between the CCP, the Chinese government, Chinese business (state- and private-owned), and other Chinese stakeholders.  Foreign-invested enterprises (FIEs) perceive that China prioritizes political goals, industrial policies, and a desire to protect social stability at the expense of foreign investors, fairness, and the rule of law.  The World Bank Global Indicators of Regulatory Governance gave China a composite score of 1.75 out 5 points, attributing China’s relatively low score to the futility of foreign companies appealing administrative authorities’ decisions to the domestic court system; not having easily accessible and updated laws and regulations; the lack of impact assessments conducted prior to issuing new laws; and other concerns about transparency.

For accounting standards, Chinese companies use the Chinese Accounting Standards for Business Enterprises (ASBE) for all financial reporting within mainland China. Companies listed overseas or in Hong Kong may choose to use ASBE, the International Financial Reporting Standards, or Hong Kong Financial Reporting Standards.

International Regulatory Considerations

As part of its WTO accession agreement, China agreed to notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations. However, China continues to issue draft technical regulations without proper notification to the TBT Committee.

Legal System and Judicial Independence

The Chinese legal system borrows heavily from continental European legal systems, but with “Chinese characteristics.” The rules governing commercial activities are found in various laws, regulations, and judicial interpretations, including China’s civil law, contract law, partnership enterprises law, security law, insurance law, enterprises bankruptcy law, labor law, and several interpretations and regulations issued by the Supreme People’s Court (SPC). While China does not have specialized commercial courts, it has created specialized courts and tribunals for the hearing of intellectual property disputes, including in Beijing, Guangzhou, and Shanghai. In October 2018, the National People’s Congress approved the establishment of a national SPC appellate tribunal to hear civil and administrative appeals of technically complex intellectual property (IP) cases.

China’s constitution and various laws provide contradictory statements about court independence and the right of judges to exercise adjudicative power free from interference by administrative organs, public organizations, or powerful individuals.  In practice, regulators heavily influence courts, and the Chinese constitution establishes the supremacy of the “leadership of the communist party.”  U.S. companies often avoid challenging administrative decisions or bringing commercial disputes before local courts due to perceptions of futility or government retaliation.

Laws and Regulations on Foreign Direct Investment

China’s new investment law, the FIL, was passed on March 2019 and came into force on January 1, 2020, replacing China’s previous foreign investment framework. The FIL provides a five-year transition period for foreign enterprises established under previous foreign investment laws, after which all foreign enterprises will be subject to the same domestic laws as Chinese companies, such as the Company Law and, where applicable, the Partnership Enterprise Law. The FIL intends to abolish the case-by-case review and approval system on market access for foreign investment and standardize the regulatory regimes for foreign investment by including the negative list management system, a foreign investment information reporting system, and a foreign investment security review system all under one document. The FIL also seeks to address common complaints from foreign business and government by explicitly banning forced technology transfers, promising better IPR protection, and establishing a complaint mechanism for investors to report administrative abuses. However, foreign investors complain that the FIL and its implementing regulations lack substantive guidance, providing Chinese ministries and local officials significant regulatory discretion, including the ability to retaliate against foreign companies.

Competition and Anti-Trust Laws

The Anti-Monopoly Bureau of the SAMR enforces China’s Anti-Monopoly Law (AML) and oversees competition issues at the central and provincial levels. The agency reviews mergers and acquisitions, and investigates cartel and other anticompetitive agreements, abuse of a dominant market position, and abuse of administrative powers by government agencies. SAMR issues new implementation guidelines and antitrust provisions to fill in gaps in the AML, address new trends in China’s market, and help foster transparency in AML enforcement. Generally, SAMR has sought public comment on proposed measures and guidelines, although comment periods can be less than 30 days. In 2019, the agency put into effect provisions on abuse of market dominance, prohibition of monopoly agreements, and restraint against abuse of administrative powers to restrict competition. In January 2020, SAMR published draft amendments to the AML for comment, which included, among other changes, stepped-up fines for AML violations and expanded factors to consider abuse of market dominance by Internet companies. (This is the first step in a lengthy process to amend the AML.) SAMR also oversees the Fair Competition Review System (FCRS), which requires government agencies to conduct a review prior to issuing new and revising existing laws, regulations, and guidelines to ensure such measures do not inhibit competition.

While these are seen as positive measures, foreign businesses have complained that enforcement of competition policy is uneven in practice and tends to focus on foreign companies. Foreign companies have expressed concern that the government uses AML enforcement as an extension of China’s industrial policies, particularly for companies operating in strategic sectors. The AML explicitly protects the lawful operations of government monopolies in industries that affect the national economy or national security. U.S. companies have expressed concerns that SAMR consults with other Chinese agencies when reviewing M&A transactions, allowing other agencies to raise concerns, including those not related to antitrust enforcement, in order to block, delay, or force transacting parties to comply with preconditions in order to receive approval. Foreign companies have also complained that China’s enforcement of AML facilitated forced technology transfer or licensing to local competitors.

