As China implements rule of law with Chinese characteristics, the main question is whether it will shift to a more economically liberal investment environment, or whether little will change.
When China’s Fourth Communist Party Plenum wrapped up on October 23, the main focus was on rule of law as opposed to the rule of men, a concept that can have big impacts on investors, creating the potential for a more economically liberal environment. As the struggle against corruption continues, China focuses on fighting it from the ground up – through a tightening on the law, aimed at reducing power at the local governance level.
Increasing numbers of government officials and owners of state-owned companies are moving their funds outside of the country. The issue has become so large that China has asked for help from Australia. Australia has vowed to become involved announcing that it is going to help locate those who have embezzled or gained funds through corruption, and moved said funds to Australia. The Australian police will even assist in extradition back to China.
The Plenum focused on increasing such capabilities at home, too: “this will be the first time for a Party session to center on rule of law. It is intended to promote the modernization of the country’s governing system and capabilities. Experts believe the key to realize it is the rule of law”, Xinhua, the Chinese state media, announced.
For investors, a move towards rule of law would be positive: corruption, embezzlement, and a weak judiciary system have often been points of contention for foreigners wanting to invest in China. Increasing regulation will lead to a more predictable and less volatile environment. These aspects have sustained a system of low efficiency state-owned enterprises, a large backlog of non-performing loans, and a society built on guanxi, or relationships, where societal hierarchy is still more valued than economic performance or the law.
The implementation of the rule of law will have an especially large effect on the local level in a country where power is as decentralised as in China. Local government officials will see less of the power they have previously used to maintain the unequal premises of Chinese society. China’s Communist Party rules one of the most unequal societies in the world, as Chinese income inequality recently surpassed that of the United States.
However, with increasing rule of law, the average person living in the Chinese countryside or a smaller city will have a better stance against corrupt government officials, and they will have less of the power they have used to resist economic liberalisation the top has pushed for, and that foreign investors have craved for so long.
On a national level, and for the party, changes may be few and far between: the party will remain above the law. State news agencies quickly announced that this rule of law would be implemented with Chinese characteristics, and that rule of law will be “advanced by the rule of the Party”.
For example, there will be no independent judiciary set up to ensure that the Party itself abides by the law. The focus on rule of law may very well be what was sought after during last year’s Plenum. Increasing liberalisation is necessary, and will attract more investment from abroad, and perhaps encourage domestic investors to invest domestically rather than internationally as it will increase legislation throughout China’s markets, increasing security.
Implementing these plans will not be easy, however, as local government officials will have to relinquish their power and agree to abide by a new law that no longer places them on an untouchable pedestal.
