Stance of the Supreme People’s Court after “Lianghui”: Equal treatment of all businesses

Echoing the Chinese government’s strong will to promote import/export and investment activities aiming at mitigating the impact of the COVID 19 outbreak, the Supreme People’s Court (SPC) also presents its position indicating “equal treatment” of all types of business including foreign ones.

On 25 May 2020, Mr Zhou Qiang, the SPC Chief Judge delivered his report to the 13th National People’s Congress held in Beijing. His report stresses the importance of property right protection, which is the cornerstone of the market economy and the essence of “rule of law”. According to this report, all market players - irrespective of their investor background (State-owned, private or foreign) and their size – shall be treated equally throughout court procedures with regard to eg status, application of laws and legal liabilities. For a long time the clear distinction between foreign and domestic investment has been an issue for international business. Even now with the new Foreign Investment Law taking effect as of 1 January 2020 which embodies China’s positive intention to further promote reform and to open up and protect foreign investment, such a distinction still remains. The distinction may have positive implications (eg preferential treatment as was quite often the case in the early years), but may also bring you discriminatory disadvantages as usually seen in reality. This is different from the case in a western jurisdiction adopting a market economy, for example, the EU does not have a special law specifically treating foreign investment in a different way. Against this background, equal treatment has long been sought after by international companies operating in China.

The topic of equal treatment has its historical complexities in China, which was also touched upon in Judge Zhou’s report. He mentioned several wrongly tried cases in the private sector which had been re-tried. Such justice rectification exercise is to be continued in a more comprehensive way. A development perspective is supposed to be used to handle compliance legacy issues, particularly in the private sector so as to eliminate unequal treatment. Some specific measures include:

• the SPC’s decision on 20 July 2019, abolishing 103 pieces of judicial interpretations which are against “equal treatment” principles. These interpretations touch upon issues like “thin company” and contractual validity, which by nature are not law as such but have in practice been followed by courts across China (ie similar to commentaries in Germany)
• applying court preservation measures (like attachments and freezing of assets) in a more cautious and business friendly way, so as to minimize the negative impact on normal operation of companies. Also strict distinctions – in the same case – shall be made between civil liability aspect (eg a contractual dispute) and criminal offence (eg fraudulent accusation associated with a contract), between legitimate properties and illegal gains, between corporate properties and personal properties, between legal financing and illegal fund raising, so as to avoid abusive use of criminal procedures and to protect entrepreneurship as well as innovation (of the private sector).

The issue of how the private sector is treated in China is a very relevant one in order to reflect and predict how foreign investment – obviously with more political importance and business weight - is to be treated in future. Considering China as now the world’s second largest economy, there is very high expectation from the western business community that the existing approach of China to treat business with a different funding background differently shall be fundamentally changed to ultimately result in foreign investment being given national treatment. Though there is still some way to go, the tone of the SPC report delivered by Judge Zhou during the country’s highest level political gathering gives a very positive sign which is well in tune with “creating a business friendly environment” exercise as now pursued by Beijing. It remains to be seen how these promising words will be turned into actions, but we remain confident.