Expropriation and Compensation

Chinese law prohibits nationalization of FIEs, except under vaguely specified “special circumstances” where there is a national security or public interest need. Chinese law requires fair compensation for an expropriated foreign investment, but does not detail the method used to calculate the value of the foreign investment.  The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress through the annual 527 Investment Dispute Report of several cases of concern.

Dispute Settlement

ICSID Convention and New York Convention

China is a contracting state to the Convention on the Settlement of Investment Disputes (ICSID Convention) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).  Chinese legislation that provides for enforcement of foreign arbitral awards related to these two Conventions includes the Arbitration Law adopted in 1994, the Civil Procedure Law adopted in 1991 (later amended in 2012), the law on Chinese-Foreign Equity Joint Ventures adopted in 1979 (amended most recently in 2001), and a number of other laws with similar provisions.  The Arbitration Law embraced many of the fundamental principles of the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration.

nvestor-State Dispute Settlement (ISDS)

Initially, China was disinclined to accept ISDS as a method to resolve investment disputes based on its suspicions of international law and international arbitration, as well as its emphasis on state sovereignty. China’s early BITs, such as the 1982 China–Sweden BIT, only included state–state dispute settlement. As China has become a capital exporter under its initiative of “Going Global” and infrastructure investments under the OBOR initiative, its views on ISDS have shifted to allow foreign investors with unobstructed access to international arbitration to resolve any investment dispute that cannot be amicably settled within six months. Chinese investors did not use ISDS mechanisms until 2007, and the first known ISDS case against China was initiated in 2011 by Malaysian investors. On July 19, 2019, China submitted its proposal on ISDS reform to the United Nations Commission on International Trade Law (UNCITRAL) Working Group III. Under the proposal, China reaffirmed its commitment to ISDS as an important mechanism for resolving investor-state disputes under public international law. However, it suggested various pathways for ISDS reform, including supporting the study of a permanent appellate body. including supporting the study of a permanent appellate body.

International Commercial Arbitration and Foreign Courts

Chinese officials typically urge private parties to resolve commercial disputes through informal conciliation. If formal mediation is necessary, Chinese parties and the authorities typically prefer arbitration to litigation. Many contract disputes require arbitration by the Beijing-based China International Economic and Trade Arbitration Commission (CIETAC). Established by the State Council in 1956 under the auspices of the China Council for the Promotion of International Trade (CCPIT), CIETAC is China’s most widely utilized arbitral body for foreign-related disputes. Some foreign parties have obtained favorable rulings from CIETAC, while others have questioned CIETAC’s fairness and effectiveness. Besides CIETAC, there are also provincial and municipal arbitration commissions. A foreign party may also seek arbitration in some instances from an offshore commission. Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies. In these instances, foreign investors may appeal to higher courts. The Chinese government and judicial bodies do not maintain a public record of investment disputes. The SPC maintains an annual count of the number of cases involving foreigners but does not provide details about the cases. Rulings in some cases are open to the public.
In 2018, the SPC established the China International Commercial Court (CICC) to adjudicate international commercial cases, especially cases related to the OBOR initiative. The first CICC was established in Shenzhen, followed by a second court in Xi’an. The court held its first public hearing on May 2019, involving a Chinese company suing an Italian company, and issued its first ruling on March 2020, siding with the Chinese company. Parties to a dispute before the CICC can only be represented by Chinese law-qualified lawyers, as foreign lawyers do not have a right of audience in Chinese courts. Unlike other international courts, foreign judges are not permitted to be part of the proceedings. Judgments of the CICC, given it is a part of the SPC, cannot be appealed from, but are subject to possible “retrial” under the Civil Procedure Law. Local contacts and academics note that to-date, the CICC has not reviewed any OBOR or infrastructure related cases and question the CICC’s ability to provide “equal protection” to foreign investors.

China has bilateral agreements with 27 countries on the recognition and enforcement of foreign court judgments, but not with the United States. However, under Chinese law, local courts must prioritize China’s laws and other regulatory measures above foreign court judgments.

