[Joint House and Senate Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
OWNERSHIP WITH CHINESE CHARACTERISTICS: PRIVATE PROPERTY RIGHTS AND
LAND REFORM IN THE PEOPLE'S REPUBLIC OF CHINA
=======================================================================
ROUNDTABLE
before the
CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
FEBRUARY 3, 2003
__________
Printed for the use of the Congressional-Executive Commission on China
Available via the World Wide Web: http://www.cecc.gov
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CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA
LEGISLATIVE BRANCH COMMISSIONERS
House
Senate
JIM LEACH, Iowa, Chairman
DOUG BEREUTER, Nebraska
DAVID DREIER, California
FRANK WOLF, Virginia
JOE PITTS, Pennsylvania
SANDER LEVIN, Michigan*
MARCY KAPTUR, Ohio*
SHERROD BROWN, Ohio*
JIM DAVIS, Florida*
CHUCK HAGEL, Nebraska, Co-Chairman
CRAIG THOMAS, Wyoming
SAM BROWNBACK, Kansas
PAT ROBERTS, Kansas
GORDON SMITH, Oregon
MAX BAUCUS, Montana
CARL LEVIN, Michigan
DIANNE FEINSTEIN, California
BYRON DORGAN, North Dakota
EXECUTIVE BRANCH COMMISSIONERS
PAULA DOBRIANSKY, Department of State*
GRANT ALDONAS, Department of Commerce*
D. CAMERON FINDLAY, Department of Labor*
LORNE CRANER, Department of State*
JAMES KELLY, Department of State*
John Foarde, Staff Director
David Dorman, Deputy Staff Director
* Appointed in the 107th Congress; not yet formally appointed in
the 108th Congress.
(ii)
C O N T E N T S
----------
Page
STATEMENTS
Randolph, Patrick A., professor of law, University of Missouri at
Kansas City, Kansas City, MO................................... 2
Schwarzwalder, Brian, staff attorney, Rural Development
Institute, Seattle, WA......................................... 6
Dorn, James A., vice president for academic affairs, the Cato
Institute and editor, the Cato Journal, Washington, DC......... 9
Cohen, Mark A., attorney-advisor, U.S. Patent and Trademark
Office, Washington, DC......................................... 13
APPENDIX
Prepared Statements
Randolph, Patrick A.............................................. 28
Schwarzwalder, Brian............................................. 33
Dorn, James A.................................................... 37
Cohen Mark A..................................................... 40
OWNERSHIP WITH CHINESE CHARACTERISTICS: PRIVATE PROPERTY RIGHTS AND
LAND REFORM IN THE PEOPLE'S REPUBLIC OF CHINA [PRC]
----------
MONDAY, FEBRUARY 3, 2003
Congressional-Executive
Commission on China,
Washington, DC.
The roundtable was convened, pursuant to notice, at 3 p.m.,
in room 2168, Rayburn House Office Building, John Foarde [staff
director] presiding.
Also present: Jennifer Goedke, office of Representative
Marcy Kaptur; Susan Weld, general counsel; Andrea Worden,
senior counsel; Keith Hand, senior counsel; Selene Ko, chief
counsel for trade and commercial law; Steve Marshall, senior
advisor; Chris Billing, communication director; Anne Tsai,
specialist on ethnic minorities; Lary Brown, specialist on
labor issues; and William Farris, senior specialist on Internet
issues and commercial rule of law.
Mr. Foarde. Welcome to the second of the staff-led public
issues roundtables for the calendar year 2003 of the
Congressional-Executive Commission on China.
My name is John Foarde. I am staff director of the
Commission. With me we have colleagues from both the Commission
staff and the personal staffers to our Commission members,
seated mostly at the other end of the table. I will be
introducing you to them a bit later in the program.
The topic of our conversation today is ``Ownership with
Chinese Characteristics: Private Property Rights and Land
Reform in the PRC.'' Our session today is scheduled until 4:30
p.m., but we may extend the discussion a bit.
