China has no shortage of regulation. It publishes laws, statutes, administrative guidance and “circulars” by the pound.
And increasingly the government’s directives are becoming more clear and direct, as China lets corporations—both local and foreign—know what is officially required of them.
Still, complying with the regulations the
is far from simple, especially for non-Chinese companies hoping to do business in the country.
Yang
“What the law says and the practice may be different,” says Yang Tie-Cheng, a Chinese regulation lawyer at Clifford Chance.
According to Yang, the compliance environment has improved dramatically in China over the past few years. These days a ministry rarely issues rules that directly contravene the higher law, but bureaucrats still have considerable leeway in what they can do even within the bounds of the official legislation that guides their actions—and they tend to take full advantage of that power.
Often, the application of rules and laws gets adjusted based on changing sentiment within the bureaucracy and the Communist Party—and that process remains complex and opaque, if not outright mystifying to foreigners. Ministerial infighting and turf wars play a large role; charismatic individuals can greatly influence policy.
This process can be seen at work in the development of the Qualified Foreign Institutional Investor program, an effort launched by the government in 2002 to allow selected non-Chinese institutions to buy local Chinese shares. The QFII regulations themselves were very clear, and were published in a transparent fashion for the world to see. Beneath the headline regulations, however, were other requirements, and they changed over time.
For example, there was a feeling among bureaucrats at the Chinese Securities Regulatory Commission that the reputation of QFII applicants was a significant issue. The formal regulations had strict capitalization guidelines and other hurdles that made it clear that only the largest financial institutions were welcome to apply. In addition, however, the CSRC wanted to make subjective judgments about the firms interested in the program. Essentially, it wanted the first QFII participants to be top-tier American, European or Japanese financial corporations, and granted permissions based on its opinion of what constituted a “credible” institution.
“We do come across cases where the law is quite simple, but there are internal guidelines. When [regulators] meet the foreign investor face to face, there are internal rules.”
— Yang Tie-Cheng
The quota on the total amount of stock each QFII participant could buy also became an issue. The program limited, with a stated dollar figure, how much each foreign financial institution would be allowed to invest in local shares. But in most cases, that limit was less than what applicants would expect from a strict reading of the rules. And the quotas were not increased in most cases for a number of years, even though the program by all accounts went smoothly. The government held back because it was worried that investors were speculating in China’s currency. While its interest was to get more foreign money into the stock market, the State Administration of Foreign Exchange wanted to limit the inflow of funds into the country, and that ministry prevailed.
“We do come across cases where the law is quite simple, but there are internal guidelines,” Yang says. “When they meet the foreign investor face to face, there are internal rules.”
Yang spends much of his time working the gray areas. He must read the law, but he must also read the newspapers to gauge the mood at the ministries. Most importantly, he meets with the bureaucrats—and gets his clients in front of them—to understand what is really going on. Yang points out, however, that the government is quite open to discussing its requirements with those who are interested.
Foreign bankers active in China note that the process at times is almost interactive, especially when it comes to complex issues regarding securities; the regulators want their input on how to regulate. In the case of the QFII, for example, the CSRC was quite interested to hear about Taiwan’s QFII program and a number of visiting bankers offered their thoughts.
Governance, Good Or Otherwise
JF Asset Management, a JP Morgan subsidiary, recently ran the regulatory gauntlet in China. Its local Chinese joint venture subsidiary wanted to launch a new mutual fund, and had to get approval from the government to do so. In some ways what it experienced was very straightforward: The steps were clear and simple and outlined in detail by the CSRC; the joint venture followed them and everything went smoothly. Then it waited. And waited. Finally the fund was launched in late June. There are many reasons for the delay, but no one really knows what exactly drives the decision-making process.
CHINA STANDARDS
The excerpt below is from chapter seven of The Code of Corporate Governance for Listed Companies in China, issued January 7, 2001, by the China Securities Regulatory Commission:
Disclosure and Transparency
(1) Listed Companies' Ongoing Information Disclosure
87. Information disclosure is an ongoing responsibility of listed companies. A listed company shall truthfully, accurately, completely and timely disclose information as required by laws, regulations and the company's articles of association.
88. In addition to disclosing mandatory information, a company shall also voluntarily and timely disclose all other information that may have a material effect on the decisions of shareholders and stakeholders, and shall ensure equal access to information for all shareholders.
89. Disclosed information by a listed company shall be easily comprehensible. Companies shall ensure economical, convenient and speedy access to information through various means (such as the Internet).