Bankruptcy Regulations

China introduced formal bankruptcy laws in 2007, under the Enterprise Bankruptcy Law, which applied to all companies incorporated under Chinese laws and subject to Chinese regulations. However, courts routinely rejected applications from struggling businesses and their creditors due to the lack of implementation guidelines and concerns over social unrest.  Local government-led negotiations resolved most corporate debt disputes, using asset liquidation as the main insolvency procedure. Many insolvent Chinese companies survived on state subsidies and loans from state-owned banks, while others defaulted on their debts with minimal payments to creditors. After a decade of heavy borrowing, China’s growth has slowed and forced the government to make needed bankruptcy reforms. China now has more than 90 U.S.-style specialized bankruptcy courts.  In 2019, the government added new courts in Beijing, Shanghai and Shenzhen.  Court-appointed administrators—law firms and accounting firms that help verify claims, organize creditors’ meetings, and list and sell assets online as authorities look to handle more cases and process them faster.  China’s SPC recorded over 19,000 liquidation and bankruptcy cases in 2019, double the number of cases in 2017.  While Chinese authorities are taking steps to address mounting corporate debt and are gradually allowing some companies to fail, companies generally avoid pursing bankruptcy because of the potential for local government interference and fear of losing control over the bankruptcy outcome. According to experts, Chinese courts not only lack the resources and capacity to handle bankruptcy cases, but bankruptcy administrators, clerks, and judges lack relevant experience.

4. Industrial Policies

Investment Incentives

To attract foreign investment, different provinces and municipalities offer preferential packages like a temporary reduction in taxes, resources and land use benefits, reduction in import or export duties, special treatment in obtaining basic infrastructure services, streamlined government approvals, research and development subsidies, and funding for initial startups. Often, these packages stipulate that foreign investors must meet certain benchmarks for exports, local content, technology transfer, and other requirements. The Chinese government incentivizes foreign investors to participate in initiatives like MIC 2025 that seek to transform China into an innovation-based economy. Announced in 2015, China’s MIC 2025 roadmap has prioritized the following industries: new-generation information technology, advanced numerical-control machine tools and robotics, aerospace equipment, maritime engineering equipment and vessels, advanced rail, new-energy vehicles, energy equipment, agricultural equipment, new materials, and biopharmaceuticals and medical equipment. While mentions of MIC 2025 have all but disappeared from public discourse, a raft of policy announcements at the national and sub-national levels indicate China’s continued commitment to developing these sectors. Foreign investment plays an important role in helping China move up the manufacturing value chain. However, foreign investment remains closed off to many economic sectors that China deems sensitive due to broadly defined national or economic security concerns.

Foreign Trade Zones/Free Ports/Trade Facilitation

In 2013, the State Council announced the Shanghai pilot FTZ to provide open and high-standard trade and investment services to foreign companies. China gradually scaled up its FTZ pilot program to 12 FTZs, launching an additional six FTZs in 2019. China’s FTZs are in: Tianjin, Guangdong, Fujian, Chongqing, Hainan, Henan, Hubei, Liaoning, Shaanxi, Sichuan, Zhejiang, Jiangsu, Shandong, Hebei, Heilongjiang, Guanxi, and Yunnan provinces. The goal of all of China’s FTZs is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects to eventually introduce in other parts of the domestic economy. The FTZs promise foreign investors “national treatment” for the market access phase of an investment in industries and sectors not listed on the FTZ negative list, or on the list of industries and economic sectors from which foreign investment is restricted or prohibited. However, the 2019 FTZ negative list lacked substantive changes, and many foreign firms have reported that in practice, the degree of liberalization in the FTZs is comparable to opportunities in other parts of China. The stated purpose of FTZs is also to integrate these areas more closely with the OBOR initiative.

Performance and Data Localization Requirements

As part of China’s WTO accession agreement, the PRC government promised to revise its foreign investment laws to eliminate sections that imposed on foreign investors requirements for export performance, local content, balanced foreign exchange through trade, technology transfer, and research and development as a prerequisite to enter China’s market. In practice, China has not completely lived up to these promises. Some U.S. businesses report that local officials and regulators sometimes only accept investments with “voluntary” performance requirements or technology transfer that help develop certain domestic industries and support the local job market. Provincial and municipal governments will sometimes restrict access to local markets, government procurement, and public works projects even for foreign firms that have already invested in the province or municipality. In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose IP content or provide IP licenses to Chinese firms, often at below market rates.

Furthermore, China’s evolving cybersecurity and personal data protection regime includes onerous restrictions on firms that generate or process data in China, such as requirements for certain firms to store data in China. Restrictions exist on the transfer of personal information of Chinese citizens outside of China. These restrictions have prompted many firms to review how their networks manage data. Foreign firms also fear that PRC laws call for the use of “secure and controllable,” “secure and trustworthy,” etc. technologies will curtail sales opportunities for foreign firms or pressure foreign companies to disclose source code and other proprietary intellectual property. In October 2019, China adopted a Cryptography Law that includes restrictive requirements for commercial encryption products that “involve national security, the national economy and people’s lives, and public interest.” This broad definition of commercial encryption products that must undergo a security assessment raises concerns that implementation will lead to unnecessary restrictions on foreign information and communications technology (ICT) products and services. Further, prescriptive technology adoption requirements, often in the form of domestic standards that diverge from global norms, in effect give preference to domestic firms. These requirements potentially jeopardize IP protection and overall competitiveness of foreign firms operating in China.

