European Chinese Law Research Hub

Navigating Stricter Data Privacy Rules for Cross-Border Data Transfers With China

3. October 2023
A new paper by W. Gregory Voss and Emmanuel Pernot-Leplay

Cross-border data transfers are a sensitive topic in many jurisdictions, even more so when China is concerned. The EU and the U.S. regulate those flows in very different ways, and China just issued rules showcasing its own specific approach, mixing privacy and national security together, which have become a compliance hurdle for many multinational companies. Our study observes holistically the regulation of personal data flows both into and from China.

Why and how the USA and the EU regulate data flows to China

In both the EU and the USA, China is often seen as an untrusted destination for data exports because of the risks that would exist for both individual rights protection and national security. These concerns are addressed by restricting the cross-border data transfers to China, but it’s done differently in the EU and the USA.

The USA does not have general data transfer restrictions, but it has taken specific actions for national security and user privacy reasons that limit data flows to China. Those are best exemplified by the Grindr and TikTok cases, both on national security protection grounds, for fear of access to the data by the Chinese government and potential blackmailing against nationals of the USA in a position to obtain access to sensitive materials. This is a regulatory risk for Chinese companies, which has sometimes resulted in them storing data in the USA. Because the USA currently lacks an omnibus data privacy law covering data flows, unlike the EU and China, data privacy restrictions cannot serve as the grounds for such procedures, and therefore the USA must resort to national security rules, instead. Nonetheless, this solution remains impractical and used only for high-profile cases. In the future however, proposed data privacy legislation in the USA may impose requirements on transferring personal data to China, resembling restrictions in other major regions.

On the other hand, the EU has strong data privacy rules in the GDPR, including on cross-border data transfers, but by virtue of the division of powers between the EU and its component Member States, national security issues are left to the prerogative of each of the Member State. The GDPR sets several conditions and safeguards to be applied to data transfers for them to be legal. The main ones are the adequacy decision on the one hand, and standard contractual clauses from the European Commission on the other. The latter provide a legal framework that obligates both the data exporter and the data importer (the entity outside the European Economic Area receiving the data) to protect the personal data in accordance with GDPR principles. An adequacy decision, however, means an entity can freely export data to the country that has received this adequacy decision from the European Commission, which greatly facilitates business operations for companies and economic exchanges between the two jurisdictions. But, in the case of China, such decision is currently virtually unforeseeable. This is due to the fact that the European Commission assesses issues such as the rule of law in the destination country in deciding adequacy. Because of the structural specificities of its political and legal system, China is unlikely to meet this first condition. Companies can still export data to China, but the exporting and receiving parties will need to commit to the standard contractual clauses.

China now restricts cross-border data flows to protect both personal data and national interests

Whereas the USA acts on outbound data flows using mainly national security arguments, and the EU focuses on data privacy, China combines both rationales in its own approach.

To provide contextual clarification, it is pertinent to underscore that the progression of data protection legislation in China has followed a peculiar trajectory. At first, there were only a few rules targeting specific sectors, with lightweight protections. This resembled the US-approach and favoured a free use of personal data without many safeguards and rights for the individuals. However, faced with the increase of privacy abuse threatening to cause social unrest, China gradually moved towards a more protective approach and started the legal transplantation of certain rules and concepts from the EU, offering more protection to Chinese consumers against misuse of their data by the private sector. As one may expect protection of the citizen against data collection by the government remains embryonic, due to the specificities of China’s political and legal system.

This progress culminated in the Personal Information Protection Law (PIPL) from 2021, sometimes dubbed as China’s GDPR, which also showcases China’s own approach to the regulation of personal data use, especially on cross-border data transfers through mechanisms implemented in 2023. In a syncretic manner, China has indeed combined data privacy and national security concerns into its mechanism to restrict data flows, impacting both domestic and international companies.

Under the PIPL, companies seeking to transfer data outside of China have possibilities: certification, standard contractual clauses (SCCs), and security assessments. These mechanisms aim to ensure that personal data remains protected and that its transfer aligns with the law’s requirements. The certification mechanism offers a route for intra-group data transfers (akin to Europe’s Binding Corporate Rules (BCRs)). However, its adoption may be hindered by complexities and potential costs. The PIPL’s SCCs provide a standardized framework for data transfers, mirroring similar processes under GDPR. However, unlike in the EU, an organization can use those two systems only under a threshold that may easily be crossed by bigger corporations. Above it, and for more sensitive data transfers, a state-led security assessment is required. This assessment evaluates not only data protection levels but also considers China’s national security, economic stability, and political implications. This is especially the case for organizations deemed critical information infrastructure operators, and is a Chinese specificity that does not exist in either the EU or the USA. Because of the large room for discretionary interpretations, favoured by the vague terminology used in the requirements, this assessment puts multinationals looking to take data out of China in a grey zone, with potential high impact on their business operations. However, it is a risk that China does want to mitigate.

China’s data localization rules are robust and align with global trends in privacy protection on one hand, but feature significant specificities on the other, which leads to uncertainty for companies but provides more maneuvering room to authorities looking to protect China’s interests. As the EU’s GDPR influenced several other jurisdictions’ data privacy rules, time will tell if China’s own approach on data flow screening will be mimicked by other countries, and if the intertwining of data privacy with national security will confirm a new trend.

The article “China Data Flows and Power in the Era of Chinese Big Tech” is forthcoming with the Northwestern Journal of International Law & Business, Vol. 44, Issue 2.

W. Gregory Voss is an Associate Professor at TBS Business School (formerly Toulouse Business School). His research focuses primarily on technology law and fundamental rights (e.g., privacy & data protection).

Dr. Emmanuel Pernot-Leplay is a principal data privacy specialist at Schneider Electric. He holds a PhD degree in Comparative Law from Shanghai Jiaotong University and writes on comparative law and policy, in the fields of data privacy, digital policy and their implications for national security.

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The Silent Influence of Guiding Cases: A Text Reuse Approach

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12. September 2023
A new paper by Benjamin Minhao Chen, Zhiyu Li, David Cai and Elliott Ash
Guiding Cases no. 19 and no. 24 both concern traffic accident liability disputes and are among those most often referred to.

What are Guiding Cases?

As a matter of doctrine, cases are not a source of law in socialist legal systems. In the People’s Republic of China, judges are generally not required to adhere to or cite prior judicial decisions. These principles have, however, been qualified—some say violated—by the Supreme People’s Court’s designation of Guiding Cases to be followed by all courts when adjudicating similar disputes.

The Guiding Case (指导性案例) system was introduced in 2011 “[i]n order to summarize adjudication experiences, unify the application of law, enhance adjudication quality, and safeguard judicial impartiality” (Provisions of the Supreme People’s Court Concerning Work on Case Guidance, 2010, English here). Guiding Cases are based on judgements selected from courts nationwide and address a wide variety of legal topics ranging from breach of contract to homicide to unfair competition to liability for traffic accidents. A Guiding Case consists of seven key sections, namely “Title”, “Keywords”, “Main Points of the Adjudication”, “Related Legal Rules”, “Basic Facts of the Case”, “Results of the Adjudication”, and “Reasons for the Adjudication”. Beginning in 2015, the “Main Points of the Adjudication” of Guiding Cases – abstract rules distilled by the adjudication committee of the SPC from the original judgments – must be referred to (参照) by courts at all levels when adjudicating similar cases (Detailed Rules for the Implementation of the ‘Provisions of the Supreme People’s Court Concerning Work on Case Guidance’, 2015, English here).