Professor Randolph will be our first speaker, as he is
going to have to leave about 4:30 to make his flight back to
Kansas City. So, we will bid him adieu when that time comes,
but in the meantime we will look forward to hearing from him
and benefiting from his expertise.
Copies of the prepared witness statements are at the back
of the room on the distribution table, and they will be
available on the Commission's Web site. That is www.cecc.gov.
As usual with our issues roundtables, a full transcript of
the roundtable will be available on the Web site in between 4
and 5 weeks. It takes us a few days to get the transcript back
and to circulate it to our panelists and to our colleagues and
the staff so that they can make grammatical corrections and we
can clean up the record. That is why it takes a bit longer than
we would like.
We have four distinguished panelists with a wide range of
experience in law in China. They are Patrick Randolph,
professor of law at the University of Missouri at Kansas City
[UMKC]; Brian Schwarzwalder, staff attorney for the Rural
Development Institute [RDI] in Seattle, WA; James Dorn, vice
president for academic affairs at The Cato Institute and editor
of The Cato Journal, from here in Washington, DC; and Mark
Cohen, an attorney-advisor with the U.S. Patent and Trademark
Office. I will tell you a little bit more about each before
they speak.
Each speaker will have 10 minutes to give us a
presentation. And we hope we can pick up the themes in their
presentations in the question and answer session later.
So, without further ado, let us begin with Patrick
Randolph. Pat is a professor of law at UMKC. He is an expert in
property law and has a long experience working in China. He is
co-author of a book entitled ``Chinese Real Estate Law'' and he
was recently named codirector of the Peking University Center
on Land Law and Policy.
Pat, please go ahead.
STATEMENT OF PATRICK A. RANDOLPH, PROFESSOR OF LAW, UNIVERSITY
OF MISSOURI AT KANSAS CITY, KANSAS CITY, MO
Mr. Randolph. Thank you for having me here today. I am,
essentially, a dirt lawyer, an American dirt lawyer. I have
spent most of my life doing real estate law and commenting on
being an
American.
About 10 years ago, I got interested in Chinese real estate
law during a visit there, and since then have spent quite a lot
of time watching Chinese real estate law develop as best it
could on the heels of, rather than in advance of, all of the
real estate development that is happening in China. Chinese
real estate law is doing a job of catch up. I find it
fascinating to watch, and I hope in my heart that the law will
eventually catch up and lead real estate development in China.
I think that there is optimism about that. I am happy to talk
to you about some of those issues today.
I think one of my functions is to give you something of an
overview of the basis of China's real estate law. Essentially,
until 1988, this was real estate law in China: the state owns
everything, and you can stop there.
In 1988, the Constitution was amended to create the concept
of the transferable interest in property that could be
privately owned and transferred. This interest was called the
Granted Land Use Right.
As I said, it has existed since 1988. And some laws were
developed even prior to that time that referred to it, and
certainly after that time, but because of other political
problems in China, the economy slowed down and development
slowed down for a while. It was not really until the early
1990s that we saw real estate development take off and with it,
the need for greater development of the regulatory system for
real estate.
The basic building block of the Chinese system that granted
land use rights is a term of years in American terms. The term
lasts from between 40 to 70 years, depending upon the right.
You buy it up front. So, it really is not like a lease when you
pay rental payments periodically. You get it up front.
Perhaps the most significant difference between the Chinese
concept and the American concept is that the Chinese are very
powered on speculation in many areas, including this one.
Consequently, when you apply for a land use right, you have an
identified purpose to which you are expected to put it, and you
must put it to that purpose within a short period of time--I
believe the time is 3 years--or else you forfeit the right and
anything you paid for it.
So, it is a rather draconian penalty for failure to develop
the property. This requirement is met with various
arrangements, but I think that it is a reasonably severe
consequence and certainly drives a lot of Chinese real estate
investment.