5. Protection of Property Rights

Real Property

The Chinese state owns all urban land, and only the state can issue long-term land leases to individuals and companies, including foreigners, subject to many restrictions. Chinese property law stipulates that residential property rights renew automatically, while commercial and industrial grants renew if the renewal does not conflict with other public interest claims. Several foreign investors have reported revocation of land use rights so that Chinese developers could pursue government-designated building projects. Investors often complain about insufficient compensation in these cases. In rural China, collectively owned land use rights are more complicated. The registration system suffers from unclear ownership lines and disputed border claims, often at the expense of local farmers whom village leaders exclude in favor of “handshake deals” with commercial interests. China’s Securities Law defines debtor and guarantor rights, including rights to mortgage certain types of property and other tangible assets, including long-term leases. Chinese law does not prohibit foreigners from buying non-performing debt, but such debt must be acquired through state-owned asset management firms, and PRC officials often use bureaucratic hurdles to limit foreigners’ ability to liquidate assets.

Intellectual Property Rights

In 2019, China’s legislature promulgated multiple reforms to China’s IP protection and enforcement systems. In January, the Guidelines on Interim and Preliminary Injunctions for Intellectual Property Disputes came into force. These SPC guidelines provide added clarity to the IP injunction process and offer additional procedural safeguards for trade secret cases.  In April, the Standing Committee of the National People’s Congress passed amendments to the Trademark Law, the Anti-Unfair Competition Law (AUCL), and the Administrative Licensing Law, among other legislation that increases the potential punitive penalty for willful infringement to up to five times the value of calculated damages. China also amended the Administrative Licensing Law to provide administrative penalties for government officials who illegally disclose trade secrets or require the transfer of technology for the granting of administrative licenses. Similarly, in March, China’s State Council revised several regulations that U.S. and EU enterprises and governments had criticized for discriminating against foreign technology and IP holders. Finally, in November, the Amended Guidelines for Patent Examination came into effect. This measure provides further procedural guidance and defines patentability requirements for stem cells and graphical user interfaces.

Despite the changes to China’s legal and regulatory IP regime, some aspects of China’s IP protection regime fall short of international best practices. Ineffective enforcement of Chinese laws and regulations remains a significant obstacle for foreign investors trying to protect their IP, and counterfeit and pirated goods manufactured in China continue to pose a challenge. U.S. rights holders continued to experience widespread infringement of patents, trademarks, copyrights, and trade secrets, as well as problems with competitors gaming China’s IP protection and enforcement systems. In some sectors, Chinese law imposes requirements that U.S. firms develop their IP in China or transfer their IP to Chinese entities as a condition to accessing the Chinese market, or to obtain tax and other preferential benefits available to domestic companies. Chinese policies can effectively require U.S. firms to localize research and development activities, making their IP much more susceptible to theft or illicit transfer. These practices are documented in the 2019 Section 301 Report released by the Office of the U.S. Trade Representative (USTR). The PRC also remained on the Priority Watch List in the 2020 USTR Special 301 Report, and several Chinese physical and online markets were listed in the 2019 USTR Review of Notorious Markets for Counterfeiting and Piracy. Under the recently signed U.S.-China Phase One trade agreement, China is required to make a number of structural reforms to its IP regime, which will be captured in an IP action plan.

6. Financial Sector

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly-developed, and multi-tiered capital market. Since their founding over three decades ago, the Shanghai and Shenzhen Exchanges, combined, are ranked the second largest stock market in the world with over USD5 trillion in assets. China’s bond market has similarly expanded significantly to become the third largest worldwide, totaling approximately USD13 trillion. Direct investment by private equity and venture capital firms has increased significantly, but has faced setbacks due to China’s capital controls, which complicate the repatriation of returns. In December 2019, the State Council and China’s banking and securities regulatory authorities issued a set of measures that would remove in 2020 foreign ownership caps in select segments of China’s financial sector. Specifically, foreign investors can wholly own insurance and futures firms as of January 1, asset management companies as of April 1, and securities firms as of December 1, 2020.

