China's Rules on Shipping: Sailing on an International Voyage

The growth in the international shipping business and of the international shipping market in China, has presented the Chinese government and its administrative departments with new problems. Hence it is crucial to have a series of ocean shipping regulations, which are comprehensive and contain effective measures to adapt to change. Also, with China's entry into the WTO, it is necessary to formulate new laws and regulations to guarantee the implementation of the Chinese government's commitments and to comply with WTO rules on market access, national treatment and the principle of transparency.

Scope of Application

The Shipping Regulations are applicable to the operating activities of international ships passing in and out of Chinese ports and auxiliary operating activities relating to shipping. "International shipping activities" primarily centres on the activities of shipping companies engaged in international transportation and berthing in Chinese ports. The subject of their activity is the ocean shipping carriers who possess ships and non-vessel operation common carriers (NVOCC). The auxiliary activities relating to ocean shipping include such businesses as international ship agency, ship management, stevedoring, warehousing, and container station and yard business, among others.

Market Access

The Shipping Regulations set out various market accession conditions for different operating subjects.

Shipping Companies

Article 5 of the Regulations sets out substantial conditions and procedural provisions for international shipping companies who possess ships. These include:

(a) the companies must possess ships being suited to engage in an ocean carriage business. Among these ships, they must have some of Chinese nationality. According to this provision, if it is a single ship company, the ship must possess Chinese nationality, if it is a company with two or more ships, at least one must be of Chinese nationality. It is likely permissible for the companies to participate in international shipping by way of time charter or bareboat charter.

(b) the ships involved shall conform to ocean traffic safety and technology criteria regulated by the state.

(c) the ships must possess bills of lading, passenger tickets and multi-modal transport documents.

(d) the vessels must have experienced business managers who have obtained employment qualifications regulated by the competent institution responsible for communication (i.e., the Ministry of Communication, or MOC).

If a shipping company also wants to offer international liner services, it shall submit the following additional materials:

(e) company name, place of registration, copies of business licences and the names of the major shareholders;

(f) names and personal certificates of the company's primary managers;

(g) particulars of ships involved;

(h) details of proposed routes, sailing schedules and calling ports; and

(i) tariff information.

The MOC will finish the examination and approval, and notify the applicant whether they can offer the services within 30 days after their receipt of the above-mentioned materials.

Non-vessel Carriage Business

The Shipping Regulations have strict stipulations regarding non-vessel carriage businesses. The Regulations define a "Non-vessel carriage business" for the first time and stipulate strict access requirements and supervisory policies.

The concept of a non-vessel operation common carrier was first put into practice by the US Federal Maritime Commission, and is widely used in international shipping. For a long time, the form of a Chinese non-vessel operation common carrier was undertaken by freight forwarders whose business activities were governed by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC, which has represented the interests of cargo owners), but whose status also brought them within the sphere of industrial jurisdiction covered by the MOC (which represents the interests of ship owners). The two ministries have never satisfactorily resolved the problems of the jurisdiction of NVOCCs. The new Regulations have expressly made a division in jurisdiction, with ocean shipping businesses (including ocean carrier businesses and non-vessel carriage businesses) and auxiliary businesses relating to ocean shipping being supervised by the MOC, and freight forwarding businesses under the supervision of MOFTEC.

The Shipping Regulations do not refer to the phrase NVOCC as it is widely used, but have used a definition of a "non-vessel carriage business": the non-vessel carriage business operator (NVCBO) accepts the shipper's shipment as a carrier, issues his own bill of lading or other transport documents, imposes freight on the shipper, completes the international ocean transportation through the shipping companies and undertakes international shipping business within the duties of a carrier. However, as the PRC China Maritime Law has differentiated between a carrier and actual carrier, we can suppose that the concept of carrier under that law included implicitly a NVCBO. Moreover, Article 102 of the Maritime Law stipulates the concept of a multi-modal transport operator (MTO), which means "the person who has entered into a multi-modal transport contract with the shipper either by himself or another person acting on his behalf". Under a multi-modal contract the goods must be transported by two or more different modes of transport, one of which is sea carriage. Comparing the definition of NVCBO in the Shipping Regulations and the Maritime Law articles referring to MTO, it seems that a NVCBO and an ocean carrier enjoy a similar responsibility. For example, the NVCBO and ocean carriers are entitled to, inter alia, liability limitation. However, the responsibilities and risks of a MTO are greater. For example, under the terms of a multi-modal transport contract, if cargo loss or damage to cargo takes place in the process of operation at the port where the ocean carriage has been completed, the MTO bears responsibility under the terms of the PRC Contract Law (中华人民共和国合同法) and cannot enjoy limitation of liability. The Contract Law contains no provisions for limitation of liability, and in such case the MTO bears a greater liability and takes greater risks than ocean carriers and NVOCCs or NVCBOs. Meanwhile, the PRC Civil Aviation Law (1995) uses the concept of a contractual carrier. In addition, Article 2 of PRC Administration of International Freight Forwarders Implementing Rules promulgated on March 9 1998 by MOFTEC use a concept of an independent operator. Taking all of this into consideration, there may be four appellations for a freight forwarder. Certainly, a freight forwarder can adjust its function according to a particular shipment, and different functions entail different responsibilities.