As I suggested, a transferable real estate right is not
only transferable, but also mortgageable and inheritable. You
can lease
property that is on a granted land use right. And so, we have a
complete system of real estate development and transfers based
upon this term of years.
Now, this is not all that unusual as compared to the
American system today. Today, shopping centers and office
buildings, many downtown areas, are completely are given over
to long-term ground use. I believe that probably a substantial
portion of the State of Hawaii also is given over to ground
leases and, in many parts of Pennsylvania, substantial areas
are given over to long-term ground leases. So, this is not an
unusual concept in the West. It is certainly possible to have a
viable development system with this kind of a base.
Now, do we have one in China? As I suggested, the problem
in China has been one of ``playing catch up.'' I think it is
best to discuss it in connection with the three major areas of
real estate
development.
The first is commercial real estate. We have seen this
development happen in the urban and suburban areas. Development
started first in these areas when real estate regulation
affected these areas first.
There has been substantial investment. Anybody who has been
to China must recognize that. The basis for the development,
however, has been somewhat different from that which we have
known in this country. Consequently, maybe it is not as much a
dependence on some of the laws that we see as significant here.
The reason for that is that a great deal of investment in China
is equity investment.
There is not that much lending as compared to the amount of
investment that goes on. The equity investment is done by the
expatriate Chinese, by government entities in other parts of
China investing in the major urban areas. They say large
portions of the Pudong, for instance, are owned by the county
and city governments of various parts of China.
The characteristic of having equity owned properties is
that they are not as vulnerable to economic cycles, because the
people who own the properties can just hang in there. They are
not beholden to the banks. Another characteristic is that they
do not have to worry quite so much about the vulnerability of
banking systems and failures of them, at least with respect to
the buildings themselves, although the businesses in those
buildings, of course, may be operating on borrowed funds.
But a negative characteristic is that--well, I think in
this country, one reason that our real estate system is so
sound and our system of real estate regulation is the
predictability that we have about behavior in the system and
the accuracy of our land records, all as a consequence of
lenders who are very risk averse and require high standards on
the transactions on which they lend.
We are not seeing that as much in China as we would in the
United States at the same level of development, and,
furthermore, I think that not as much as we probably will in
the future. I suspect that we will not see as much equity
investment as the Chinese
system becomes reliable enough to attract lending capital.
I think the biggest test, nevertheless, for the commercial
real estate system is, as for any legal system, what happens
when the bubble bursts? Anybody who has done business in this
country in the real estate area knows that it is a reciprocal
market. There is a demand. The demand, then, is met on a time
line that is 5 or 10 years in development.
And by the time all the demand has been met, it has been
over met, and we have a surplus of supply. We are starting to
see that in certain cities in China. Sooner or later, just as
we have in this country, we will have major real estate bubble
bursting. And the question is, whether the legal system, which
really is not as strong and as predictable as we would like,
will be able to track the price, protect the investments when
there is not enough money to go around.
It is quite easy to make mistakes and to patch them up when
the property is on an upward track. It is quite different when
there is not enough money to go around.
In the last 3 or 4 years, we have seen massive development
in residential real estate in China, perhaps unprecedented
anywhere in the world, at any time in the world. To listen to
the real estate executives in China talk, they are telling us
that 80 percent of urban Chinese now own their own home. That
is a much higher percentage than the number of Americans who
own their own homes. Or if not much higher, that is higher.
I am dubious about the number, but I think there is no
question that an extraordinary number of Chinese people in the
last 4 years have moved from housing that was not their own
into housing for which they do have a land use right or
participate in a land use right on a more or less condominium
basis.
What I find intriguing about this development is that it
promises the possibility of a sense of ownership, a sense of
individual autonomy for an individual Chinese citizen, that,
perhaps, has not been experienced by a individual Chinese
citizen of the middle class or a lower middle class person at
any time in Chinese history. And I think the ramifications of
this kind of sense of autonomy for the development of a sense
of political awareness, and eventually, a development of a
demand for human rights coming from the Chinese citizens
internally is quite gratifying and quite promising. And I
really hope we see that start to occur, and I do have some
suggestions I can talk about later as to how that might be
assisted here.