China has been an IMF Article VIII member since 1996 and generally refrains from restrictions on payments and transfers for current international transactions.  However, the government has used administrative and preferential policies to encourage credit allocation towards national priorities, such as infrastructure investments.  As of 2019, over 40 sovereign entities and private sector firms, including Daimler and Standard Chartered HK, have since issued roughly USD48 billion in “Panda Bonds,” Chinese renminbi (RMB)-denominated debt issued by foreign entities in China.  China’s private sector can also access credit via bank loans, bond issuance, and wealth management and trust products.  However, the vast majority of bank credit is disbursed to state-owned firms, largely due to distortions in China’s banking sector that have incentivized lending to state-affiliated entities over their private sector counterparts.

The Monetary and Banking System

China’s monetary policy is run by the People’s Bank of China (PBOC), China’s central bank.  The PBOC has traditionally deployed various policy tools, such as open market operations, reserve requirement ratios, benchmark rates and medium-term lending facilities, to control credit growth.  The PBOC had previously also set quotas on how much banks could lend, but abandoned the practice in 1998.  As part of its efforts to shift towards a more market-based system, the PBOC announced in 2019 that it will reform its one-year loan prime rate (LPR), which will serve as an anchor reference for Chinese lenders. The LPR is based on the interest rate for one-year loans that 18 banks offer their best customers.  Despite these measures to move towards more market-based lending, China’s financial regulators still influence the volume and destination of Chinese bank loans through “window guidance” – unofficial directives delivered verbally – as well as through mandated lending targets for key economic groups, such as small and medium sized enterprises.

The China Banking and Insurance Regulatory Commission (CBIRC) oversees China’s roughly 4,000 lending institutions.  At the end of the first quarter of 2019, Chinese banks’ total assets reached RMB 276 trillion (USD40 trillion).  China’s “Big Five” – Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, and Industrial and Commercial Bank of China – dominate the sector and are largely stable, but over the past year, China has experienced regional pockets of banking stress, especially among smaller lenders. Reflecting the level of weakness among these banks, in November 2019, the PBOC announced that about one in 10 of China’s banks received a “fail” rating following an industry-wide review.  The assessment deemed 420 firms, all rural financial institutions, “extremely risky.” The official rate of non-performing loans among China’s banks is relatively low: below two percent as of the end of 2019.  However, analysts believe the actual figure may be significantly higher.  Bank loans continue to provide the majority of credit options (reportedly around 66 percent in 2019) for Chinese companies, although other sources of capital, such as corporate bonds, equity financing, and private equity are quickly expanding their scope, reach, and sophistication in China. In December 2019, the Coronavirus (COVID-19) pandemic emerged in Wuhan, China. In response, the PBOC established a variety of programs to stimulate the economy, including a re-lending scheme of USD4.28 billion and a special credit line of USD50 billion for policy banks.  In addition, the Ministry of Industry and Information Technologies established a list of companies vital to COVID-19 efforts, which would be eligible to receive additional loans and subsidies from the Ministry of Finance.

As part of a broad campaign to reduce debt and financial risk, Chinese regulators over the last several years have implemented measures to rein in the rapid growth of China’s “shadow banking” sector, which includes wealth management and trust products. These measures have achieved positive results: the share of trust loans, entrusted loans, and undiscounted bankers’ acceptances dropped a total of seven percent in 2019 as a share of total social financing (TSF) – a broad measure of available credit in China.  TSF’s share of corporate bonds jumped from a negative 2.31 percent in 2017 to 12.7 percent in 2019. In October 2019, the CBIRC announced that foreign owned banks will be allowed to establish wholly-owned banks and branches in China.  However, analysts noted there are often licenses and other procedures that can drag out the process in this sector, which is already dominated by local players. Nearly all of China’s major banks have correspondent banking relationships with foreign banks, including the Bank of China, which has correspondent banking relationships with more than 1,600 institutions in 179 countries and regions.  Foreigners are eligible to open a bank account in China, but are required to present a passport and/or Chinese government issued identification.

Foreign Exchange and Remittances

Foreign Exchange

While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported challenges and delays in obtaining approvals for foreign currency transactions by sub-national regulatory branches. Chinese authorities instituted strict capital control measures in 2016, when China recorded a surge in capital flight that reduced its foreign currency reserves by about USD1 trillion, stabilizing to around USD3 trillion today. China has since announced that it will gradually reduce those controls, but market analysts expect they would be re-imposed if capital outflows accelerate again. Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately USD50,000 each year and restrict them from directly transferring RMB abroad without prior approval from the State Administration of Foreign Exchange (SAFE). In 2017, authorities further restricted overseas currency withdrawals by banning sales of life insurance products and capping credit card withdrawals at USD5,000 per transaction. SAFE has not reduced the USD50,000 quota, but during periods of higher than normal capital outflows, banks are reportedly instructed by SAFE to increase scrutiny over individuals’ requests for foreign currency and to require additional paperwork clarifying the intended use of the funds, with the express intent of slowing capital outflows.