Guiding Cases have therefore been characterized by some as “a new source of ‘judge-made law’ in China” (Liu 2021) and ‘the remarkable terminus a quo’ of the trend ‘toward embracing case law’ (Wang 2020). The true impact of Guiding Cases on judicial practice has however been called into question by many legal scholars and commentators. Previous studies almost uniformly find that citations to Guiding Cases are sparse, and many Guiding Cases are not cited at all (Daum 2017; Zhang 2018). The ‘extremely low’ incidence of citations is taken as symptomatic of ‘the dysfunction of the [G]uiding [C]ase system as a type of case law’ (Wang 2019) and as proof of the incongruity of case-based adjudication in China (Ahl 2014; Zuo & Chen 2015; Finder 2017; Jia 2016).

How to measure their influence?

However, citations might not be an accurate measure of the influence of cases, especially in jurisdictions that do not recognize judicial decisions as a source of law. In our study, we re-evaluate the impact of Guiding Cases on adjudicatory outcomes by searching for instances of text reuse between the Main Points of Adjudication of Guiding Cases and the legal rationales given by lower courts.

Our premise is that reuse of text uniquely ascribable to the Main Points of Adjudication is a strong indicium of the influence of Guiding Cases on judicial decision-making. This idea is implemented by running the Basic Local Alignment Search Tool (or BLAST) algorithm to search for text reuse in approximately 3 million judgments of Shanghai and Beijing courts from January 1970 to September 2021. Matches returned by the BLAST algorithm are validated by legally qualified human coders. To make human validation of the machine-generated results feasible, our analysis is limited to two Guiding Cases identified by prior research as being among the most cited (Zhang 2020; Guo & Sun 2018): Guiding Cases 24 and 60.

To summarize, we find more instances of unattributed text reuse than citations for the Guiding Cases studied. For Guiding Case 24, the number of local court decisions that engaged in validated, unattributed text reuse is approximately four to six times the number of decisions citing the Guiding Case. Moreover, between 3.4 and 14.6% of local judgments that could have applied Guiding Case 60 cited it and between 9.5 and 11.7% of them recited language from Guiding Case 60 without acknowledging so.

A close reading of local court decisions reveals that it is not uncommon for them to cite statutory or regulatory instruments for propositions reproduced from a Guiding Case (“statutory ventriloquy”). In addition, rather than quote the Main Points of Adjudication as directed by the Supreme People’s Court’s Detailed Rules, many judgments simply repeated the various legal arguments adduced in the Guiding Case (“jurisprudential retracing”).

It appears that despite applying the Guiding Cases, local judges practice statutory ventriloquy or jurisprudential retracing to avoid citing them as a source of legal authority. Both techniques serve to maintain the dogma of legislative supremacy even as statutory law is being supplemented—and sometimes modified—through judicial initiative.

Do they really have little impact？

To conclude, previous studies report that Guiding Cases are rarely cited in judicial decisions, suggesting that their practical effect is negligible. The anemic impact of Guiding Cases has sometimes been taken as demonstrating the fundamental incompatibility between socialist legality and judicial precedent.

We demonstrate, however, that Guiding Cases are more influential than conventionally thought. The influence of Guiding Cases is not only manifested through citations; it can also be detected through the reuse of text uniquely traceable to them. By uncovering how the Guiding Cases are referred to other than by name, we not only illuminate the operation of Chinese law but also inform debates about legal traditions, cultures, and transplants.

The paper The Silent Influence of Chinese Guiding Cases: A Text Reuse Approach was published in Artificial Intelligence and Law in May 2023. The authors will present the paper at the Annual ECLS Conference in Helsinki on September 22nd. The work described in this post was substantially supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. HKU
27603721).

Benjamin M. Chen is associate professor of law at the University of Hong Kong. He applies interdisciplinary methods to the study of administrative and judicial processes and institutions.

Zhiyu Li is an assistant professor in law and policy and a fellow at the Research Methods Centre at Durham University, UK. She studies the interplay between courts, technology, and politics through comparative and interdisciplinary approaches.

David Cai is a MRes/PhD student in the Economics and Management program at the LSE. He uses econometric and machine learning techniques on applied social scientific questions.

Elliott Ash is Assistant Professor of Law, Economics, and Data Science at ETH Zurich’s Center for Law & Economics, Switzerland. His research and teaching focus on empirical analysis of the law and legal system using techniques from econometrics, natural language processing, and machine learning.

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Chinese State-Owned Companies and Investment in Latin America and Europe

29. August 2023
A new paper draft by Larry Catá Backer
Lock on the Panama Canal


In the United States at least, there has been an increasing worry about the state of US relations (economic and political) with Latin American states. Increasingly that is measured by the extent of Chinese development of its own political and economic relations with Latin American and Caribbean states. Europeans, more than most, worry about this shift in the sources of overseas investments from the perspective of their now decades long objectives to embed human rights more directly in economic activities and political life. 
 
US military leaders have also expressed fears about Beijing’s influence on Mexico’s communications industry, where 80 percent of telecoms are provided by Chinese companies, according to General Glen VanHerck, commander of both the US Northern Command and the North American Aerospace Defense Command. China is also extending its reach into the ‘Lithium Triangle’ which spans Argentina, Bolivia and Chile: The Chinese battery company Catl recently struck a deal worth more than $1 billion to develop Bolivia’s lithium reserves. Some analysts have speculated this resource-grab constitutes a ‘lithium monopoly in the making’. The benefits gained from these investments are coupled with the willingness of Latin American countries to accept loans worth tens of billions of dollars from China.
 
At the center of Chinese overseas investment are their state-owned and controlled enterprises. The Chinese state-owned enterprise (CSOE) presents an anomaly in the operation of the well-ordered construction of a self-referencing and closed system of liberal democratic internationalism, especially as that system touches on business responsibilities under national and international human rights and environmental law and markets driven norms. The anomaly is sourced in the increasingly distinct and autonomous framework principles within which it is possible to develop conduct-based systems respectful of both human and environmental rights which are emerging in between liberal democratic and Marxist-Leninist systems.
 
This essay considers the forms and manifestations of these disjunctions where CSOEs are used as vehicles for the projection of Chinese economic activity beyond its borders. The essay first situates the CSOE within the political ideology of its home state. These CSOEs are both creatures of the political-economic system from which they are constituted and economic actors seeking to maximize return for investment in a risk reducing environment. CSOEs are instruments of state power and its political-economic objectives, as well as value maximizing market participants. They seek to avoid risk and maximize value-but their calculation of risk and value are a function of the normative system from which they are constituted. That, in turn, affects their engagement with human rights and the sustainability impacts of their operations.

To better understand the CSOE especially as they operate in host states is especially necessary as global and national systems for compliance and accountability are refined, and as national security regimes increasingly constrain the extent and form of inbound public investment. To that end the essay focuses on the formal structures for CSOE supervision by state organs that operationalize the guiding ideology through which they are conceived and operated. This provides the basis for a deeper consideration of the way that the projection of CSOEs abroad is structured within a conceptual cage of policy objectives: specifically, emerging conceptions of socialist human rights, including environmental rights and obligations, and an operational framework in the form of the Chinese Belt & Road Initiative. It is only in the complex interplay of these layers of law, principle, regulation, and guidance described above, that one can begin to see the outline of the normative cage within which human rights can be understood and practiced by CSOEs. 