With respect to rural real estate, one of my colleagues on
this panel will address that issue. All I would say, again, is
the development that has occurred only in the last 1 or 2
years, that we are seeing massive conversion of property that
had been traditionally put over to the household responsibility
system. It has begun to converge into some other kinds of
ownership and other kinds of development with very little
evidence that the peasants, the people who originally had
control over these lands, are benefiting from these
conversions.
And that is a matter of terrific concern to me, and I
believe it to be a matter of great concern to the Chinese. I
know there has been a recent new development in the legal
system concerning that.
I want to make one more quick point, which is that it is
important for anyone who thinks about Chinese law and the
development of Chinese law to understand that legal power in
China is widely distributed. The popular U.S. image of the all-
powerful monolithic central government--this is not an accurate
picture of China in the area of economic rights.
It is one thing to say that where local, county, and
provincial government overlords have interests that are
parallel with those of the national government, there seems to
be a strong enforcement of the will of the national government.
All of these people have an interest in power, and where they
coincide, the power is going to come down very hard on the neck
of the average citizen.
However, when we are talking about economic interests, the
local and provincial governments have profits in mind. And
there is no question that their interest in maintaining
autonomous control over development and the rules that govern
that development often conflict with the interest of the
national government in having a transparent, predictable legal
system that, basically, is the rule of law. And so, I think
that if we do not see rule of law in some of the rural areas,
we are disappointed in the performance of the Chinese legal
system with respect to protection of individual investors'
rights and property rights.
But we have to be concerned that we not necessarily hold
the central government policies to blame for that. There is a
great deal of distributed power within the Chinese system.
[The prepared statement of Mr. Randolph appears in the
appendix.]
Mr. Foarde. Pat, thank you very much.
I neglected to mention that my colleague, Mark Christopher,
who is sitting in the second row, will keep us all on the
straight and narrow when it comes to time, by giving you a
warning when you have 2 minutes left, and then holding up a red
card when your time is up. We will all try to stay very close
to that.
Our second speaker this afternoon is Brian Schwarzwalder,
staff attorney with the Rural Development Institute. As RDI's
China Program coordinator, Brian has managed two nationwide,
random sample surveys monitoring implementation of ongoing
rural land tenure reforms in China.
He has also assisted Chinese policymakers and legislative
drafters in developing and implementing several laws, including
the
recent Rural Land Contracting Law.
Brian comes all the way from Seattle. Thanks for coming out
here.
STATEMENT OF BRIAN SCHWARZWALDER, STAFF ATTORNEY, RURAL
DEVELOPMENT INSTITUTE, SEATTLE, WA
Mr. Schwarzwalder. Thanks, John. I would like to, first of
all, thank all of the members of the Commission for giving me
the
opportunity to speak here today.
I would like to start by giving a very brief introduction
to my organization and then touching on some of the highlights
of my written statement.
RDI is a nongovernmental land law and policy institute, as
John mentioned, located in Seattle. We have a total of nine
attorneys working on land law reform in a number of different
countries. China is our main program.
We have been involved in China since 1987. In the past 15
years we have conducted over 800 direct, very detailed
interviews with farm households in over 20 provinces around
China. As John mentioned, we have collaborated with Chinese
research partners in
designing and analyzing two large-scale, random-sample surveys.
I think most followers of China are aware of the impact of
decollectivization of agriculture under the Household
Responsibility System in the early 1980s, specifically, the
increase in agricultural productivity and improvements in
farmer well-being that resulted from the ability to cultivate
individual plots, rather than working collectively. But I think
even the closest observers of China are probably not aware of a
recent series of law and policy reforms that are designed to
fundamentally transform the nature of agricultural land rights
that are held by farm households.
