Posts of the Week: 7/6 - 7/12

China Offers More Carrots to Entice Anemic Inflows at All Roads Lead to China

Smart Money In China Knows Limits Of Yuan at China Journal

Cross border settlement - PBOC regulations at China Translated
But I'd still check out dragonbeat from a few weeks ago, and the above China Journal post.

RMB 1.5 trillion in new Chinese lending — can we turn this thing off? at China Financial Markets
What's wrong with making "enormous amounts of bad loans," again?

Hey Sucker, We've Got Your China Trademark And Your're Goin' Down at China Law Blog
Interesting tales of tricky lawyering.

Chinese Tax Rebates Unaffected By Yuan Settlement Experiment at Tax-News.com
Well, that's a good thing.

In China, What Workers Want at China Journal

Strategy for Foreign Companies' Purchase Transactions in China During Financial Crisis at China Law Update

Owe Money To A Chinese Company? No Need To Pay at China Law Blog
A rerun, but with more details and more cases.

Skeptical About the World Bank's Compiled Rankings? How Might China Measure Governance?

twofish left an interesting comment on my post about the World Bank's Governance Indicators, and his skepticism about the rankings. Here's an excerpt:

I should point out that I find that these rankings tell much, much more about the World Bank than about China. One thing that I'd love to see is someone official in China do a ranking of countries in the world. I'm sure it would be very different from the World Bank's, but I'd be interested to see *how* it's different. You can also extend this to individuals. If I ask you to take all the countries in the world and rank them on governance, I can really find out a lot about you.

I thought it would be fun to come up with some indicators that a Chinese official might use to rank the governance of a country, and how those indicators might apply to the US. I think we can all concede that any government official would choose indicators that are important to the governance of his or her own country. I'm making a broad generalization here, of course, but if a Chinese official were to devise a governance ranking system I think it would be designed around two major indicators: 1) stability and 2) the central government's ability to implement policy.

As to stability, China has proven much more stable over the past 30 years than many countries of Latin America, Africa, Eastern Europe, several of which have had violent, military, or major but peaceful transfers of power in that same time frame. And that is impressive on China's part. But when we start using the stability indicator to compare China with representative democracies we get caught on some snags.

Sure, gerrymandering has lessened power shifts in the US legislature, but every 4-8 years there is a transfer of power between individuals and/or political parties in the US executive branch. With its 30 (plus, if you're willing, but I wouldn't be willing to go beyond the Gang of Four to Deng transfer) years of peaceful rule, 5 year plans and its scientific socialism, it seems that Beijing and the CPC would look down upon this level of instability in the US. One year we're waging a holy war against an Axis of Evil, and the next we're all but ignoring those nations with whom we have some differences. Beijing might back down on some laws, but such major swings in national policy seem like they would be unacceptable. This isn't to say that the Party hasn't proven remarkable at reinventing itself, but it is still the same Party.

Beijing's ability to implement national policy is a work in progress. China's status as a de facto federalist state is an impediment. The other impediment is that China is physically large, there are a lot of people to rule over, and the level of corruption suggests transparency issues in the implementation of policy from Beijing to the provinces down to the local. I would say that Beijing has certainly done nothing but improve in this indicator, though. Major evidence is the rooting out and prosecution of that corruption.

The US is a de jure federalist state (though ludicrous interpretations of Congress's power to regulate interstate commerce grind away at the de jure status), and conflict between the federal sovereign and the state sovereigns was designed into the Constitution. Additionally, it is confusing as to who or what exactly is the US sovereign and who or what is trying to implement policy. The head of the executive branch? The head of the legislative branch? Which part of the legislature? And the publicly reported fractures within parties makes this hard to figure out even when one party controls all three. Again, this frustration of a powerful central government was designed into the Constitution.

While China might consider the ability of the central government to implement policy an important indicator of governance, its importance is less clear when measured in a state such as the US where our Constitution is designed around limiting the power of the central government.

When we take a look at the organizations that the World Bank compiled their governance indicators from, we find that they are all "Western" or Western-dominated (yeah, I'm looking at you Development Banks). I don't know how much we could actually learn about these institutions from these rankings other than that they intentionally or inadvertently embrace indicators that are important to the governance of their home countries systems, predominantly representative democracies. And the governments of representative democracies need different attributes to govern well than do oligarchies. Sort of a transparency and accountability thing versus a stability and control thing. Though I am biased in favor of Aristotle I'm not trying to pass a value judgment, and I think it would be difficult to argue that the CPC is becoming a less effective Philosophical Oligarchy.

