In the news: Corruption cases continue to rise, the NPC updates the civil code, and investors seek VIE clarity after the Ambow case

Legislators at the ongoing National People's Congress (NPC) introduced amendments to China's civil code to make defaming “heroes and martyrs” of the ruling Communist Party a civil offense. Delegates made 126 changes to the most recent draft of the rules, released on March 8, which will serve as a preamble to the final law, expected in 2020, according to state media. Other revisions to the previous draft included changing the age at which a minor is considered to be capable of civil actions to 8 years old from 6. The ongoing compilation of the civil code is seen by some legal reformers as a test of how far China will go in allowing civil liberties that may impinge upon state power. The proposal has been met with criticism that it will be used as a tool for the Chinese leadership to clamp down on dissenting opinions and fortress its society against perceived external ideological threats. Also, who qualifies as a “hero” or “martyr” and what constitutes defamatory remarks would be open to debate.

SPC ruling on VIE structure leaves investors' questions unanswered

A recent Supreme People's Court decision related to a variable interest entity (VIE) owned by Ambow Education, a Chinese personalized e-learning service provider, has provided little comfort to investors in VIE structures, said the China Accounting Blog. Hunan Changsha Yaxing Co. sold a school to Ambow's VIE in 2009, part in cash and part in Ambow stock, which collapsed after it was delisted from the New York Stock Exchange and put into receivership in the Cayman Islands. Yaxing sued to get the school back, arguing that the VIE could not legally own the school. The court upheld the transaction and ruled that the VIE was a Chinese corporation. The court consulted with the Ministry of Education, which acknowledged the VIE arrangement was a conventional one but did not express an opinion as to its legality. Although the decision appears to clarify the validity of the commercial transactions of a VIE, it does not relate to the validity of the VIE contracts between Ambow's VIE and its wholly foreign-owned enterprise (WFOE), wrote Paul Gillis, author of the blog. Investors are most concerned about the enforceability of the contracts between the WFOE and the VIE's Chinese shareholders, as a number of previous cases have found them to be unenforceable. The draft PRC Foreign Investment Law attempted to pull VIEs out of their grey area and resolve the core issue by resting the answer with the ultimate controller, but stakeholders still face significant uncertainties regarding the future of the structure.

7 new FTZs on the way

Seven new free trade zones (FTZs) are slated for inauguration in China as the country looks to accelerate the testing of economic reforms. Draft guidelines for the Chongqing FTZ has been presented to the State Council and is reportedly awaiting final approval. Henan and Shaanxi provinces are also in the final stages of preparation. The central government approved seven applications for the third batch of FTZs in August last year: Liaoning in the northeast, Shaanxi in the northwest, Zhejiang in the east, Henan and Hubei in central China, and Sichuan and Chongqing in the southwest. Chongqing's plan aims to implement the nation's western development strategy. Hebei will build a base for high tech industries and promote the Yangtze River Economic Belt, Shaanxi will diversify trading connections along the Belt and Road, Henan will become a logistics hub, Zhejiang will push trade liberalization and e-commerce, and Liaoning will conduct market reforms to reinvigorate the old industrial heartland. The current four FTZs in Shanghai, Guangdong, Fujian and Tianjin have been served as testing grounds as China opens up its markets to the world. While the reform drive has seen some hiccups in the way—with measures such as capital controls coming into play at times of stress—access to the world's second-largest economy has never been greater. The new free trade zones can serve as further stepping stones to a freed market.

Corruption cases increase more than 30%

The number of corruption cases heard by Chinese courts jumped by about a third last year, according to an annual report from the nation's chief justice. The country's top prosecutor vowed that there would be zero tolerance and no letup in China's anti-graft campaign, which has been enforced with unprecedented vigor since President Xi Jinping took office in 2012. The report said courts heard 45,000 corruption cases involving 63,000 people last year. The campaign has been far-reaching, with at least one top official in each of China's 31 provinces being ensnared in one corruption scandal or the other. A record number of high-ranking officials were convicted in 2016, with 28 former provincial and ministerial-level officials being sentenced to imprisonment or even death. The drive has affected sales at luxury stores in China, and hit top marque car brands and even gambling revenue in the former Portuguese territory of Macau. There have been whispers, however, that the president may have used corruption charges to sideline political rivals—a notion that Xi himself appears to have addressed in October with remarks that the Communist Party's credibility has been undermined by “political conspiracies” among certain members and their acts of bribery. While the allegations remain to be proven, the anti-corruption momentum looks unlikely to falter anytime soon.