According to Article 7 of the Shipping Regulations, in order for one to engage in a non-vessel carriage business in China, he must set up an enterprise legal person in accordance with the law. This means that foreign companies and individuals, and Chinese individuals, are forbidden from participating in this business. It is anticipated that this provision will prohibit ineligible companies and individuals from defrauding the freight of Chinese cargo owners by recklessly issuing the NVOCC / NVCBO bill of lading in China, and additionally the provision will help in regulating the market and fully protecting the cargo interests.

According to the Shipping Regulations, NVCBOs shall register their bill of lading and pay a cash deposit to the MOC. The deposit sum is Rmb800,000 and increases by Rmb200,000 for each existing branch office, and each additional branch office of the company, that is established. The bill of lading is the most important document in ocean shipping, and functions as the document of title. For many years in the Chinese shipping market, the bill of lading, especially the NVOCC bill of lading, , has been subject to abuse. The occurrence of a freight forwarding company or particular individual using another's bill of lading secretly, issuing a bill of lading belonging to others, and counterfeiting of a foreign company's bill of lading have been serious problems that have led to the frequent appearance of cases of freight fraud and delivery of cargo without the original bill of lading and have deeply hurt the interests of cargo owners. Furthermore, due to the fact that NVOCCs and NVCBOs do not possess ships, when the provision on bills of lading is breached, they will be faced with having to pay the fine or will be liable for external compensation (mostly for cargo losses or delivering cargo without a bill of lading and freight fraud). Often this leads to insolvency, and brings serious losses to the owners of cargo. The policy of applying a bill of lading and requiring a cash deposit from the NVCBO will resolve the problem to a certain degree.

The Regulations also stipulate that before signing an agreement with a NVCBO, the ocean carrier should confirm that the NVCBO has already registered the bill of lading and has paid the cash deposit. The ocean carrier must pay attention to this obligation when signing a contract with a NVCBO, and should require the NVCBO to show proof on these points or be faced with possible administrative fines. This can be seen as an attempt to standardize the non-vessel carriage business but it is reasonable for people to doubt how effective it will prove to be.

International Ship Agency Services

International ship agency services shall meet the following conditions:

(a) at least two of the senior business managers shall have over three years of experience of participating in international ocean shipping operations; and

(b) the firm must have a fixed place of business and necessary operating equipment.

International Ship Management Business

A ship management company shall meet the following conditions:

(a) at least two of its senior managers must have over three years' experience participating in international shipping operations;

(b) it must employ those who have the appropriate certificates of captain and chief officer corresponding to the types of ships and sea areas under its management; and

(c) it must possess the equipment and facilities adapted to an international ship management business.

It should be noted that a shipping business, non-vessel carriage business and ship agency business should apply to the MOC for a business qualification. However, the international ship management business and auxiliary businesses relating to ocean shipping should apply to the communication department of the government in the province, autonomous region or municipality where it is located for the licence.

Tariff Reporting Policy

The Shipping Regulations introduce the American practice of a tariff rates reporting policy (issued in the US Shipping Act of 1998) and require the liner business operator and NVCBO to report their "published freight rates" and "contract price" to the MOC. Published freight rates and contract prices come into effect 30 days and 24 hours, respectively, after the MOC accepts the report.

Article 22 of the Regulations stipulates that if the ocean shipping companies engaged in an international liner service sign freight conference agreements and tariff rates agreements involving Chinese ports, they shall forward a copy of the agreements to the MOC within 15 days from the signature of the agreements. It is the first time that freight conference activities have been supervised in the form of regulations to prevent monopolies in freight conference and anti-competitive behaviour. The tariff rates and agreements reporting policy have taken an active position in reflecting the principles of transparency in business practices, equality and fair competition.

Bill of Lading Registration Policy

The bill of lading registration policy is a progressive administrative measure, of which there are precedents in the aforementioned US Shipping Act of 1998. The Shipping Regulations require international ocean carriers and the NVCBOs to report their bills of lading, passenger tickets and multi-modal transport documents to the MOC, which conforms to international practices and is one of the most important measures of this legislation. A problem, however, is that freight forwarding companies acting as either a NVCBO, MTO or independent operator certainly will face the fact that they must apply to the MOC and MOFTEC respectively for registering their bills of lading according to Article 7 of the Shipping Regulations and Article 37 of the PRC Administration of International Freight Forwarders Implementing Rules; definitely this will increase costs in the industry. How to resolve such an issue will involve delineating the roles of different departments.

Prohibited Activities

It is forbidden for international shipping companies, NVCBOs, operators of an international ship agency and operators of international ship management to transfer their business qualifications obtained lawfully to others. To those who haven't obtained an international liner business licence, it is forbidden for them to engage in international liner business activities and to publish liner schedules or accept booking notes.