90. The secretary of the board of directors shall be in charge of information disclosure, including formulating rules for information disclosure, receiving visits, providing consultation, contacting shareholders and providing publicly disclosed information about the company to investors. The board of directors and the management shall actively support the secretary's work. No institutions or individuals shall interfere with the secretary's work.
(2) Disclosure of Information Regarding Corporate Governance
91. A listed company shall disclose information regarding its corporate governance in accordance with laws, regulations and other relevant rules, including but not limited to: (1) the members and structure of the board of directors and the supervisory board; (2) the performance and evaluation of the board of directors and the supervisory board; (3) the performance and evaluation of the independent directors, including their attendance at board of directors' meetings, their issuance of independent opinions and their opinions regarding related party transactions and appointment and removal of directors and senior management personnel; (4) the composition and work of the specialized committees of the board of directors; (5) the actual state of corporate governance of the company, the gap between the company's corporate governance and the Code, and the reasons for the gap; and (6) specific plans and measures to improve corporate governance.
(3) Disclosure of Controlling Shareholder's Interests
92. A company shall timely disclose detailed information about each shareholder who owns a comparatively large percentage of shares of the company, the shareholders who actually control the company when acting in concert and the company's actual controllers in accordance with relevant regulations.
93. A listed company shall learn about and disclose in a timely manner, changes in the shareholding of the company and other important matters that may cause changes in the shareholding of the company.
94. When controlling shareholders increase or decrease their shareholding or pledge the company's shares, or when the actual control of the company transfers, the company and its controlling shareholders shall timely and accurately disclose relevant information to all shareholders.
Source
Code Of Corporate Governance For Listed Companies In China (Chapter 7; Issued Jan. 7, 2001 by the China Securities Regulatory Commission)
“Depends on what? I don’t know,” says Alan Wang, marketing manager for China International Fund Management, the local joint venture company. “Depends if you have the right product. Depends on your relationship with the CSRC. It is not easy to know what they want. The market changes. The idea of the CSRC governor changes.”
Many foreign companies obsessively adhere to all the laws and related pronouncements, going out of their way to meet both the spirit and the letter of the rules. Partly this is a function of fear: They have seen what can go wrong when a company doesn’t actively seek to meet muster.
The most famous example is probably Carrefour, the French supermarket chain. In the mid-1990s it came to China and was welcomed by a number of local city governments. After it opened a few stores, the central government informed the foreign firm that it had broken the country’s laws on retailing. It then had to apologize and renegotiate its access.
Hoenig
Jay Hoenig, China president for risk management firm Hill and Associates and former chairman of the American Chamber of Commerce in Shanghai, doesn’t think that compliance is an especially big concern for foreign companies, especially for the larger firms. He believes that their own internal rules are strict enough already and that they can and do meet the requirements of the Chinese government.
“In general,” he says, “corporate ethics and corporate social responsibility force them to take the high road.”
He finds that one of the biggest problems for American companies in China is not so much Chinese regulations, but American law. The Sarbanes-Oxley Act requires companies to keep exceedingly tight control over the structures and financial systems of their overseas subsidiaries. In China, that means achieving international standards in a place where that’s not always possible. Fraud and corruption are a significant problem within companies. It’s a great challenge just to keep the books straight and corporate governance in reasonable shape in China.
The situation for smaller companies entering China can be difficult and often frustrating. In many cases, they are competing with Chinese companies that work hard—and rather successfully—to avoid the law. As a result, foreign firms face a cost and price disadvantage. In particular, according to lawyers in China, local companies will often use their connections to avoid withholding taxes and to skirt environmental laws. The latter are becoming quite strict in China, but are almost never obeyed by local factories.
Some foreign investors try to match their local counterparts. They cut corners as well, especially as they make more friends in high places.
Schaub
“They try to out-Chinese the Chinese,” quips Mark Schaub, a Shanghai-based partner at King and Wood, a local Chinese law firm.
Inevitably this ends poorly for the foreign company, which is often raided, fined, and ends up having to meet the regulations it initially avoided. Usually the authorities ignore the Chinese companies and let their infractions go unpunished. In fact, it is very often the local competitor, a company better connected than the foreign company, that gets the regulator to see if the non-Chinese outfit is compliant.
“The problem is not so much with the law,” says Schaub, who believes that the regulations are fairly easy to access and understand. “It’s the selective enforcement of it.”
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