Nonetheless, at its core, the study is about risk- its ideology and the way it is expressed through governance expectations and principles. One speaks here about legal risk (to align the discussion with the 1st Pillar of the UN Guiding Principles), but also of business risk (aligning the markets driven, private law structures of the UNGP 2nd Pillar). More importantly, the sort of risk that one encounters here, in comparing the liberal democratic and Marxist-Leninist models of human rights and sustainability, is intimately tied to the principle of “prevent-mitigate-remedy”, and its administrative-compliance overlay.  In a sense, when one speaks to human rights and sustainability, and especially climate change, one is using the qualitative language of rights to speak to the quantitative probabilities of risk of harm, and more importantly risk of irremediable harm. The function of those principles, then, framed through the prevent-mitigate-remedy principle is to provide a formula for valuing those risks, and for placing them within a hierarchy of risk tolerance. Increasingly in liberal democratic regimes, risk tolerance for strategies that do not privilege prevention (and then mitigation and last remedy) are reduced, or in some cases, risk aversion is implicitly or explicitly the result of the application of the “principles” analysis. That is fair enough and represents the culmination of conversation about value choices. Nonetheless, Marxist-Leninist systems approach risk, and risk tolerance, in a different way. That difference is in part a function of differences in the conceptualization of both human rights and sustainability as a function of development and collective prosperity. But it is also in part a reflection, effectively, of what might be preferences for mitigation-remediation (or otherwise exit if the costs of prevention exceed the anticipated vale of an activity), at least indifference as between the strategies as a function of expected value. That poses some challenges for any project that seeks global consensus on what had once been the unchallenged valuations and framework of liberal democracy.   

Larry Catá Backer is a W. Richard and Mary Eshelman Faculty Scholar and Professor of Law and International Affairs. He does research in Legal Fundaments, Political Economy and International Relations. Currently working on “Next Generation Law”–data driven governance; the emergence of new global trade regimes (Belt and Road Initiative and America First); and the emergence of new theories of Leninist state organization as they may apply to non-Leninist institutions.

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Rules for Ensuring the Accuracy of Social Credit Data

30. July 2023
A new paper by Hannah Klöber

Born from an intention to establish a financial credit (investigation) system, the Social Credit System (SCS) is a mega-project to improve governance capabilities and legal compliance. However, the modern publicly run SCS resembles rather an interconnected set of initiatives under the umbrella term of creating “trust” than being a comprehensive system to monitor and rank all citizens. Currently, the basic components at the national level that are being created are the information infrastructure and the joint enforcement mechanism. Both components rest on the sharing among agencies and the general disclosure of compliance information on subjects, to on the one hand punish and educate, but also to facilitate assessing any entity’s “trustworthiness”. They constitute an emerging state-led data processing mechanisms which may strongly impact the lives of individuals, companies, social organizations and other actors throughout China, with the centrepiece being the information it holds about its subjects. Acknowledging the wide-reaching consequences that the contents of social credit information about a subject may have, this article (draft) asks: What legal framework do SCS builders create to guarantee the accuracy of personal social credit information?

Why is Personal Data Accuracy Important?

One area where social credit information is currently bringing about consequences for subjects is the joint enforcement mechanism – or “joint disciplining for trust-breaking”. The joint enforcement mechanism is mostly set up by State Council policy documents, promoting desired behaviours and discouraging unwanted ones through so-called blacklists and redlists. Listing might lead to punishment or benefits by unrelated actors (as redlists confer benefits, they are much less problematic and thus not discussed in detail).  It has to be noted that the mechanism’s main focus rests on companies but there is a corporate overlap, as leading personnel can get blacklisted due to their company’s wrongdoings. So far, there is no real central management to these lists. For the purpose of analysing the legal aspects of joint enforcement, four stages must be differentiated: preparatory acts before blacklisting, the blacklisting decision, the publication of the blacklist and the ensuing disciplinary action. They can be based on the same facts and norms but may be executed by different actors and be linked together. 

To achieve its goal of promoting trust and steering behaviour, the SCS needs large amounts of accurate data. Simultaneously, data inaccuracy in this behemoth of a reputational shaming machine could potentially harm a large number of people: Because open government data is intended to be reused, it is very hard to control once publicised. For example, if an entity is entered on one of the many blacklists for trust-breaking, she may find her name on display in public spaces as well as online platforms, screenshots of which may be further shared across social media. The inaccuracy discussed here encompasses only factual errors, thus instances where data is not correct, complete, or timely, resulting from inattentiveness during handling. Legal errors on the other hand concern the application of law (for example excessiveness of punishment) and are outside the scope of this study. 

What Legislation is There?

The looseness of the concept of social credit and the plurality of actors involved make the regulatory situation quite complex. There is no national social credit law (although a draft for soliciting comments from the public has been published in November 2022), but a host of special sectoral and provincial regulations dealing with different social credit initiatives create a jumbled regulatory landscape. Apart from this, in the context of personal data accuracy national legislation such as the 2021 Personal Information Protection Law (PIPL) and the Regulation on Open Government Information (ROGI, revised in 2019) apply. Administrative legislation on procedural issues should be applicable, but the placement of joint enforcement measures under administrative law is still disputed.

What Does it Offer?

Basic Definitions

Generally, social credit is defined as the status of information subjects complying with legally prescribed obligations or performing contractual obligations in their social and economic activities (see e.g., Shanghai Municipal Social Credit Regulations art 2(1), Tianjin Municipal Social Credit Regulations art 2(2)), while social credit information is defined as  (objective) data and materials that can be used to identify, analyse and judge the status of information subjects’ compliance with the law and contract performance (see e.g. Shanghai Municipal Social Credit Regulations art 2(2), Henan Provincial Social Credit Regulations art 3 (3)). What this means in detail remains unclear, though. Two types of social credit information exist: public credit information and non-public (or market) credit information, depending on the generating entity (state or private actor).

Accuracy Obligations for Data Processors

PIPL and ROGI provide some guidance on how to handle and publish government information, but data quality requirements are not sufficient for the complex processes of the SCS. The examined provincial documents either set up principles for the processing of public social credit data or impose data-quality responsibilities on information providers. The latter can also be found in sectoral regulation, but only in a third of the covered documents.

Notification Requirements

Because of the multi-actor structure of joint enforcement, credit subjects face the problem of recognizing the possibility of rights relief and identifying the right addressee for enforcing their rights. One important way to counteract this situation is notification requirements. The PIPL introduced a general notification obligation in 2021, covering among other things the processor’s name and contact information, and the methods and procedures for individuals to exercise their rights. But proper notification requirements are generally rare among special legislation documents. To best protect credit subjects, notification should occur at all four possible stages of joint enforcement. In the preparatory stage and after the listing decision they are however only seldom found. A few provincial documents provide for the notification of listing, but only for the so-called seriously untrustworthy lists, which cause stricter restrictions than normal blacklists. Some measures consider the publication of blacklists as a form of public notification. Notification of punishment is generally not covered by blacklist management documents, as the listing entity is usually not in charge of punishment. A quarter of the sectoral and most of the provincial documents do not set up any notification procedures.

Review Procedures Prior to Blacklisting

Among the analysed documents, procedures for prior review can be found only in those measures which also stipulate notification before inclusion. None of the norms provide for suspension, however. A clear classification of joint enforcement measures under administrative law would improve the situation, although there is no general administrative procedure law in China.

Access to One’s Personal Credit Information

General access rights are provided by both the PIPL and the ROGI. About half the provincial documents explicitly set up a right to inquire one’s own information. Other regulations appear to take accessibility for granted and only regulate the corresponding procedures for data providers.

