The Legislative System
China is a civil law country. Statutes that are adopted by legislatures and court decisions do not have precedential authority. The Chinese legal system consists of various levels of law, including the Constitution, national laws, administrative regulations, departmental rules, and local regulations.
THE CONSTITUTION AND NATIONAL LAWS
The Constitution is adopted by a two-thirds majority vote from all deputies of the National People’s Congress (“NPC”). Foreign investors are unlikely to encounter the Constitution in the course of commercial practice, although it sets the foundations for the principles of Chinese laws and the legal system.
Other national laws and amendments are adopted by a simple majority vote of all deputies of the NPC, or by its standing committee. National laws are utilized in a number of broad areas, such as crimes, fundamental civil institutions – such as property law, intellectual property law, and other civil law – basic economic systems, and basic systems of finance, taxation, customs, banking, foreign trade, litigation, and arbitration. Many national laws use general wording and only layout broad principles.
The PRC Foreign Investment Law, coming into force on 1 January 2020, is the fundamental law promulgated by the PRC in the foreign investment area, which sets out general principles and basic administrative mechanism for foreign investments in China.
ADMINISTRATIVE REGULATIONS AND DEPARTMENTAL RULES
The State Council enacts administrative regulations that implement national laws. The ministries and commissions of the State Council and the organs with administrative functions directly under the State Council – such as the Ministry of Commerce (“MOFCOM”), the State Administration for Market Regulation (“SAMR”, previously known as the State Administration for Industry and Commerce, i.e. “SAIC”), and the China Securities Regulatory Commission (“CSRC”) – may also enact departmental rules to provide detailed interpretation of
national laws and administrative regulations, relating to subject matters that are within their respective jurisdiction.
The people’s congresses and the people’s government of different provinces, autonomous regions, and municipalities directly under the central government, also have the power to enact local regulations and administrative rules to implement national laws. These regulations and rules allow for the implementation of the laws in a way that takes into account the local political, economic, and cultural conditions.
Bills are usually deliberated in closed sessions. The process is not published in government documents, nor are the bills announced to the public. However, in recent years, laws, regulations, and rules that are controversial, or may have a significant social and economic impact on Chinese society, have been released on the internet to solicit public opinions, such as the Individual Income Tax Law, the Drug Administration Law, also among the latest and most significant ones, the Foreign Investment Law and six draft sections of the PRC Civil Law in 2018 and 2019. Public seminars and hearings have also been held – for example, revisions proposed for the Individual Income Tax Law. To comment on the draft bills, foreign investors and foreign-invested enterprises may submit comments on their own or, as is more commonly seen in practice, through trade associations or chambers of commerce.
HOW DO THE DIFFERENT LEVELS OF LEGISLATION FIT TOGETHER?
National laws often provide a high-level framework from which more detailed regulations can then be built from. National laws are usually supplemented by the State Council’s administrative regulations
– particularly when the issues involve multiple ministries. Administrative regulations are often worded broadly, with implementing details set out in departmental rules. In addition, local regulations may be promulgated to implement the national laws.
Legally, departmental rules should not conflict with the State Council’s administrative regulations, while national laws take precedence over local regulations.
However, in practice, it is not uncommon to find inconsistencies among rules promulgated by different ministries. In the case of inconsistencies, consultation with the relevant authorities may be needed.
The government hierarchy is headed by China’s President down to the State Council, to China’s ministries and administrative agencies, and to their respective counterparts at the provincial, municipal, county and township or village level.
The government organizations charged with approving investment projects are broadly divided into three levels: the central government level; provincial-level government or government of the municipalities directly controlled by the central government; and the local municipal or county government level. In each case, the higher the level of government, the greater the degree of authority and responsibility. Foreign investors need to understand which authorities are relevant to their particular activities – it is also important to recognise the government is playing a significant role in approving foreign-invested projects.
The Judicial System
The People’s Courts represent the judicial arm of the state and consist of the Supreme People’s Court; the Special People’s Courts, which includes maritime courts, military courts, forestry courts, and so forth; and the Local People’s Courts, consisting of District People’s Courts, Intermediate People’s Courts, and Higher People’s Courts. In recent years, two specific types of court have been established. The Standing Committee of NPC approved the establishment of the Intellectual Property Court in August 2014 in Beijing, Shanghai, and Guangzhou, and the establishment of a Shanghai Financial Court in April 2018. The Intellectual Property Courts will have jurisdiction over specific types of intellectual property cases and the Shanghai Financial Court will have jurisdiction over specific types of financial cases in Shanghai. Also, since 2016, the Supreme People’s Court has established six Circuit Courts as its standing judicial organs and branch offices to try major administrative, or civil and commercial cases across different Provinces and Autonomous Regions. First-instance cases with significant impact nationwide or appeal cases filed against an administrative or civil and commercial judgment or ruling as rendered by a higher people’s court as a court of the first instance will be accepted by the Circuit Courts.
The Supreme People’s Court supervises the Local People’s Courts at each level, the Special People’s Courts, and the Intellectual Property Courts. The higher-level People’s Court supervises the work of the lower-level People’s Courts. Shanghai Financial Court is subject to the supervision of both the Supreme People’s Court and the Shanghai High People’s Court.
In the Chinese trial system, judgment at a second instance is final, meaning that a case is only heard twice, by courts at two levels, and the last court decision will be final and binding – under limited circumstances, a retrial procedure may be triggered. The People’s Courts at various levels have jurisdiction to adjudicate criminal cases, civil and commercial cases, intellectual property cases, and administrative cases.
The Supreme People’s Court, in respect of all matters, and the Supreme People’s Procuratorate, in respect of the matters within its authority (mainly criminal law), is authorized by the Standing Committee of the NPC to interpret laws and regulations in the context of specific legal issues, arising from cases they hear or as requested by lower People’s Courts. In practice, the judicial interpretations made by the Supreme People’s Court and the Supreme People’s Procuratorate on particular legal issues are binding on, and followed by, lower-level courts.
Arbitration bodies are set up in China at national and local levels. The China International Economic and Trade Arbitration Commission (“CIETAC”) is the best-known arbitration institute in China that handles international economic and trade disputes, including foreign investment-related cases. In 2012 and 2013, the former Shanghai Sub-Commission and Shenzhen Sub-Commission of CIETAC split from CIETAC and renamed themselves as Shanghai International Economic and Trade Arbitration Commission (“SHIAC”, also known as Shanghai (International Arbitration Centre) and Shenzhen Court of International Arbitration (“SCIA”, also known as Shenzhen Arbitration Commission or South China International Economic and Trade Arbitration Commission). Both are also capable of handling commercial cases that involve foreign investors.
In addition, local arbitration bodies, such as the Beijing Arbitration Commission and the Shanghai Arbitration Commission, arbitrate domestic and foreign-related cases. Arbitration rulings in China are final at first instance, which means that the ruling takes effect immediately when rendered. However, if the parties believe that the ruling has been wrongly decided and that the conditions for an annulment of the ruling have been met, they may apply to the court for a review of the case and an annulment of the arbitration award.