China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning. In August 2019, the U.S. Treasury Department designated China a “currency manipulator,” given China’s large-scale interventions in the foreign exchange market. Treasury removed this designation in January 2020.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC), which was launched to help diversify China’s foreign exchange reserves. Established in 2007 with USD200 billion in initial registered capital, CIC currently manages over USD940 billion in assets as of the close of 2018 and invests on a 10-year time horizon. CIC has since evolved into three subsidiaries:

CIC International was established in September 2011 with a mandate to invest in and manage overseas assets.  It conducts public market equity and bond investments, hedge fund, multi-asset and real estate investments, private equity (including private credit) fund investments, co-investments, and minority investments as a financial investor.
CIC Capital was incorporated in January 2015 with a mandate to specialize in making direct investments to enhance CIC’s investment in long-term assets.
Central Huijin makes equity investments in Chinese state-owned financial institutions.

CIC publishes an annual report containing information on its structure, investments, and returns.  CIC invests in diverse sectors, including financial services, consumer products, information technology, high-end manufacturing, healthcare, energy, telecommunications, and utilities.  China also operates other funds that function in part like sovereign wealth funds, including: China’s National Social Security Fund, with an estimated USD325 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated USD10 billion in assets; the SAFE Investment Company, with an estimated USD417.8 billion in assets; and China’s state-owned Silk Road Fund, established in December 2014 with USD40 billion in assets to foster investment in OBOR partner countries. Chinese state-run funds do not report the percentage of their assets that are invested domestically. However, Chinese state-run funds follow the voluntary code of good practices known as the Santiago Principles and participate in the IMF-hosted International Working Group on SWFs. The Chinese government does not have any formal policies specifying that CIC invest funds consistent with industrial policies or in government-designated projects, although CIC is expected to pursue government objectives. CIC generally adopts a “passive” role as a portfolio investor.

7. State-Owned Enterprises

China has approximately 150,000 wholly-owned SOEs, of which 50,000 are owned by the central government, and the remainder by local or provincial governments.  SOEs, both central and local, account for 30 to 40 percent of total gross domestic product (GDP) and about 20 percent of China’s total employment.  Non-financial SOE assets totaled roughly USD30 trillion.  SOEs can be found in all sectors of the economy, from tourism to heavy industries.  In addition to wholly-owned enterprises, state funds are spread throughout the economy, such that the state may also be the majority or largest shareholder in a nominally private enterprise.  China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.”  SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals.  SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt.  A comprehensive, published list of all Chinese SOEs does not exist.

PRC officials have indicated China intends to utilize OECD guidelines to improve the professionalism and independence of SOEs, including relying on Boards of Directors that are independent from political influence. Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers who have produced mixed results. However, analysts believe minor reforms will be ineffective if SOE administration and government policy remain intertwined, and Chinese officials have made minimal progress in fundamentally changing the regulation and business conduct of SOEs. SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy. Among central SOEs managed by the State-owned Assets Supervision and Administration Commission (SASAC), senior management positions are mainly filled by senior CCP members who report directly to the CCP, and double as the company’s party secretary. SOE executives outrank regulators in the CCP rank structure, which minimizes the effectiveness of regulators in implementing reforms. The lack of management independence and the controlling ownership interest of the state make SOEs de facto arms of the government, subject to government direction and interference. SOEs are rarely the defendant in legal disputes, and when they are, they almost always prevail. U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs.

Privatization Program

Since 2013, the PRC government has periodically announced reforms to SOEs that included selling SOE shares to outside investors or a mixed ownership model, in which private companies invest in SOEs and outside managers are hired. The government has tried these approaches to improve SOE management structures, emphasize the use of financial benchmarks, and gradually infuse private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance. In practice, however, reforms have been gradual, as the PRC government has struggled to implement its SOE reform vision and often preferred to utilize a SOE consolidation approach. Recently, Xi and other senior leaders have increasingly focused reform efforts on strengthening the role of the state as an investor or owner of capital, instead of the old SOE model in which the state was more directly involved in managing operations.