Under the Household Responsibility System, ownership of
rural land was retained by the collective farmer communes,
typically at the village level. Farm households were allocated
the right to a proportional share of village land, based on
each household's
population.
Now, this type of collective ownership of household rights
has been the predominant form of land tenure in China for about
the last 20 years. But unlike the urban land use rights that
Professor Randolph was discussing, rural land rights have been
insecure and have not been easily marketable.
About 80 percent of Chinese villages adopted a practice of
periodically reallocating land among households to reflect
population changes within the village. Under these land
readjustments, what happened was households whose populations
had decreased lost land, and that land was given to households
whose population had increased, as a way of maintaining an
overall equality among households in the village.
The result was that no farmers could be certain of how long
they would remain on any given parcel of land. So, in our
interviews with farmers over the course of many years in China,
they consistently told us three things.
One is that land readjustments constrained long-term
investments in land. They were not willing to make an
investment if they were worried that someone else would benefit
from that investment if the land were taken away from them
through a land readjustment.
The second was that the uncertainty created by land
readjustments made land transactions very difficult. Again,
people were unwilling to take on rights to land if they were
worried that it could be readjusted away during the term of the
transfers.
And last, farmers told us that they preferred longer term
rights to land. The recent reforms take very significant steps
toward
providing farmers with the long-term, secure rights that they
have indicated they would prefer over the uncertainty of the
land re-
adjustment regime.
Most important under these reforms is the adoption of a new
Rural Land Contracting Law by the National Peoples' Congress in
August of last year. The law stops short of giving farmers full
private ownership of their land. But the rights that it creates
embody many of the important characteristics of private
property rights. I just want to highlight some of the main
features of the law.
Under the law, farmers are entitled to receive 30-year use
rights to land, backed by a written contract and a land use
certificate. Most important, the land during the 30-year term
should remain free from land readjustments in all except very
rare circumstances.
The law also provides protections for women's rights under
the new ``no-readjustment'' regime. Women will be particularly
vulnerable to losing land under a ``no-readjustment'' regime,
because they are most likely to leave the household upon
marriage, and may not receive an allocation of land in their
new village under a ``no-readjustment'' policy. So, it is
important that, for the first time, this law specifically
addresses the issue of women's rights.
In terms of marketability, the law allows a broad range of
transactions, including lease, transfer, exchange, and
assignment,
assignment being a transfer of the full remaining term.
A priority right is created for members of the village in
which the land is located. But transfers to nonvillagers are
also allowed under the law.
Transfers and assignments are treated somewhat differently.
A transfer of less than full remaining term does not require
any approval by the collective land owner. Whereas, an
assignment of the full remaining term, essentially the
equivalent of a sale in our system, does require approval of a
collective land owner.
Under previous laws and policies, the rules governing all
types of transactions were very unclear. So, these new
guidelines should really provide the basis for the development
of a market in long-term transfers of rural land use rights.
In terms of the rule of law, I think the Rural Land
Contracting Law will also make important contributions to
strengthening the rule of law in China's rural areas. Chapter
IV of the law provides farmers for the first time with
actionable claims against collective officials who violate
their land rights. It does this by listing, very specifically,
a set of prohibited actions, and then imposing strict civil
penalties on anyone who violates those rules.
It also envisions equitable relief for farmers. That is,
they can forestall future activities or undo violations of
their land rights after they have occurred.
And in terms of resolving disputes that occur between
farmers and collective officials, the law gives farmers the
choice of a menu of different dispute resolution options,
including consultation, mediation, arbitration, or direct
filing suit in the People's Court.
I think there are a couple of very important implications
of the law. The bottom line is that effective implementation of
these rights will provide farmers with the incentive to
increase productivity and to diversify production on their
land.
True 30-year rights are long enough for farmers to recover
the value of almost any type of agricultural investment over
the course of the term, including planting of long-term crops,
such as tree
orchards.
Equally important, these secured, marketable rights will
bring to life dead capital that is tied up in China's rural
land.
