Western Rule of Law vs Chinese Legalism: Will Xi Jinping's legal and economic reforms seeking to improve corporate governance in Chinese companies be empty words on paper?

Reforming Chinese companies mechanism of corporate governance especially the SOE sectors had been the featured element since China’s opening up and reform in 1982. The Chinese economy had experienced a painful transformation from a centrally planned economy to a socialist market economy. During the course of the late 19th century till today, each generation of CCP leadership had carried their own corporate governance reform in order to improve Chinese enterprises ability to compete in the market economy. Since November 2012, the inauguration of China’s new leader President Xi Jinping, who is the new ‘core leader’ of China and its policies have been described as ‘Politically Conservative but Economically Liberal’ by political scientist Cheng Li of Brooking Institution (1). The new paramount leader has implemented far reaching crack downs on China’s corruptions and emphasised the importance of rule of the law and restructuring China’s SOE corporate governance. Despite the fact that Xi’s anti-corruption and economic reforms have been widely praised among the Chinese populace, foreign observers outside China worry that Xi’s autocratic ‘strong man’s ruling style’ will inevitably characterise reforms and legal notions seeking to improve corporate governance in Chinese companies as ‘empty words on paper’. This article is going assess and analyse the possibilities of such predication.

The very first vital factor of limiting Chinese reforms on improving corporate governance in China’s State Owned Enterprises is the Chinese notion of the ‘rule of the law’. China and the west simply do not share consensus on the concepts of the term ‘rule of law’. For the western elites, the nation is governed by the principles of laws rather than by government officials. In Britain, laws and legislations are debated in the House of Commons by democratically elected MPs. The separation of administrations and legal departments motivated by the principle that the a nation should be governed by law rather than being governed by the arbitrary decision from government officials is the central theme to the notion of rule of law. The most representative western example of the rule of law can be traced back to the reign of James I of England (1603-1625), the Case Prohibition 1607. It occurred when King James I attempted to place himself as the Judge for a dispute but was repealed by the English Chief Justice Sir Edward Coke stating that ‘the King is above all but God and the Law.(2)

For Chinese elites however, the rule of law is influenced by legalism, a classic ancient Chinese political thought favouring absolute monarchy with big government. The leading figure head of legalism Han Feizi, stated that the core principle of legalism is to maintain social stability via establishing a strong autocratic state with tough laws to deter people from committing crimes due to the legalist perception that human nature is greedy and evil. As opposed to the English rule of law, the Bill of Rights 1689 which functioned as a legal tool to counter the notion of ‘The Divine Right to Rule’. The Chinese legalism on the other hand, is in favour of absolute monarchy, believing the country must be ruled by a strong committed monarch with absolute power and such method is the only way to maintain social stabilities(3). Therefore, rule of law in China meant rule by law, where the monarch decide the laws commenced by his royal court should be passed to govern his country, rather than the monarch had to abide the law made by his royal court. In the modern context, government are the law makers and rule issuers, the country is ruled by the government rather than by independently made laws. Under such sharp contrast, China’s legal reforms are in fact bird caged reforms, where the ruling party will not grant full judicial independence to the court, such phenomena will have a direct impact on corporate governance too. The legalist style of rule by law will not permit China’s corporate governance reform to move towards the Anglo-Saxon Corporate structure where the Chinese companies can establish their own independent board of executives and mangers free from the CCP appointed officials having the final say on company policy matters. The precondition of China’s legal reform notion is ‘the party must be in charge’. This meant that China’s economy is still relation based and power syndromic, it inevitably contributed to China’s legal notion attempting to improve corporate governance as empty words.

Nevertheless, there are positive news about China’s corporate governance reforms under Xi Jinxing are moving forward despite all the pessimistic analysis.

According to the WikiLeaks released American diplomatic cables, one source dated in December 2007 revealed that Citi Bank’s (China) CEO Richard Stanley met with US Strategic Economic Dialogue Special Envoy ambassador Alan Holmer and discussed a number of issues concerning China’s financial market and banking system. The Citi Bank CEO expressed his frustration for the CSRC Executive Shang Fulin, but gave praise to the then vice president of China, Mr Xi jinping, now the Paramount leader of China as an ‘impressive person with pro business background and has a history of being friendly to foreign investments’. According to Stanley, ‘this is not a bad outcome from the commercial standpoint’ (4). In addition, the Citi Bank CEO also gave us good news about the future of China’s economic reforms. Stanley is contended that China will move further down the road as a market economy, nonetheless the central government of China will make such transition in a slow pace, as they believe both Chinese banks and the financial market lacked discipline and maturity. Stanley asserted that China’s political calendars play vital influence to the Politburo’s decision makings on China’s economic policies and particularly reforms in SOE sectors. By the time of October 2007, CCP’s 17th National Congress is imminent, both Hu Jintao and Wen Jiabao along with their colleagues were distracted. ‘Number one in those people’s mind is their next job, they don’t get paid a lot, what these officials working for are power and position’ Stanley mocked (4).