It is forbidden for those who haven't handled the registration of the bill of lading or paid the cash deposit according to the provisions of this regulation to operate a non-vessel carriage business.

Additionally, international shipping carriers and NVCBOs cannot undertake the following;

(a) provide services with lower-than-normal freight levels;

(b) secretly give discounts to shippers "off the books" to canvass shipments;

(c) abuse their status or do harm to competitors through discriminatory pricing or other methods (establishing an unfair contract with a weaker opposing party, for example; in this case, a shipping liner company misuses its monopolistic status, and establishes contracts with shippers); or

(d) other activities causing harm to competitors or to the international ocean shipping market.

In addition, it is forbidden for representative offices set up by foreign shipping companies and auxiliary companies in China to engage in business operations.

In the current state of shipping in China, the activities forbidden by the Regulations exist to varying degrees and some pose very serious problems. Poorly defined and vaguely worded "illegal" activities and weak deterrents and penalties are among the root problems to properly tackling these issues. The proper implementation of these regulations depends largely on strengthening the investigation of abuses and enforcing severe penalties. To strengthen its operating function, the implementing rules need further explanation and clarification in the definition of some key concepts and in the execution of procedures.

Investigations and Dispute Resolution Systems

The Shipping Regulations draw on the experience of developed countries that certain institutions of the state are entitled to investigate and handle unfair competition claims, make detailed definitions of unfair competition and define the bases of investigation and prosecution, among others.

Article 40 states that the investigating institution shall make a conclusion and notify the investigated party and any interested party in writing at the end of the investigation. Where it is found that the acts under investigation hamper fair competition, the investigating institution can adopt such prohibitive and restrictive measures as compelling the party to amend any relevant agreements, restrict the number of international lines, nullify the tariff rates or suspend the record of freight price and force them to regularly report relevant data. Article 41 stipulates that the investigating institution shall notify the parties concerned that they are entitled to demand the hearing of witnesses before the investigation institution decides to adopt prohibitive and restrictive measures. When the parties concerned make such a demand, the hearing of witnesses shall be held. The stipulation concerning investigation and dispute resolution and other measures to support fair competition are important supplements to the PRC Anti-unfair Competition Law (中华人民共和国反不正当竞争法).

Reciprocity Principle

Article 59 of the Regulations stipulates that if any country or territory adopts prohibitive, restrictive or other similar measures in a discriminatory way to a PRC ocean transport operator, ship or crew, the government of the PRC shall adopt relevant measures according to the principle of reciprocity.

Special Stipulations on Foreign Investment

With the approval of the MOC, foreign merchants can invest in and incorporate a Sino-foreign equity joint venture (EJV) or a Sino-foreign cooperative joint venture (CJV) to operate an international shipping service, ship agency, ship management, stevedoring, warehousing, container station or container yard business, and incorporate a wholly foreign-owned enterprise (WFOE) to engage in warehousing for ocean cargo.

For those EJVs and CJVs engaging in international shipping businesses and ship agency services, the foreign investor's capital contributions shall not exceed 49%. The Chinese investors designate the chairman of the board of the directors and the general manager of the EJV and CJV for international shipping businesses. In this respect, the Regulations differ from the amendments to the PRC Sino-foreign Equity Joint Venture Law (中华人民共和国中外合资经营企业法) made in March 2001.

The Shipping Regulations permit foreign merchants to establish EJVs, CJVs and WFOEs to provide daily services for their ships, such as cargo canvassing, issuance of bills of lading and freight clearance and signing of agreements on a parent company's behalf. In effect, this means that foreign enterprises cannot directly participate in ship agency services in China, nor can EJVs, CJVs and WFOEs established in China provide ship agency services to other shipping companies, except for its parent company.

The above stipulations conform to the Schedule of Specific Commitments on services in China's Protocol of Accession to the WTO.

Special Policies for Greater China

Supplementary articles in the Regulations make definite stipulations regarding shipping services between the mainland and the Hong Kong and Macao Special Administrative Regions, as well as the carriage business between mainland China and Taiwan. Article 57 stipulates that without the approval of the MOC it is forbidden for foreign shipping companies either to operate ship transport businesses between mainland China and Hong Kong or Macao, or to operate two-way carriage directly, or via a third place, between mainland China and Taiwan.

The government has adopted a circumspect policy when handling the shipping business between mainland China and Hong Kong, Macao and Taiwan, as issues of sovereignty and the "one country, two systems policy" may be involved in the decision-making process.

Conclusion

Although the Regulations have already been made public, and have introduced some new administrative measures to adapt to the current market situation and to meet WTO demands, what is urgently needed is close cooperation between the relative departments to realize the goal of standardizing international shipping activities, safeguarding fair competition, maintaining market order and protecting the benefits and rights of all members of the international shipping community. This is the challenging task now facing China.