Objection Procedures after Blacklisting

If personal information held by the government is found to be incorrect or incomplete, individuals have a general right to request correction under PIPL and ROGI. The content of specific objection procedures among the special legislation is uneven. Two models can be found in the analysed documents: objection to wrong information for a fixed time period after publication of the decision, or a general possibility of objection. In provincial documents, only the latter can be found, while some of the ministerial documents designate no objection possibilities at all. Generally, the stipulated handling time for objections in provincial documents is shorter than in the ministerial regulations, often calling for verification within a few days, rather than weeks. While the State Council calls for the suspension of enforcement during verification procedures, this is rare in implementing documents. On the contrary, some ministries and the SPC explicitly regulate that objection will not cause suspension or impact publication. A compromise, to mark objected information during verification procedures, is employed by almost two-thirds of the provincial documents. The deletion of non-verifiable data is not always required.

Dissemination of Corrected Data throughout the System(s)

The dissemination of corrected data is thinly regulated. Where it is mandated, it often merely requires that other providers of the information are informed. The information subject itself might only be informed of updates and corrections in its social credit information if the change is due to a successful objection the subject has initiated.

A Patchwork

The study finds that special legislation is inconsistent and that national legislation is often too vague to deal with the complicated and diverse processes of the SCS. Further legislation will be needed to standardise procedures. While it is often difficult for data subjects to exercise their rights against first-party collectors, when raised against third party-reusers of data, the problem multiplies. Special legislation by different national actors and local legislators is very diverse, and procedural requirements are often vague, fragmented or missing. Some regulations deviate from protection measures proposed in policy documents. The rules in the examined documents range from almost no regulation to some very promising models in the eastern, economically more developed provinces. The biggest issue remains a lack of solid ex ante control mechanisms, as most relief is only provided after the fact. This is problematic, as the spread of inaccurate data can cause unforeseen consequences, and reputational damage is difficult to repair.

The article The Regulation of Personal Data Accuracy in China’s Public Social Credit System was published in the Hong Kong Law Journal (2023, Vol. 53, No. 1). A free draft is available here.

Hannah Klöber is a Research Assistant at University of Cologne, where she is currently working on her PhD with the Chair for Chinese Legal Culture. Her dissertation deals with the Proportionality Principle in Chinese administrative law, examining it from a comparative perspective, exploring its application by and use for Chinese actors, thereby gaining deeper insight into its function, potential and limitations. She holds a BA and MA in Chinese Regional Studies, Law from Cologne University. She can be contacted at hkloeber[at]smail.uni-koeln.de

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What does the Proposed Amendment to the Chinese Company Law Hold?

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15. July 2023
A new paper by Fang Ma

Chinese company law is going through significant reforms. The current law, first passed by the National People’s Congress in 2005 and last amended in 2018, has played an important role in establishing a modern enterprise system and promoting the development of a socialist market economy in China. As stated in the explanatory notes for the first draft amendment to the Company Law, the current law provides the fundamental and theoretical legal framework for companies; however, it lacks detailed rules, in particular, in the areas of directors’ liabilities and the protection of shareholders and creditors. This article maps the proposed amendments and draws parallels to Company Law in the United Kingdom.

To mend these shortcomings, two amendments have been proposed: The first draft amendment was published on 24 December 2021 by the Standing Committee of the 13th National People’s Congress for soliciting comments from the public. Based on the feedback and rounds of consultation, the amendment was revised and the resulting second draft amendment was issued on 27 December 2022. The probably final round of deliberation is expected in August 2023. This is the third major reform of the 2005 Chinese Company Law following the amendments in 2013 and 2018. As laid out in the explanatory notes that accompany the draft amendment, the main purposes of this Company Law reform are to “deepen state-owned enterprise reform, improve business operation environment, improve the protection of property rights and optimize fundamental systems for the capital market”.

The stated aim manifests in the following concrete changes:

  • The Chinese party-state is given stronger controls over its state-owned enterprises, as decisions made in previous years by the Central Committee of the CPC are woven into the Company Law.
  • Some clarity on the duty of diligence (勤勉义务) and the duty of loyalty (忠实义务): While the 2005 Company Law stipulates that directors, supervisors and senior managers all owe a duty of diligence and a duty of loyalty to their companies, and lists some activities they must not engage in, specific rules for the application of these requirements are lacking. The proposed amendment (draft article 180) defines the duty of diligence similarly to the duty to exercise reasonable care, skill and diligence as stipulated in the United Kingdom’s 2006 Company Act.
  • Detailed rules on self-dealing: The draft amendment suggests detailed notification and approval procedures for when supervisors, directors and senior managers enter into a contract or transaction with the company (draft article 183).
  • Expansion of the corporate opportunity doctrine: Under the current Company Law, the duty to refrain from taking advantage of one’s position to acquire a business opportunity that belongs to the company applies to directors and senior managers only. The draft amendments not only extend this duty to supervisors, but also lay out exceptions such as when the business opportunity was rejected by the board of directors or the shareholder meeting (draft article 184).
  • Clarification of the joint liability of directors, senior managers and controlling shareholders with the company (draft articles 190 and 191): Directors and senior managers will be jointly liable with the company if they have, either deliberately or due to gross negligence, caused losses to other people when they are performing their duties.
  • Giving teeth to corporate social responsibility duties: The Company Law requires businesses to not only abide by laws and regulations, but also “observe social morals and business ethics, act in integrity and good faith, accept the supervision of the government and the public, and bear social responsibility” (Article 5). Critiques have pointed out that this provision is a paper tiger as it is broad and comes without remedies. While the draft amendment does specify who the stakeholders are (employees, consumers, and the environment), concrete measures for the enforcement of this rule are not proposed (draft article 20).
  • Finally, the proposed amendment introduces the double derivative action (draft article 188). Derivative actions are suits brough by shareholders in the name of the company against a third party, normally a director of the company. The institution of the double derivative action, as laid down in the draft Article 188, allows a shareholder in a parent company to sue the directors, supervisors and senior managers of its wholly-owned subsidiary.

This paper explores the rationale for the current law reform and analyses the proposed changes in relation to directors’ duties and the protection of shareholders’ interests. It also assesses the relevant law in the 2006 Companies Act of the United Kingdom in order to draw comparative lessons for future company law reforms in China. The proposed amendments have not solved all of the problems in relation to the current law on directors’ duties and shareholders’ derivative actions; nevertheless, they undoubtedly reflect Chinese legislators’ effort to improve the corporate legal framework and enhance corporate governance in China. If these proposals are adopted in the final legislation, they will bring significant improvement to company law and corporate governance in China; ultimately, they will make Chinese companies more competitive and attractive to both home and foreign investors.

The paper Chinese Company Law Draft Amendments: Strengthening Directors’ Duties and Improving Shareholders’ Protection was published in the International Company and Commercial Law Review.

Dr Fang Ma is a Senior Lecturer in Law at the University of Portsmouth in the UK. Her research interests include Company law and Corporate Governance in China and in the UK. She can be contacted at fang.ma[at]port.ac.uk.

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Force Majeure or Change of Circumstances: An Enduring Dichotomy in Chinese Law?

5. June 2023
A forthcoming chapter by Qiao Liu

How does the Chinese system deal with supervening impediments to contract performance? In this article (draft), I address this question from the angle of the (unbalanced) interrelationship between two doctrines: the doctrine of force majeure (不可抗力) and that of change of circumstances (情势变更). The imbalance can be readily seen from the current judicial data showing that the doctrine of force majeure has been applied by Chinese courts ten times more often than the doctrine of change of circumstances. This article offers explanation to the reasons and implications of this striking situation.    