8. Responsible Business Conduct

General awareness of RBC standards (including environmental, social, and governance issues) is a relatively new concept to most Chinese companies, especially companies that exclusively operate in China’s domestic market.  Chinese laws that regulate business conduct use voluntary compliance, are often limited in scope, and are frequently cast aside when other economic priorities supersede RBC priorities.  In addition, China lacks mature and independent non-governmental organizations (NGOs), investment funds, worker unions, and other business associations that promote RBC, further contributing to the general lack of awareness in Chinese business practices.  The Foreign NGO Law remains a concern for U.S. organizations due to the restrictions on many NGO activities, including promotion of RBC and corporate social responsibility (CSR) best practices.  For U.S. investors looking to partner with a Chinese company or expand operations, finding partners that meet internationally recognized standards in areas like labor, environmental protection, worker safety, and manufacturing best practices can be a significant challenge.  However, the Chinese government has placed greater emphasis on protecting the environment and elevating sustainability as a key priority, resulting in more Chinese companies adding environmental concerns to their CSR initiatives.  As part of these efforts, Chinese ministries have signed several memoranda of understanding with international organizations such as the OECD to cooperate on RBC initiatives.  As a result, MOFCOM in 2016 launched the RBC Platform, which serves as the national contact point on RBC issues and supplies information to companies about RBC best practices in China.

9. Corruption

Since Xi’s rise to power in 2012, China has undergone an intensive and large-scale anti-corruption campaign, with investigations reaching into all sectors of the government, military, and economy. Xi labeled endemic corruption an “existential threat” to the very survival of the CCP. Since then, each CCP annual plenum has touched on judicial, administrative, and CCP discipline reforms needed to root out corruption. In 2018, the CCP amended the constitution to enable the CCP’s Central Commission for Discipline Inspection (CCDI) to become a state organ, calling the new body the National Supervisory Commission-Central Commission for Discipline Inspection (NSC-CCDI). The NSC-CCDI wields the power to investigate any public official and those involved in corrupt officials’ dealings. From 2012 to 2019, the NSC-CCDI claimed it investigated 2.78 million cases – more than the total of the preceding 10 years. In 2019 alone, the NSC-CCDI investigated 619,000 cases and disciplined approximately 587,000 individuals, of whom 45 were officials at or above the provincial or ministerial level. The PRC’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 7,500 fugitives suspected of corruption who were living in other countries. The PRC did not notify host countries of these operations. In 2019 alone, NSC-CCDI reported apprehending 2,041 alleged fugitives suspected of official crimes, including 860 corrupt officials, as well as recovering about USD797.5 million in stolen money.

Anecdotal information suggests the PRC’s anti-corruption crackdown is inconsistently and discretionarily applied, raising concerns among foreign companies in China. For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, the PRC’s health authority issued “black lists” of firms and agents involved in commercial bribery, including several foreign companies. Anecdotal information suggests many PRC officials responsible for approving foreign investment projects, as well as some routine business transactions, delayed approvals so as not to arouse corruption suspicions, making it increasingly difficult to conduct normal commercial activity. While central government leadership has welcomed increased public participation in reporting suspected corruption at lower levels, direct criticism of central government leadership or policies remains off-limits and is seen as an existential threat to China’s political and social stability.

China ratified the United Nations Convention against Corruption in 2005 and participates in the Asia-Pacific Economic Cooperation (APEC) and OECD anti-corruption initiatives.  China has not signed the OECD Convention on Combating Bribery, although Chinese officials have expressed interest in participating in the OECD Working Group on Bribery meetings as an observer.

Resources to Report Corruption

The following government organization receives public reports of corruption:  Anti-Corruption Reporting Center of the CCP Central Commission for Discipline Inspection and the Ministry of Supervision, Telephone Number: +86 10 12388.

10. Political and Security Environment

Foreign companies operating in China face a low risk of political violence. However, protests in Hong Kong in 2019 exposed foreign investors to political risk due to Hong Kong’s role as an international hub for investment into and out of China. The CCP also punished companies that expressed support for Hong Kong protesters — most notably, a Chinese boycott of the U.S. National Basketball Association after one team’s general manager expressed his personal view supporting the Hong Kong protesters. In the past, the PRC government has also encouraged protests or boycotts of products from countries like the United States, South Korea, Japan, Norway, Canada, and the Philippines, in retaliation for unrelated policy decisions. Examples of politically motivated economic retaliation against foreign firms include boycott campaigns against Korean retailer Lotte in 2016 and 2017 in retaliation for the South Korean government’s decision to deploy the Terminal High Altitude Area Defense (THAAD) to the Korean Peninsula; and the PRC’s retaliation against Canadian companies and citizens for Canada’s arrest of Huawei Chief Financial Officer Meng Wanzhou.

PRC authorities also have broad authority to prohibit travelers from leaving China (known as an “exit ban”) and have imposed exit bans to compel U.S. citizens to resolve business disputes, force settlement of court orders, or facilitate government investigations. Individuals not directly involved in legal proceedings or suspected of wrongdoing have also been subject to lengthy exit bans in order to compel family members or colleagues to cooperate with Chinese courts or investigations. Exit bans are often issued without notification to the foreign citizen or without clear legal recourse to appeal the exit ban decision.