NPC mulls civil law amendment

Legislators at the ongoing National People's Congress (NPC) introduced amendments to China's civil code to make defaming “heroes and martyrs” of the ruling Communist Party a civil offense. Delegates made 126 changes to the most recent draft of the rules, released on March 8, which will serve as a preamble to the final law, expected in 2020, according to state media. Other revisions to the previous draft included changing the age at which a minor is considered to be capable of civil actions to 8 years old from 6. The ongoing compilation of the civil code is seen by some legal reformers as a test of how far China will go in allowing civil liberties that may impinge upon state power. The proposal has been met with criticism that it will be used as a tool for the Chinese leadership to clamp down on dissenting opinions and fortress its society against perceived external ideological threats. Also, who qualifies as a “hero” or “martyr” and what constitutes defamatory remarks would be open to debate.

SPC ruling on VIE structure leaves investors' questions unanswered

A recent Supreme People's Court decision related to a variable interest entity (VIE) owned by Ambow Education, a Chinese personalized e-learning service provider, has provided little comfort to investors in VIE structures, said the China Accounting Blog. Hunan Changsha Yaxing Co. sold a school to Ambow's VIE in 2009, part in cash and part in Ambow stock, which collapsed after it was delisted from the New York Stock Exchange and put into receivership in the Cayman Islands. Yaxing sued to get the school back, arguing that the VIE could not legally own the school. The court upheld the transaction and ruled that the VIE was a Chinese corporation. The court consulted with the Ministry of Education, which acknowledged the VIE arrangement was a conventional one but did not express an opinion as to its legality. Although the decision appears to clarify the validity of the commercial transactions of a VIE, it does not relate to the validity of the VIE contracts between Ambow's VIE and its wholly foreign-owned enterprise (WFOE), wrote Paul Gillis, author of the blog. Investors are most concerned about the enforceability of the contracts between the WFOE and the VIE's Chinese shareholders, as a number of previous cases have found them to be unenforceable. The draft PRC Foreign Investment Law attempted to pull VIEs out of their grey area and resolve the core issue by resting the answer with the ultimate controller, but stakeholders still face significant uncertainties regarding the future of the structure.

7 new FTZs on the way

Seven new free trade zones (FTZs) are slated for inauguration in China as the country looks to accelerate the testing of economic reforms. Draft guidelines for the Chongqing FTZ has been presented to the State Council and is reportedly awaiting final approval. Henan and Shaanxi provinces are also in the final stages of preparation. The central government approved seven applications for the third batch of FTZs in August last year: Liaoning in the northeast, Shaanxi in the northwest, Zhejiang in the east, Henan and Hubei in central China, and Sichuan and Chongqing in the southwest. Chongqing's plan aims to implement the nation's western development strategy. Hebei will build a base for high tech industries and promote the Yangtze River Economic Belt, Shaanxi will diversify trading connections along the Belt and Road, Henan will become a logistics hub, Zhejiang will push trade liberalization and e-commerce, and Liaoning will conduct market reforms to reinvigorate the old industrial heartland. The current four FTZs in Shanghai, Guangdong, Fujian and Tianjin have been served as testing grounds as China opens up its markets to the world. While the reform drive has seen some hiccups in the way—with measures such as capital controls coming into play at times of stress—access to the world's second-largest economy has never been greater. The new free trade zones can serve as further stepping stones to a freed market.

In the news: Corruption cases continue to rise, the NPC updates the civil code, and investors seek VIE clarity after the Ambow case

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