It first briefly traces the history of the two doctrines and makes three inquiries about their interrelationship. First, do they address different events? It is noted that there is a general tendency in China to categorically characterise certain events, including the COVID-19 pandemic, as force majeure. This tendency, which neglects or downplays a proper assessment of the event’s actual or potential impact on the performance of the particular contract, is rejected in this article. I discuss various elements of the two doctrines such as the tripartite ‘unforeseeable, unavoidable and insurmountable’ requirements and the ‘non-commercial risk’ requirement, as interpreted and applied in Chinese cases or judicial documents. I conclude that all these elements are intrinsically interwoven with the particular parties and contracts and must be ascertained as such. For example, ‘commercial risks’ should be understood as no more than ‘inherent’ or ‘normal’ risks and therefore depend on the particular parties and contract for ascertaining the scope of ‘inherency’ or ‘normality’. Although this requirement seems to be reserved for the doctrine of change of circumstances, the same requirement is captured by the requirements for ‘unforeseeable, unavoidable and insurmountable’ under the doctrine of force majeure. Similarly, the latter requirements should equally be applied under the doctrine of change of circumstances. In this sense, there is a relationship of homogeneity between the two doctrines.

The second inquiry moves on to explore the different ‘contract impact’ tests applied under the two doctrines. The doctrine of force majeure encompasses two such tests: whether the event results in a situation that the affected party ‘cannot perform’ its side of the contract (the ‘cannot perform’ test) or whether the event renders the purpose of the contract ‘unfulfillable’ (the ‘contract purpose’ test). The doctrine of change of circumstances, since the enactment of the Civil Code, endorses a single test: whether the event renders continuing performance of the contract ‘manifestly unfair’ to a party (the ‘manifest unfairness’ test). This is a critical point of division between the two doctrines – they are distinguished in their respective ‘contract impact’ test(s). One problem in Chinese judicial practice is that excessive use has been made of the ‘cannot perform’ test, which is further discussed in the article. More detailed discussion of the other two tests is left to future research.  

The third and final inquiry concerns the differing legal consequences attached to the two doctrines. The most notable remedial difference between the two doctrines is that contract adaptation (or modification) is available only under the doctrine of change of circumstances. This article reviews the general principles/rules for contract adaptation and its relationship with contract renegotiation. In particular, contract adaptation is distinguished from ‘exemption of liability’, which is a unique remedial consequence attached to force majeure, in that contract adaptation varies primary obligations under the contract whilst ‘exemption of liability’ affects secondary obligations only. However, there remains ambiguity as to the meaning of ‘exemption of liability’ which in practice has led to increased discretion.

The second half of the article attends to cases involving a contract affected by COVID-19, bringing the discussion above to a specific context. Cased decided and judicial documents issued by Chinese courts (especially the Supreme People’s Court) concerning SARS and COVID-19 (for a more detailed outline of Covid-19 judicial documents, see Qiao (2020)) are analyzed. I argue that a wider reception of the doctrine of change of circumstances can be observed from COVID-19 documents and should be encouraged. A categorical characterisation of COVID-19 as force majeure should be avoided. Which of the two doctrines is best to be applied in a particular case should be left to be determined through the ‘contract impact’ tests.  

It is also observed that from the SARS pandemic to the COVID-19 pandemic, both the meaning and role of the ‘cannot perform’ test have undergone some transformation. The SARS cases are dominated by a narrow understanding of the ‘cannot perform’ test by unduly excluding cases where a party ‘can’, but decides not to, perform the contract. COVID-19 cases, on the other hand, display the revival of a broad interpretation, which equates ‘cannot perform’ with a ‘failure to perform’. Unfortunately, in practice, mostly due to the undisciplined extension of ‘exemption of liability’, the ‘cannot perform’ test has been much overused and abused. This article thus calls for a more structural and coherent approach to the allocation of work between the two doctrines.   

Professor Qiao Liu’s article Force Majeure or Change of Circumstances: An Enduring Dichotomy in Chinese Law? is a chapter in The Making of the Chinese Civil Code – Promises and Persistent Problems, forthcoming with Cambridge University Press in September 2023. Find a draft here.

Qiao Liu is Professor and Deputy Director of the Centre for Chinese and Comparative Law, School of Law, City University of Hong Kong; Honorary Professor, TC Beirne School of Law, University of Queensland; Adjunct Chair Professor, School of Law, Xiamen University. The work described in this paper was fully supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. 11608821).

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Judicial Transparency as Judicial Centralization: Mass Publicity of Court Decisions in China

16. May 2023
A new paper by Lei Chen, Zhuang Liu and Yingmao Tang
Beijing Dongcheng People’s Court Photo by 冯正虎

China runs the largest online program for publicizing judicial decisions in the world. The mass publicity of court decisions in China, this article (draft here) argues, is part of the broader trend of the Chinese judiciary becoming increasingly centralized. The mass publication of court decisions in China seems puzzling: Disclosure of government information is often linked to an aspiration for political participation, which contributes to accountability and creates an obligation for responsive government. As a style of governance, transparency is usually associated with democracies, and few authoritarian states show much interest in government transparency.

In this article, the authors explain the reform towards greater transparency of the Chinese judiciary in a principal-agent theoretical framework and contextualize it within strategic moves of the central and the local governments in this setting. Previous studies of the political system in China have documented a deeply rooted agency problem between the central government (the principal) and local courts (provincial courts and courts at the lower levels – the agents), often discussed as “local protectionism”: The primary goal of the Supreme People’s Court is that centrally stipulated laws are applied in a unified way for the entire country, however, such application may conflict with local interests and social stability in local communities. Hence, in practice, courts often function as a local apparatus that protects local interests. This tension between the central government and the SPC on the one hand and local governments and respective courts on the other is a result of the structure of the Chinese political system. For example, local courts’ finance and personnel are controlled by local governments. While it is on the reform agenda to make the high court at the provincial level control and manage the finances of all courts in the province, control over personnel remains with the local governments. More importantly, information asymmetry embedded in the multiple-layered government structure and thereby the inability for the centre to monitor the local.

Responding to this dilemma, the Supreme People’s Court carries out a reform towards transparency. The mass publicity of court decisions, this article contends, is a top-down effort to address the principal-agent problem. By means of establishing a centralized judicial data collection system, the Supreme People’s Court can more directly control the information reporting process within the judicial hierarchy and reduce information asymmetry. By making mass local court decisions publicly available on a centralized venue, it attempts to curb wrongdoing and improve decision consistency and quality in local courts through public oversight. Together, the transparency reform helps the centre (i.e., the SPC) rein in local courts.

As in most principal-agent settings, agents, here local courts, responded strategically, by disclosing fewer decisions than required. After the Supreme People’s Court mandated judicial decision disclosure for courts in 2014, disclosure rates remained low, at 39.4%, 44.5%, and 47.9% in 2014, 2015, and 2016, respectively, with strong regional variations. For example, the disclosure rate of Tianjin in 2016 was about 71%, while that of Hainan was only 16%.

In the existing personnel arrangement, local governments control the appointment and promotion of judges. Yet an increasing number of provincial high courts are now presided over by judges or
officials who have work experience at the SPC or other agencies of the central government. Our data shows that judicial decision disclosure rates increased at courts that were headed by cadres with work experience in the central government. We find that the presence of these cadres is associated with more than a 10 percent higher disclosure rate of judicial decisions by the respective court. This finding suggests that the dispatched judicial cadres were quite successful in promoting transparency of the courts in their jurisdictions according to central policy – just as they are in promoting other central policies.

The transparency reform is to be contextualized within other reforms toward a more centralized judicial sector in China. Local protectionism of courts, that is, courts serving local interests rather than following the law, is well documented in the literature. The requirement that all judgements be uploaded to the centralized website enables the SPC to supervise local courts’ behaviour not only through public oversight but also through steering legal development in a certain direction, and aligning local judicial decisions with its own policy goals. For example, the SPC can easily search for local judgements and check whether their decisions are consistent with judicial interpretations and guiding cases.