From field work that we have done in comparable Asian
countries--and by that I mean countries that are in similar
stages of economic development to China and have similar
population pressure on land--our estimate is that 30-year
rights will attain a short-term value of somewhere between USD
$3,500 and USD $4,500 per hectare. That is even discounting the
fact that use rights are not equivalent in value to ownership
rights, which are found in other Asian countries. So, if that
level, that average value is achieved in China, that represents
a total value for all rural land of somewhere between USD $500
billion and USD $600 billion.
So, placing that wealth in the hands of farmers will have
profound impacts on rural China's economic, political, and
social development over the long term.
Implementation of the law, of course, represents an
enormous challenge. We are talking about close to one million
natural villages across China. So, it will be a long-term
process.
There are some recent statements from the Central
Government in Beijing that are encouraging with respect to
implementation. Both President Hu Jintao and Premier-to-be Wen
Jiabao spoke at the recently concluded Rural Work Conference,
and their statements seemed to indicate an overall increase of
importance on rural issues, and particularly with respect to
implementing the Rural Land Contracting Law, which was listed
as the top priority for rural work in the coming year.
But as Professor Randolph mentioned, in cases where local
interests do not match up with national interests or central
government interests, there is likely to be resistance among
local officials in many areas. This is certainly true of
implementation of the Rural Land Contracting Law. Local
officials consider land to be an important source of both
wealth and power, and are likely to resist implementing reforms
that give farmers greater power and lessen the ownership right.
So my organization, together with a number of Chinese
partners, plans to stay very closely involved in a variety of
implementation-related activities that are outlined in my
written statement, but that include publicity for the new law,
educating farmers with respect to what their rights are,
monitoring implementation through additional field work and
surveys, drafting province level implementing regulations, and
over the long-term, developing a system of supporting
institutions that will help farmers enforce their new rights.
Thank you very much.
[The prepared statement of Mr. Schwarzwalder appears in the
appendix.]
Mr. Foarde. Brian, thank you. It sounds like fascinating
work. We will hear some more about it in the Q and A, I am
sure.
Our next panelist is Dr. James Dorn, vice president for
academic affairs at the Cato Institute, and editor of the Cato
Journal. Jim is an economist and a China specialist. He has
written copiously and well on economic reform and financial
institutions in China, and has edited 10 books, including
``China's Future: Constructive Partner or Emerging Threat,''
and a book called ``Economic Reform in China.''
Jim, welcome, and thank you for coming today.
STATEMENT OF JAMES A. DORN, VICE PRESIDENT FOR ACADEMIC
AFFAIRS, THE CATO INSTITUTE AND EDITOR, THE CATO JOURNAL,
WASHINGTON, DC
Mr. Dorn. Thank you very much. Good afternoon. I would like
to thank the Commission for this opportunity to address the
issue of property rights in China, especially the pace of
enterprise privatization, capital-market liberalization, and
the implications of
ownership reform for human rights and civil society.
Those issues are extremely important both to China and for
United States-China relations. The primary goal of the fourth
generation leaders of China is basically to maintain strong
economic growth and increase prosperity throughout China.
However, to do so, they will have to confront a number of
serious problems, particularly, the debt-ridden financial
system and the inefficiency of state-owned enterprises [SOEs].
China's big four state-owned banks are technically insolvent,
with nonperforming loans estimated to range from 25 to 40
percent or more of outstanding loans. The SOEs, that is, the
state-owned-enterprises, account for more than two-thirds of
all bank loans in China, but produce less than one-third of the
total value of industrial output.
That massive waste of capital under China's socialist
market economy cannot be stopped without fundamental reform.
The
biggest problem facing China today is the problem of financial
instability. What needs to be done, I would argue, is wide-
scale, or wide-spread, privatization and the implementation of
the rule of law.
China's largest SOEs remain under firm control of the
government, but many medium and small-sized SOEs, up to
300,000, have been restructured or are being restructured.