Posts of the Week: 6/29 -7/5

Capital Markets Poised to Develop/ at Managing the Dragon

China Looks to Undermine U.S. Power, With ‘Assassin’s Mace’ at Danger Room
I have yet to lose my boyhood infatuation with military hardware.

Forum Selection Clauses. Do NOT Try Those At Home at China Law Blog

China OEM Agreements. Why Ours Are In Chinese. Flat Out at China Law Blog

World Bank's Governance Indicators: China's a Mixed Bag Over the Past Decade

The World Bank just released their latest report on World Governance Indicators. The "six dimensions of governance" are Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. Those links will take you to a more precise definition, as well as the sources that the World Bank used in compiling the raw scores. The World Bank also took each country's raw score and converted it into a percentile providing comparison with the other 212 countries that were a part of the study. Here's a look at how China's governance indicators have fared over the past 10 years, from 1998-2008.

One quick note: the results for the earlier years all have much higher standard deviations much likely due to fewer sources being used to compile the raw scores, and possibly due to a lower amount of available information.

Voice and Accountability
"Voice and accountability measures the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media."

Any guesses as to how China fared in this category last year? China ranked in the bottom 5.8%, as opposed to the bottom 9.6% in 1998 and 12.5% in 2000. At the very extremes, the standard deviations can make the raw scores overlap, but the raw scores can still reflect a real change towards less voice and accountability.

Factors that probably weigh against voice and accountability in 2008 as opposed to 2000 include the crackdown on expression and association in the lead up to the Beijing Olympics, restrictions on information out of the Himalayas, and the retracted promises as to the freedom of foreign media in China during the Olympics. Factors that seem like they should have helped China in 2008 in this category include the freedom of press during the earthquake (do you see any rebar in any of the collapsed bridges?) and the general factor of the growth of the internet.

The political rights of China's citizens remain little changed since 1998, so the freedom of expression is probably drove this raw score down.

Political Stability and Absence of Violence
"Political stability and absence of violence measures the perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism."

In 2008, China ranked at the 33.5 percentile, as opposed to the 43.3 percentile in 1998. The raw scores are quite spread, and the 2008 raw score is within one standard deviation from the 1998 score. For comparison, Honduras is ranked at the 32.5 percentile.

I don't think there's much in the way of error here. There are plenty of valid reports of the tens of thousands of demonstrations that occur annually in China, but these get little to no play in the US. The world's media was covering China in 2008 like it never had before, and plenty of Chinese people were thoroughly pissed about some high profile events. The two biggest were the melamine in baby's milk and the deaths of 70,000 in the Sichuan earthquake. Local and State government officials have been charged with or implicated in complicity with both of these which may have helped to decrease the stability standing. But Wen Jiabao was widely credited with distancing the central government from the more horrific of the two.

Government Effectiveness
"Government effectiveness measures the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies."

China does well here ranking at the 63.5 percentile in 2008 as opposed to the 46th percentile a decade ago. Though they're still not as highly ranked as in 1996 when they were in the 64.5 percentile.

2008 gave China plenty of opportunities to demonstrate government effectiveness on an international stage, and this may have helped them reach their highest ranking in 10 years. 2008 saw quick government responses to a harsh winter and a devastating earthquake. And the Games went off without too many flaws (except a stabbing, and the Russians or Georgians apparently trying to steal the spotlight or at least operate in the shadows of a worldwide event).

Regulatory Quality
"Regulatory quality measures the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development."

China moved from the 40th percentile in 1998 to the 46.4 percentile in 2008. This seems like a big shift, but the raw scores just barely budged.

After two consecutive years of melamine scandals it is amazing that China is ranked so high. Also, after reading Yasheng Huang, it is questionable as to whether we're actually witnessing real private sector development in China's domestic business.

Rule of Law
"Rule of law measures the extent to which agents have confidence in and abide by the rules of society, in particular the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence."