The article Judicial Transparency as Judicial Centralization: Mass Publicity of Court Decisions in China was published in the Journal of Contemporary China. A draft version is available here.

Lei Chen is Chair of International Arbitration and Chinese Law at Durham Law School, UK. He has been elected as a Titular Member of the International Academy of Comparative Law and a Fellow of the European Law Institute.

Zhuang Liu is an Associate Professor of Law at the University of Hong Kong. His research interests include the role of the courts and judicial behaviour, as well as law and development. His work has appeared in several leading academic journals specialising in law, economics, and China studies.

Yingmao Tang is an Associate Professor at Peking University Law School. His research interests include international finance regulation, investment law and the Chinese judicial system. His recent work focuses on opening China’s capital markets, online judicial transparency and big data & computational legal studies.

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Shaming the Untrustworthy and Paths to Relief in China’s Social Credit System

24. April 2023
A new paper by Marianne von Blomberg and Haixu Yu
Media outlets and government websites use cartoons to explain SCS practises

Much has been said and written about China’s Social Credit System (SCS). Stories about an almighty, high-tech surveillance dictatorship that rates its citizens are persistent in global media discourse while the image of an omnipresent and omnipotent social credit score already found its way into memes. An increasing number of observers debunk the horror stories with facts and point to the low-tech nature of most SCS projects. As unfounded as many social credit stories are, they have also fuelled a long-overdue debate outside of China about data protection and the power of assessments. In a proposal for an AI regulation, the European Union cast the imagined “social credit scoring” as antagonist.

Meanwhile, the social credit stories and their policy responses abroad overshadow the actual innovations and challenges that the SCS brings to governance in China. The SCS does not have the capacity to function as the Orwellian surveillance tool it is often depicted as, but that does not mean that it is less ambitious and transformative. Zooming in on one of the multiple innovations that emerge under the SCS’s overarching aim to engineer trust, we studied the architecture behind the systematic disclosure of information on the “untrustworthy” (失信人) and, in a second part, interrogate paths to relief for targeted subjects. Those who find themselves shamed as “untrustworthy” are almost exclusively persons who have violated laws and regulations or not fulfilled court orders, rather than persons who have breached unspecified moral norms, and consist overwhelmingly of companies rather than individuals. The SCS’s shaming practices are thus best contextualized within public regulation work. Our study finds that the SCS formalizes and elevates a concept of public regulation that is best conceptualized as reputational regulation to new prominence. Shaming as a regulatory tool is not new and has been applied by state agencies globally. The Occupational Safety and Health Administration of the USA for example routinely uses its Twitter account to shame companies that violated work safety rules. However, the SCS is the first central-level government strategy that systematically implements shaming schemes in all regulatory realms from transport to food safety and equips the practice with a clear rhetorical framework. Public disclosure of compliance assessments is also a common practice in emerging, transnational ESG regimes (Environmental, Social and Corporate Governance). The driving factors of both, the SCS’s reputational regulation scheme and global ESG regimes are similar: The aim to enforce norms of public interest in the absence of an efficient and comprehensive regulatory infrastructure.

We first identify three pillars of successful reputational regulation through a review of empirical and theoretical literature on reputational regulation and then point out how the SCS realizes them.

(1) In reputational regulation, the declared purpose of the information disclosure is to punish, rather than to increase government transparency or warn of dangers (e.g., from poisoned food products). The NDRC and PBoC stipulate blacklisting and the public sharing of information on trust-breaking in their 2022 list of SCS disciplinary measures. Both sanctions are reputational only, as the more tangible punishments that come with blacklisting, such as restrictions on market access and subsidies, are listed separately. Further, a plethora of core structural policies document the punitive purpose of disclosure, for instance the foundational Planning Outline on the Construction of a Social Credit System (2014-2020) calling to “give rein to the role of the masses in appraisal, discussion, criticism, and reports, shape social deterrence through social moral condemnation, and censure trust-breaking acts.”

(2) To ensure that the public and media generate the negative publicity necessary to pressure target subjects to change, a government agency engaging in reputational regulation needs to provoke this disapproval by embedding the disclosure within a moral message. The SCS endowed the existing disclosure strategy of dual publicity (双公示), which initially promoted disclosure of administrative punishment decisions to foster government transparency, with the trust-breaking rhetoric, making it part of the SCS toolkit. Negative social credit information technically consists merely of violations of laws and regulations and is not novel. The innovation brought by the SCS is to relabel selected categories of administrative information as “credit/trust information” and publicize them as such. To information recipients, the impression conveyed is that a violator of the law in one realm is overall untrustworthy. The trust rhetoric dominates all publication formats: Blacklists and disclosure platforms carry titles such as “seriously untrustworthy companies”.

(3) Finally, reputational regulation requires that the information must be brought to the attention of actors who are in a position to exert pressure on the deviator. A variety of dissemination channels amplified by a state-dominated media environment ensure that information on trust-breakers reaches far. Apart from online platforms and local government websites, public billboards, announcements at local festivities, television and radio broadcast, ringtone announcements and various apps inform about who has been designated untrustworthy. Credit service agencies also tap into social credit information.

To summarize, the SCS drives a type of information disclosure that is intended more to punish than to warn, comes with a negative moral message, and is disseminated to the public through various channels. Regulatory shaming is, however, notorious for infringing on target subjects’ rights. Chinese literature has described the publication of negative social credit information as a new type of reputational punishment (声誉罚). The agency loses control over the scope and intensity of punishment once information is published because the punitive action itself is carried out by others. Even if a target subject successfully objects to the publication of adverse information and the agency takes it down, the reputational damage can hardly be undone. The second part of our study discusses how targets of reputational punishment under the SCS can seek legal remedy.

There are three potential paths to relief for those adversely affected by SCS-driven regulatory shaming in China: administrative reconsideration (行政复议) and litigation, internal agency controls, and the SCS’s own mechanism of credit repair (信用修复). The prior two paths may provide more or less satisfying outcomes for conventional administrative penalties such as fines, in the case of shaming however, revoking the agency’s act means only ceasing publication. Reproductions of the negative information concerned in news outlets and other channels remain in place. Additional remedies such as apologies and compensation payments appear necessary but while the Administrative Litigation Law provides for such remedies, we could not find court decisions ordering such remedial measures in social credit-related cases.

Where subjects believe to be unlawfully designated “untrustworthy” and bring the claim to court, they frequently face the following issues:

