Why rule of law in China matters to Australian business

Should Australian business be interested in The fourth plenum of the 18th Central Committee of the Chinese Communist Party (CCP)? Why does business care that the rule of law was a central theme at a gathering of the most important members of the CCP?  For Australian business the rule of law, ie the idea that government and leaders, as well as all private and public entities, are equally accountable under the law in the same way as ordinary citizens, is like oxygen – taken for granted as the way things are.

But, for many of our clients the rule of law is more than an abstract issue.  Like local Chinese businesses they are concerned about whether they will get a fair hearing before an unbiased arbitrator.  This explains what President Xi Jinping meant when he said that “strong and effective law enforcement builds a strong nation, but slack law enforcement weakens a nation” and “in the whole process of reforms, a mindset and governance method under the rule of law must be prioritised and the guiding and driving role of the rule of law should be fully tapped.” Clearly President Xi sees the rule of law as a part of his ambition to deliver the Chinese dream. Is there a place for the rule of law in the wider ambition of “rejuvenating” China?

At a practical level it means many things. But for those looking to do business in China this programme for advancing the rule of law means that the Chinese are developing the rule of law with “Chinese characteristics”. This is important for business because it means a system where increasingly you can expect a law-abiding government. A system that wants to enhance judicial credibility. 

There is real evidence that the Chinese government wants to root out judicial corruption. Indeed, these failures of the Chinese judicial system have led authorities to take an institutional approach to addressing the problem by amending the system. According to the Central Commission for Discipline Investigation, a total of 182,038 Chinese government officials have been punished for corruption in the last year. This anti-corruption drive aims to strengthen the framework of the judicial system so there is greater accountability and transparency.

Similarly better transparency in the legislative design process (policy will always be a CCP matter) will in the long run mean better legislation. Better legislation that is the product of wider exposure based on informed opinions and comments. This might also mean a legislative process that includes some participation for the general public.

President Xi's reform of the judicial system is the first comprehensive and probably the most committed reform we have ever seen in contemporary China. The reform goes hand in hand with President Xi's anti-corruption agenda. The plenum proposed 11 legal innovations, but the most important for business are: to examine the legitimacy of major decision-making in governments; to improve the system for independent and impartial execution of judicial powers according to the law; to set up a protection mechanism for judicial personnel in performing their statutory duties and responsibilities; and to set up a system to recruit judges and prosecutors from qualified lawyers and law experts.

Ultimately these steps if successfully enacted will give Chinese law a predictability that business needs. The plenary session may have laid out a new path for promoting the rule of law, but there are many turns in the path before the destination can be reached. Although there are difficulties, most experts agree that China has embarked on the fast track towards a rule of law, albeit with Chinese characteristics.

The language of the fourth plenum spoke of a socialist system of rule of law with Chinese characteristics. This means building a socialist state of rule of law. There seems to be an explicit and implicit recognition of the need to try to create a system that is fair. This is significant and is a genuine attempt to build on the third plenum goal of developing a socialist system with Chinese characteristics and a modern “national governance system and governance capabilities”.

In some ways it's a good opportunity to reflect on what we mean when we say that a system is fair. Implicit in “fairness” is the assurance of a stable system with mechanics and policies that are bound to a rule of law. In  behavioural economics it is called “inequity aversion.”  Like any English word, “fair” has multiple meanings. The Macquarie Dictionary defines fair as “free from bias, dishonesty, or injustice.” Interestingly it seems even Capuchin monkeys get what fairness is. For the business community that means a belief that the rules of the game are transparent and are applied equally (including to government). Judicial equity should promote and guarantees fairness, if it is free from corruption and influence.  But none of this gets very far unless there is a real desire to implement  the plenum's lofty ideas.

For Australian businesses, fairness means all business are treated equally before the law and there are reasonable safeguards that exist to ensure people are not treated arbitrarily or unfairly by governments or officials. The fourth plenum seems to be going some way towards a similar understanding of what people dealing with the Chinese system are entitled to expect.

For business in China we hope that the plenum will lead to an end to complaints that they can't get a fair hearing in court because judges answer to local governments and CCP organs, that may have their own interests to protect. We do not expect that China is about to set up a fully independent judiciary. In this sense the “Chinese characteristics” are more likely to mean that, for sensitive cases such as high-level corruption, the CCP will remain firmly in charge.

There is a growing awareness that for sustainable economic growth the rule of law has an important role in China's market economy. That is why we expect that the path mapped out by this plenum will be one that leads to a destination where for example, companies could challenge the rulings of regulators in court. One where judges operated professionally, independently and with transparency (in at least commercial matters) providing high quality written judgements and decisions largely free from judicial corruption and political influence.