The Relationship Between Economics and Law in China

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The CPC also protected private property rights by more clearly setting parameters on the power of eminent domain. When the government exercises its power of eminent domain in forcibly purchasing private property, it must compensate the owner. In 2004, the government again amended the Constitution, declaring “that citizens’ legal private property rights are inviolable” and that “the state may, as needed in the public interest take over or use citizens’ private property in accordance with the law, and give compensation.” Without recognition of this property right, individuals would have no recourse in the event the government confiscated property for development. Because an individual’s fear of being left without recourse would deter the purchase of real estate and property transactions, the CPC instituted safeguards to promote economic activity and investment. Fear of insufficient compensation nevertheless remains a concern; homeowners are not legally empowered to challenge their forced relocation or the terms of compensation.[14]

The CPC treats rural land differently from urban land. Historically, the CPC has emphasized collectivism in rural regions: “the government created collectives of the villages and then, in turn, integrated the collectives into huge people's communes comprised of approximately some 5000 households each. These mammoth units made sense from a communist ideological standpoint, but they often did not make economical sense.”[15]

Rural land remains under the ownership of collectives, but the property rights have been contracted out to individual farmers in an effort to improve productivity. Even so, the CPC often requisitions such land from the collectives for commercial development with only minimal respect for property and contract rights. These confiscations of land are performed in an effort to accelerate economic productivity. In this sense, the absence or deliberate rejection of secure property rights for rural collectives is designed to promote positive property rights for commercial developers.

The reform of property rights surrounding state owned enterprises (SEOs) has also played a central role in China’s economic advance. In 1988, the SOEs permitted factory or company directors to run SOEs on a day-to-day basis. It also provided for local and central government supervision of the enterprise, and created democratic management, such as allowing trade unions.[16] In 1993, the CPC passed the Company Law. It allowed SOEs to become publicly held corporate associations. It mandated that SOEs have shareholders, a board of directors, and a board of supervisors. Rather than treat SOEs as the exclusive property of the state, buyers could purchase shares of SOEs. Although shares are not always thought of as property, this relaxation over the control of SOE control was consistent with other measures meant to promote free enterprise. The Company Law was designed to promote separation between the government and the enterprise. In this sense, it afforded SOEs a small right to self-management and control.

Property rights in China remain complex and evolving. Although not as protective of private property as Western approaches, China has made significant economic advances with its reforms. This has been the case with both urban and rural real estate, as well as the control and management of SEOs. The changes have given the land new value and created a real estate market. This new market, combined with double digit economic growth, has created a booming real estate industry.[17]

The development of contract law in China has been central to its growth. It remains so today. The relationship has been described in the following way:

“[…] the Communist Party needs high levels of domestic and foreign investment to help build the legitimacy of its regime on economic performance. Thus, the Party must acquire and maintain a strong reputation for respecting contracts into which domestic and foreign investors enter with the government or its agencies by: first, not fecklessly repudiating contractual commitments; and, second, sanctioning government agencies or officials who do not respect these contracts. Thus, the Communist Party […] rather than the courts, provides the principal assurance to domestic and foreign investors that their investments will not be subject to political encroachment or expropriation ex post (once costs are incurred).”[18]

Deng Xiaoping’s reforms in 1978 were the first to emphasize the importance of instituting the rule of contract law in promoting economic progress. The Four Modernizations Program, for example, spoke to the responsibility of economic actors to perform their agreements and the value of individual autonomy in setting the terms of economic transactions and relationships.[19] Prior to the reforms, any existing Chinese contract law served to promote the CPC’s economic plan and objectives, rather than the desires of individual economic actors. “Because contracts were merely a means for achieving the state's plan, the government would not enforce contracts that did not support the plan's goals.”[20] The CPC expected that a system based on freedom of contract rather than on central planning would increase production because it would provide rewards for producers. Additionally, the CPC hoped to attract foreign capital and technology.[21] Without guarantees that agreements would be legally enforceable, investors would remain fearful of providing resources.

In considering of these concerns, the CPC specifically enacted two contract laws: the Economic Contract Law (“ECL”) in 1981, and the Foreign Economic Contract Law (“FECL”) in 1985. The ECL is designed to govern domestic contract law. It was the first effort to make Chinese contract law predictable and explicit. The underlying intent of the ECL was to promote urban economic reform that focused on liberalizing state operated enterprises from the constraints of government branches.[22]

The FECL, on the other hand, applies to contracts between foreign investors and enterprises operated by the Chinese government. The FECL is closer to the Western conception of contract law, whereas the ECL displays Chinese characteristics. Even the FECL, however, permits the Chinese government to invalidate contracts that violate Chinese public policy.[23] The FECL therefore serves to introduce the right to contract while tempering its full effects. In this sense, FECL is similar to the CPC’s reforms regarding real property. It should also be noted that both the ECL and FECL did not include a specific right to contract for individuals. They were instead intended largely to apply to business associations.[24]

One FECL provision that is especially encouraging to foreign