Whom to sue?
  • It is often unclear which agency is to sue because a single SCS penalty can involve multiple state agencies. For example, a construction bureau in Jiangsu blacklisted a company for not paying wages to migrant workers, resulting in a different local agency acting on the information by restricting the company from public bidding. When the company sued the construction bureau, the court held that the bureau was not the defendant. It held that the correct defendant was instead the other agency that had punished the company. In other cases, the agency that administered the blacklist was held to be the correct addressee. The confusion over the correct defendant in litigation may be further exacerbated by the trend to outsource shaming work to industry associations.
Are social credit penalties litigable?
  • If it was confirmed that social credit shaming measures constitute administrative punishment, the Administrative Punishment Law (APL) would apply, subjecting the shaming regulators to a series of procedures such as notifying targets beforehand and offering them a chance to defend themselves. Is SCS-driven regulatory shaming an administrative punishment? No legislation to date has clearly addressed this question. Courts regularly deny arguments that any SCS penalties, including shaming, constitute administrative punishment. Some claims have been accepted nevertheless with courts defining the SCS measure as an administrative act that has affected the plaintiff’s rights, and on this basis examined whether this act had the legal basis it needs according to law. A legal basis may consist of SCS regulations and measures issued by sectoral regulators from the ministry level down to that of local municipal agencies. In rather exceptional decisions, courts held that central-level policy documents that were not translated into local rules do not suffice as a legitimate legal basis for a social credit penalty.
Are social credit penalties subject to procedural restrictions?
  • A growing number of SCS policy documents stipulate procedures for social credit penalties, which increasingly find their way into local law where they can be invoked by courts. For instance, many local and sectoral regulations stipulate a duty on the part of the regulatory agency to notify a person before entering her on a blacklist. The Jingyang District Court of Deyang City ordered an agency to delete a negative record because the agency failed to “inform the administrative counterpart of the administrative decision to be made and listen to the administrative counterpart’s statement and defence.”
Just information disclosure or a reputational penalty?
  • In most instances, remedies for social credit penalties are denied because social credit measures pose conceptual novelties to adjudicators. In particular, the courts have invoked the accessory nature of publication, the necessity for government transparency, and the political priority of SCS building to reject plaintiffs’ claims. For Tianheng Investment Construction Management Ltd. from Hangzhou for example, appearing on a list of untrustworthy companies for having submitted forged materials meant the de facto end of its business, at least for the stipulated publication period of twenty-four months. However, the courts of all three instances denied the company’s claim that the disclosure was punitive, holding instead that publication was part of the agency’s duty to objectively record and publicize their decisions. In other cases, the SCS goals of building a trustworthy society and market have been invoked by adjudicators to legitimize credit information recording, scoring, and publication practices. Lianfa Construction & Engineering Ltd. had won an initial case against a local housing agency which had, without legal basis, imposed a social credit penalty. However, the court of appeal overturned the ruling, insisting that the mechanism for disciplining law-violating and trust-breaking behaviour must be perfected. As Peking University Professor Chun Peng points out, in the larger mission of SCS building, courts are not just the guardians of lawful conduct of state agencies but also “vanguards of disciplinary measures for trust-breaking”.

Litigation does little to alleviate the damages ensuing from undue shaming for trust-breakers. The clumsiness of shaming measures and their irreversibility render them hardly controllable through the judiciary. Alternatively, control mechanisms within the information handling agency may prevent undue damages. Only the ability to object prior to publication can provide an effective safeguard against wrongful shaming sanctions, and agency rules on social credit information lay down the procedures that lead to publication. However, no solution to effectively overseeing such procedural rules in the absence of judicial review has surfaced.

Finally, where target subjects admit guilt, they may obtain relief from shaming through the reintegrative path of credit repair. Credit is repaired and respective negative information publication halted if subjects correct untrustworthy conduct and eliminate negative impact, make credit commitments, participate in charitable activities, and/or undergo educational training, depending on the relevant sectoral and local credit repair mechanism. Credit repair is not strictly a remedial path as it does not operate on the premise of agency mistakes and in practice remains porous. However, with credit repair’s concept to function as a reintegrative path comes an innovation that has the potential to resolve the irreversibility of shaming: In some credit repair programs, instead of deleting the original negative record, that record is supplemented by a record of repair clearly explaining the reason for the repair and the final assessment.

Reputational regulation remains a work in progress. But is it effective? Other than traditional enforcement tools of state agencies such as fines, reputational regulation requires the cooperation of non-state actors, in this case, the shaming community which has to act upon disclosed information and exert pressure on the shamed subject. Initial studies found that company representatives across China believe reputational harm from negative publicity to be one of the key concerns with regard to the SCS. However, more research is needed to assess under which circumstances and to whom the disclosure of information on trust-breaking is relevant.

Marianne and Haixu’s paper is published with Modern China, a draft version is available at SSRN.

Marianne von Blomberg is a Research Associate at Bern University of Applied Sciences, Institute for Global Management, and is currently completing a PhD with Cologne University’s Chair for Chinese Legal Culture and Zhejiang University’s Guanghua Law School. Her research revolves around social credit regimes in China and beyond, assessment-based public regulation, and data governance. In her dissertation, she explores how the Social Credit System project in China strengthens, weakens, and transforms the law. She holds an LL.M in Chinese Law from Zhejiang University and a BA in Communication, Culture and Management from Zeppelin University. She can be contacted via Twitter @mariannehuashan or email at m.vonblomberg[at]uni-koeln.de.

Haixu Yu is a Research Associate and doctoral student of the Chair of Chinese Legal Culture. He passed the national judicial examination of the People’s Republic of China in 2014. His research interests include Chinese judicial reform and Chinese public law. Before studying in the University of Cologne, Haixu Yu graduated from the Chinese University of Political Science and Law in 2018, where he received LL.M degree, majoring in Chinese economic law and fiscal law. He received his LL.B. and B.A. degree in 2015 also at China University of Political Science and Law.

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Opportunities and Risks of Fintech-Bank Partnerships in China’s Credit Market

15. March 2023
A new paper by Robin Hui Huang and Christine Menglu Wang
Shoppers in Shenzhen Photo by Chris via Flickr

A regulatory crackdown on China’s Big Tech in the past years has drawn attention to a blossoming business model: Micro loans extended on a massive scale through collaborations between banks and fintech firms such as Alibaba’s Ant Financial. The application of information technology has disrupted the traditional way of providing financial services and products in recent years. In China, a pioneer in developing new models for credit business based on fintech-bank partnerships, two main forms evolved, namely the model of loan facilitation and the model of co-lending (see figures below). The model of loan facilitation refers to the practices of fintech firms providing financial institutions with technical support and credit-related services. Under the model of co-lending, apart from the provision of ancillary services, fintech firms also contribute some funds to extend loans together with their partner financial institutions. This paper observes the FinVolution Group and Ant Group as examples to illustrate the two business models of FinTech-bank partnership.

By establishing business partnerships, fintech firms can leverage massive customer data and innovative platform technology to provide important assistance for financial institutions at some key junctures of the credit extension process, thus improving access to finance for more customers. The collaboration with fintech firms enables financial institutions to concentrate on their core business by outsourcing certain work and serve their customers with greater efficiency. Fintech firms can take advantage of the funds, expertise and resources of financial institutions to engage in credit-related business without applying for a separate license. The partnership with financial institutions can bring reputational benefits for fintech firms and strengthen their brand image in the credit market.

While fintech-bank partnerships may bring many benefits to China’s credit business, they also pose serious risks and problems. Firstly, the collaboration with fintech firms increases the operational complexity of financial institutions. Due to regulatory arbitrage, fintech firms are not subject to strict financial regulations. A challenge for financial institutions lies in dealing with outsourcing risks arising from misconduct of their partner fintech firms. Secondly, the exclusive control of data and technology on the part of fintech firms is likely to reinforce their monopolistic practices, thus leading to a vendor lock-in problem for their partner financial institutions and customers. Thirdly, as fintech-bank partnerships involve the processing and sharing of vast amounts of customer information, concerns regarding data security and privacy issues grow. Further, algorithms and other data-processing technologies are applied to conduct creditworthiness assessments of customers. Fintech firms risk extending loans to customers based on credit assessments that are inaccurate due to the input of biased data and a defective design of assessment technologies. Last but not the least, the risks that financial institutions face when outsourcing data security services and assessment are even greater due to the fact that a small number of fintech firms dominate the provision of such services. The operational failure of or cybersecurity incidents at dominant fintech firms can easily give rise to financial contagion and systemic events in the market.