11. Labor Policies and Practices

For U.S. companies operating in China, finding, developing, and retaining domestic talent at the management and skilled technical staff levels remain challenging for foreign firms. In addition, labor costs, including salaries along with other production inputs, continue to rise. Foreign firms continue to cite air pollution concerns as a major hurdle in attracting and retaining qualified foreign talent. Chinese labor law does not provide for freedom of association or protect the right to strike. The PRC has not ratified the International Labor Organization conventions on freedom of association, collective bargaining, or forced labor, but it has ratified conventions prohibiting child labor and employment discrimination. Foreign companies complain of difficulty navigating China’s labor and social insurance laws, including local implementation guidelines. Compounding the complexity, due to ineffective enforcement of labor contract laws, Chinese domestic employers often hire local employees without contracts, putting foreign firms at a disadvantage. Without written contracts, workers struggle to prove employment, thus losing basic protections such as severance if terminated. Moreover, in 2018 and 2019, there were multiple U.S. government, media, and NGO reports that persons detained in internment camps in Xinjiang were subjected to forced labor in violation of international labor law and standards. In October 2019, CBP issued a Withhold Release Order barring importation into the United States of garments produced by Hetian Taida Apparel Co., Ltd. in Xinjiang, which were determined to be produced with prison or forced labor in violation of U.S. import laws. The Commerce Department added 28 Chinese commercial and government entities to its Entity List for their complicity in human rights abuses.

The All China Federation of Trade Unions (ACFTU) is the only union recognized under the law.  Establishing independent trade unions is illegal. The law allows for “collective bargaining,” but in practice, focuses solely on collective wage negotiations. The Trade Union Law gives the ACFTU, a CCP organ chaired by a member of the Politburo, control over all union organizations and activities, including enterprise-level unions. ACFTU enterprise unions require employers to pay mandatory fees, often through the local tax bureau, equaling a negotiated minimum of 0.5 percent to a standard two percent of total payroll. While labor laws do not protect the right to strike, “spontaneous” worker protests and work stoppages regularly occur. Official forums for mediation, arbitration, and other similar mechanisms of alternative dispute resolution often are ineffective in resolving labor disputes. Even when an arbitration award or legal judgment is obtained, getting local authorities to enforce judgments is problematic.

12. U.S. International Development Finance Corporation and Other Investment Insurance Programs

In the aftermath of the Chinese crackdown on Tiananmen Square demonstrations in 1989, the United States suspended Overseas Private Investment Corporation (OPIC) programs in China. OPIC’s successor, the U.S. International Development Finance Corporation, currently does not operate in China.  The Multilateral Investment Guarantee Agency, an organization affiliated with the World Bank, provides political risk insurance for investors in China.  Other foreign commercial insurance providers for political risk insurance include the People’s Insurance Company of China.

Conclusion

For those who look the other way when China is mentioned as a threat to the US for global dominance, they are only looking for trouble. It is real, China wants a return to the days when they were the top dog and the world trembled when China was mentioned. As you can see by this article, China is doing everything to attain this goal. If you think I covered this subject in a thorough manner, you would be wrong, because I barely scratched the surface. The US is in a fight for their lives with China, and if that was not enough Russia has the same aspirations. More of this I will discuss in the second part of this series, the Russia Federation.

Resources

en.wikipedia.org, “Federal Republic of China.” By Wikipedia Editors; worddisk.com, :All-China Federation of Industry and Commerce”; state.gov, “2020 Investment Climate Statements: China”; asiapowerwatch.com, ” The vision of the New Federal State of China…” BY HIROFUMI HATOMI;

Common Sense and Ramblings In America

The China Federation? Part One

All-China Federation of Industry and Commerce

Core functions

Structure

Leadership

Regional federations

EXECUTIVE SUMMARY

1. Openness To, and Restrictions Upon, Foreign Investment

2. Bilateral Investment and Taxation Treaties

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

8. Responsible Business Conduct

9. Corruption

10. Political and Security Environment

11. Labor Policies and Practices

12. U.S. International Development Finance Corporation and Other Investment Insurance Programs

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All-China Federation of Industry and Commerce

Core functions

Structure

Leadership

Regional federations

EXECUTIVE SUMMARY

1. Openness To, and Restrictions Upon, Foreign Investment

2. Bilateral Investment and Taxation Treaties

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

8. Responsible Business Conduct

9. Corruption

10. Political and Security Environment

11. Labor Policies and Practices

12. U.S. International Development Finance Corporation and Other Investment Insurance Programs

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