Nevertheless, there are positive news too, Richard Stanley’ assumption on Xi jinping and his estimation of Chinese economy’s future market transition were mostly accurate. After the CCP’s Third Plenum of the CCP’s 18th Congress, the government announced the decision to ‘Comprehensively deepening the reform’. In the field of the economy, the new government decided to ‘allow the market to play a decisive role in allocating resources’. Political economist Dr Arthur Kroeber from the brooking institution suggested that Xi will be committed to move corporate governance of the State Owned Enterprise further. This will mean that Xi’s main objectives are to restructure the SOEs and get government out of the resource allocation process, thus reducing the power of the SOEs. Indeed, in the previous Jiang-Zhu and Hu-Wen administrations, the party conferences concerning the government relationships with the market have been the rhetorics of ‘letting the market to play a basic role in the resource allocation’, Xi had made a bold offensive on the economic reforms by changing the tones from ‘basic role’ to ‘decisive role’. Such bold decision is in fact, consistent with Premiere Li Keqiang’s call of reduction of bureaucracy. Dr Kroeber argues that following the decision to make the government retreat further from the macroeconomic management, the SOE’s style of governance must be changed. Xi will keep the SOEs but make them more efficient. In comparison to Margaret Thatcher’s neoliberal reforms of completely privatising the failing SOEs, Xi’s approach was rather cautious. Privatisation is off the table and much of it had been focused on reshaping its corporate governance. Kroeber illustrated Xi’s corporate governance reform agenda on the SOEs as ‘subjecting the SOEs to much more intense market competition and tighter regulation’. As many pro free market western economists believe that a matured market economy is not just about private ownerships but of fairer competitions. Xi certainly wants the SOEs to be more competitive and professional in the market based environment(5).

In the book of , Xi had made his SOE corporate governance priority clear: ‘improve corporate governance structure to ensure smooth operation and effective checks and balances. Establish a system of professional managers and give better play to the role of business executives, long term incentives and restraint mechanism and adds more scrutinise on the SOE’s operations and investment, meanwhile publicise SOE’s financial budget(6). This is a clear sign that Xi is ready to implement more aggressive roles to reform the ownership structure, the management sectors and ultimately the overall corporate governance of the SOEs as a whole to make the SOEs more efficient, professional and transparent.

The real question is whether the new Chinese president pledge to reform the corporate governance and rule based business management in Chinese companies would be effective, can he deliver his plans? Prof Kerry Brown, Director of the China Institute at King’s College London, stated Xi Jinping as the ‘New CEO of China’ because he is the leader of China’s State Owned Enterprises which are crucial for the party state(7). Therefore the leader must have determination and sufficient political powers in order to fully enforce his plans. If we take Xi’s autocratic, legalist ruling style into account, the possibility of his reforms being ‘empty words on paper’ is less likely to suffice. Since Xi’s inauguration, he has significantly centralised the institutional powers of the central leadership in Beijing in comparison to his predecessor Hu Jintao. Xi’s ruthless crackdowns had been successful in eliminating his opponents, many of those arrested were those powerful oligarchs of the ‘Oil Cliques’ in the SOEs, included Mr Zhou Yongkang, who was once the chief executive of the Sino Pec and known as China’s ‘Reinhard Heydrich’, the most feared man and the ‘Tsar’ in China’s security service during the Hu-Wen Administration. As a result of Xi’s extensive anti-corruption efforts in the major SOEs, removing many obstacles stood in his way, the opposition force against Xi’s liberal economic reforms decided during the Third Plenum of the CCP’s 18th CCP Central Committee in Oct 2013. In July 2016, Xi Jinxing received the title of ‘The Leadership Core’ after the Sixth Plenum concluded. This means that we can assume the new president’s corporate governance and legal reforms could give us more hope about the future improvements of China’s rule of law and corporation management efficiency. More prominent changes would commence after the 18th October 2017, when the 19th National Congress of the CCP electing new members of the Politburo standing committee (China’s core decision making body) conclude.

Most importantly, these reform measures would not be the type of change that western political scientists and economists would appreciate, they will be ‘reforms with Chinese characteristics’. Each country has its own political and economic cultures, people should not apply their own way of thinking to analyse or interpret the logics of others who come from different backgrounds. Just as Henry Kissinger once said: ‘What we (Americans) must not demand or expect is that they (the Chinese) will follow the mechanisms with which we are familiar. It will be a Chinese version..and it will not be achieved without some domestic difficulties’ (8)

References and Citations:

1. Li Chen, ‘A new type of major power relations?’ 26th September 2014, The Brooking Institution, https://www.brookings.edu/on-the-record/a-new-type-of-major-power-r...

2.Philips, Hood, Owen, Leading cases in constitutional law (London, 1957) pp.46-47

3.Pines, Yuri, Goldin Paul and Kern Martin, Ideology of power and power of ideology in early China (2015) p.156

4. Beede, Christopher, ‘Citi’s Stanley on banking, economy, reforms, politicians in China’, 11th December 2007 https://wikileaks.org/plusd/cables/07SHANGHAI784_a.html

5.Kroeber, R, Arthur, ‘Xi Jinping’s ambitious agenda for economic reform in China,’ 17th November, 2013, The Brookings Institution

6. Xi jinping, The governance of China (Beijing, 2013) p.87

7. Brown, Kerry, CEO, China: The Rise of Xi Jinping, (London, 2016) p.154

8. Walter Pincus, ‘Kissinger offers wise words on China’. Washington Post, 9th October 2012, accessed on the 26th August 2016. http://www.washingtonpost.com/pb/world/national-security/kissinger-... words-on-china/2012/10/08/9d27c27c-1210-11e2-855a-c9ee6c045478_story.html

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