In response, China’s government has endeavoured to address the above problems by strengthening laws in related areas, such as anti-monopoly law, data protection law and financial law. Specifically, antitrust regulators have issued guidelines for the platform economy to prevent monopolistic practices and safeguard customer interests. China has further consolidated its regulatory regime for data security and privacy protection to tighten oversight of fintech firms’ business. The formulation of industry standards for algorithmic applications has also improved compliance with requirements for financial innovations. These regulatory responses have both strengths and weaknesses. This paper focuses on the particular issue of regulatory arbitrage arising from outsourcing activities.

Our study suggests that in case of the co-lending business model, there is a regulatory loophole that allows some fintech firms to circumvent licensing requirements and carry out credit business in an indirect way. The loophole may be closed by clarifying that relevant requirements apply equally to indirect participation in co-lending business. In the loan facilitation model, under the current framework, fintech firms do not need to hold a credit business license but can rather ride along on the license of their partnering financial institutions. This gives rise to challenges since reliance is unduly placed on financial institutions who have to oversee their partnering fintech firms and are ultimately responsible for the performance of outsourced services.

Drawing upon the experiences of overseas jurisdictions, including the US, the UK, the Netherlands, Luxembourg and Switzerland, this paper argues that China can adopt a staged and differentiated approach to regulate fintech-bank partnership. The UK initiated the regulatory sandbox regime in November 2015, which allows fintech firms to develop and test innovative products and services in a controlled environment. It sets out plans for implementing the regulatory sandbox, including the entry and exit criteria, a tailored authorization process for different firms and appropriate safeguards for customers. A similar model, adjusted to local circumstances, would be suitable in China. As fintech firms need time and resources to meet relevant sandbox requirements, China may also create a special test environment for start-ups by introducing an umbrella regime. It allows fintech firms to conduct innovative business under the shelter of an umbrella entity. The sandbox umbrella, as a regulated entity, will provide ample experimental space and ensure better customer protection, because fintech firms can use its license for trial services and products under the actual circumstances.

After fintech firms complete the sandbox process and proceed to operation, the key issue becomes the continuous supervision of their partnership with financial institutions. Switzerland has introduced a new fintech license with relaxed requirements to promote innovation. The licensing process depends on the quality of each application and the complexity of the fintech business. Based on that model, China is advised to implement a sophisticated licensing regime to set out differentiated rules for fintech firms according to the nature and types of services they engage in. In this regard, more categories of special licenses can be created as ‘limited licenses’ as distinct from the traditional ‘full licenses’ to address the problem of regulatory arbitrage. Further, it is worth experimenting with a mentorship scheme, under which the monitoring responsibility of financial institutions is limited to compliance violations of their partnering fintech firm and emphasis is placed on helping start-ups.

The paper FinTech‑Bank Partnership in China’s Credit Market: Models, Risks and Regulatory Responses was published in European Business Organization Law Review. Robin Hui Huang 黃輝 is Chair Professor at the Faculty of Law, Chinese University of Hong Kong. Prior to joining CUHK, Professor Huang was a tenured staff member in the Faculty of Law at the University of New South Wales, where he now holds a position of Adjunct Professor. He is also Li Ka Shing Visiting Professor in McGill Law School and Honorary Professor at East China University of Political Science and Law. Christine Menglu Wang 汪夢露 is a Post-doctoral Fellow in the Department of Law, the University of Hong Kong.

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Due Process in China? Developments in Administrative Law since 2013

8. February 2023
A new paper by Björn Ahl
“Sign the (compensation) contract early, select a house early, improve early, benefit early” Largely proportional to the total number of administrative cases, most of the cases invoking the due process principle concern compensation claims for the expropriation of land and other coercive measures in the name of urban development. Photo by makzhou

While administrative law in China developed slowly, starting from the 1990s, the importance of administrative procedure law to fight corruption and foster society’s trust in the public administration became apparent. However, China’s legislation did not firmly establish the due process principle in the law. Rather, administrative law scholars as well as courts in China moved forward and developed the notion of due process. For instance, the Intermediate People’s Court of Suqian City in Jiangsu has in 2004 found that the local urban development bureau should have given inhabitants of buildings they demolished the chance to make statements and defend themselves, despite respective provisions being absent from the law. Meanwhile, legal scholars argue that due process is an unwritten general legal principle of administrative law.

Earlier investigations have pointed out that while judges have made use of due process in their adjudication work, such cases, even if designated representative by the SPC, do not suffice to fully establish the principle in administrative procedure law (Haibo He 2008). The post-2013 era in China is generally characterized by developments pointing to a regression of the rule of law. In this paper, administrative cases decided by Chinese courts from 2014 to 2019 are analysed to determine whether or not courts have further expanded the application of the due process principle. During that period, the High People’s Courts and the Supreme People’s Court published 321 decisions that mentioned the due process principle. About 70 percent of the court decisions dealt with rights relating to immovable property, including land use rights of state-owned land and the ownership of collectively owned land.

When an institution of higher learning makes a decision against a student who violates school rules and disciplines that affects his/her basic rights, it must allow the student to defend him/herself, and it must deliver the decision in a timely manner after it is made; otherwise, it will be deemed a violation of due process.

The due process principle finds its expression for instance in the famous case of student Tian Yong 田永, who was denied his graduation certificate by a university. Beijing Intermediate People’s Court decided in 1999 that the university’s decision was unlawful, arguing that due process was not being observed by the school. (指导案例38号，最高人民法院公报 2015 (8))

While a general administrative procedure law is absent at the national level, some laws such as the Administrative Penalty Law, the Administrative Enforcement Law and the Administrative Licensing Law include several due process requirements. The Administrative Penalty Law for instance, amended in 2021, includes the requirement for administrative agencies to notify in advance and consider any objections from persons against whom an administrative penalty is taken, among others. Some of the changes in the new Administrative Penalty Law were inspired by experimental legislation at the local level: Provincial legislators such as in Hunan (in 2008) and Jiangsu (in 2015) had already passed Administrative Procedure Regulations with a wide range of due process requirements. Apart from local legislation, policy documents adopted by the State Council emphasize the importance of due process rights and while they are not legally binding, do indicate a general trend for future legislation.

The study of court decisions undertaken here demonstrates that indeed, courts have continued to expand the application of due process after 2013. Due process rights are applied across different fields of substantive administrative law, and to different forms of administrative actions, including administrative penalty decisions as well as physical acts such as the demolishing of buildings. Courts however rarely elaborate on specific requirements the due process principle contains. Among others, notification rights, rights to a hearing and the right to ‘adequate participation’ for adressees of administrative acts have been held to be part of due process.

However, these developments are not always directed towards a general strengthening of administrative procedure to provide effective pre-judicial remedies. In several cases, courts use the reference to the due process principle as a catch-all clause for administrative injustices including for instance the requirement that belongings of former inhabitants of a building must be appropriately stored before demolition. Courts further do not always attach legal consequences, such as the revocation of the administrative act, where they find a violation of due process. We find that applying the due process principle helps courts avoid deciding on the substantive legality of the administrative acts in question, potentially interfering in the conflict between different administrative agencies.

Björn Ahl is Professor and Chair of Cologne University’s Chinese Legal Culture. Before joining the University of Cologne in 2012, he was Visiting Professor of Chinese Law, Comparative Public Law and International Law in the China EU School of Law at the Chinese University of Political Science and Law in Beijing. Prior to that he held a position as Assistant Professor of Law in the City University of Hong Kong. He has also worked as Associate Director and Lecturer in the Sino German Institute of Legal Studies of Nanjing University and as a Researcher at the Max Planck Institute of Comparative Public Law and International Law in Heidelberg. Find him on LinkedIn.

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