Though China has improved to the 45th percentile from the 41.4 percentile, the raw scores remain largely unchanged.

Disturbing lack of development, and 2007's figures are even worse so we can't conveniently pin this on the Labor Contract Law. Anybody know what percentage of contract disputes are actually decided in court as opposed to arbitration? Is this just because of a poor perception of the courts? Is the quality of the coastal courts substantially outweighed by the quality of the inland courts?

Control of Corruption
"Control of corruption measures the extent to which public power is exercised for private gain,
including petty and grand forms of corruption, as well as “capture” of the state by elites and private interests."

China has fallen from the 45.1 to the 41.1 percentile, and has substantially dropped in raw score.

Though the numbers aren't as bad as 2004-2007 when there were a lot of high profile arrests, there probably was not less corruption in 1998 than 2008. What we're probably seeing in the 2008 figures is a reflection of the memory of the rests, another look at the corruption through trials stemming from those arrests, and the allegations of corruption in the melamine scandal and the aftermath of the Sichuan Earthquake.

Posts of the Week: 6/22 - 6/28

Registering Your Trademark In The US And China On The Cheap at China Law Blog
And commentary at China Hearsay.

China's Anti-Monopoly Law. One Year On at China Law Blog

Google’s China Rift Hints At Challenges Ahead at Epicenter

The Futures Market in China at Managing the Dragon

US & EU File WTO Complaint Vs. China at China Journal

Pace of financial reform will only accelerate in China at Dragonbeat

Posts of the Week: 6/15 - 6/21

Defective Product Recalls In China. What's That? at China Law Blog

Rule of Law: ‘Harmonious’ Result in Deng Yujiao Case at China Hearsay

What’s Your Real Value in China? at All Roads Lead to China

New Tax Rebates: Full List of Commodities at China Sourcing Blog

Familiar Beijing Différance in Managing Large Enterprise Corporate Tax Risks and Compliance

“Deconstruction is not a dismantling of the structure of a text, but a demonstration that it has already dismantled itself. Its apparently-solid ground is no rock, but thin air." - J. Hillis Miller

Crucial to deconstructionism is Jacques Derrida's concept of différance. The essence of différance (if you'll allow me to ignore the paradox) is that the "complete meaning is always postponed in language; there is never a moment when meaning is complete and total" because "words and signs can never fully summon forth what they mean, but can only be defined through appeal to additional words" (shamelessly quoted from the above Wikipedia article). A recent article from the BNA Daily Tax Reports shows that the meaning of words in SAT Circulars, Circular (2009) No. 90 in particular, are always ready for a new interpretation.

Circular (2009) No. 90, "China SAT Guide for Large Enterprises to Manage Tax Risks," makes several recommendations for the internal enterprise establishment of tax control mechanisms. The controls range from the comprehensive, for significant tax risks, to the reasonable. And the circular recommends creating tax departments in various areas of an enterprise to manage these controls. The purpose of this circular is to increase compliance with China's tax code, and presumably increase tax revenues. Increasing tax revenues and combating tax evasion are high on a lot of governments priority lists right now in order fund fiscal stimulus packages.

The BNA Report points out that there are two things in this Circular that require a bit of deconstruction: "Large Enterprises;" and "suggests"/"should."

As for the "Large Enterprises" contained in both the title and body of the Circular, this ostensibly refers to the 45 enterprises overseen by the Large Enterprise Administration Department (LEAD). "Ostensibly" because under Chinese there is no limit on the types of enterprises that this Circular is making suggestions to, which includes "all companies, whether foreign or domestic, public or provate, and regardless of their size or legal structure." Eventhough the Circular might apply to foreign SMEs, if it's only a suggestion, it can't have too big of an impact foreign SMEs, right?

If only it were that simple. BNA reports that LEAD posted a memorandum on the SAT website saying that if LEAD companies don't follow the suggestions in the Circular, they'll probably "attract the attention of regional and local tax authorities." So, you don't need to follow the rules, but if you don't follow the rules you will get audited? I think someone wrote a book about this... Something to do with vague bureaucratic excess...

SMEs probably don't need to worry now, but the complete meaning of this law looks like it will be deferred until the future when even a small enterprise will need to implement internal tax controls or at least, as also provided, seek the qualified advice of China tax professionals.