Moreover, since 1978, Beijing has allowed experimentation with
different forms of ownership. They should be congratulated for
doing so. Today, there are more than 20 types of ownership
forms, including private firms, collective firms--for example,
township and village enterprises, many of which are now
private--joint stock companies, and foreign-funded enterprises,
which play a huge role in the dynamic nonstate sector.
The exact scope of the private sector is difficult to
estimate or calculate because private firms often conceal their
true identity. The law in China is very gray. It is not a black
and white picture. So, firms often conceal their true identity,
that is, ``wear a red hat,'' in order to gain access to state
bank loans at subsidized interest rates, or to obtain other
state favors.
The private sector receives only one-half of 1 percent of
all state bank credit in China and is heavily discriminated
against. That is why private firms conceal their true identity.
A reasonable estimate is that the private sector now
accounts for one-third of China's GDP. Private entrepreneurs,
however, have to go to the informal sector to find funds, which
is often illegal--that is, many forms of credit allocation in
the informal sector are illegal.
Private and cooperative enterprises have been extremely
successful over the past 25 years and now account for more than
two-thirds of the value of industrial output.
The dynamic sector, to re-emphasize, has been the nonstate
sector, which includes private firms as well as collective
firms and other types of firms. Their success has resulted in
official recognition. Article 11 of the Chinese Constitution,
which was amended in 1999, now reads, ``Individual, private and
other nonpublic economies that exist within the limits
prescribed by law are major components of the socialist market
economy.'' Who would ever have thought that such a statement
would appear in the Chinese
Constitution?
Private firms were illegal in 1978, and SOEs dominated the
economic landscape. Today, there are nearly 2 million private
enterprises employing more that 24 million workers, as stated
in the ``Statistical Yearbook.''
The number of private enterprises is growing by more than
30 percent per year, especially in the coastal areas. Much of
the growth of the private sector has been spontaneous, in the
sense that privatization took place without central direction
by leaders in Beijing, as opportunities for local leaders and
entrepreneurs increased--that is, as trade opportunities
increased, especially in the special economic zones.
Local jurisdictions were allowed to experiment with new
ownership forms. When they were successful, others sought to
imitate that success. Like politicians everywhere, China's
politicians like to imitate success. The central government
initially did not fully support the nonstate sector.
Only later did Beijing put its stamp of approval on the
institutional innovations, which is why I like to call the
development of the private sector ``spontaneous
privatization.''
The growth of the private sector, or private enterprise,
occurred despite the lack of transparency in the legal regime
and despite the severe restrictions on access to state bank
credit, which shows the ingenuity of the Chinese people.
Informal private capital markets have evolved to fund the
private sector, and overseas Chinese have been an important
source of investment funds for the foreign invested
enterprises. Professor Kelly Tsai, who I list in the
recommended readings at the end of my formal statement, has
done an excellent job showing the importance of the informal
financial organizations.
The strong performance of provinces with greater economic
freedom, such as Fujian, Guangdong, and Zhejiang, has created a
new middle class and a demand for better government and more
secure property rights. One can see this very clearly.
Capitalists are now free to join the Chinese Communist
Party, and several well-known private entrepreneurs are already
members of the National People's Congress. As more
entrepreneurs join the Party, there will be mounting pressure,
I believe, to change the status quo.
China's accession to the World Trade Organization [WTO] in
December 2001 has resulted in a long-term commitment to
economic liberalization and legal reform. The policy of
engagement is working to change China's legal system and better
protect property rights, and, hence, human rights. I think that
is very important to recognize. For example, China's first
civil code has just been drafted, including an entire chapter
dedicated to the protection of
private property rights.
China's top judge, Xiao Yang, president of the Supreme
People's Court, has called for safeguarding private property
rights, and told a national conference in Beijing recently,
``Efforts should be made to enhance awareness of the need for
equal protection of all
subjects in the marketplace.''
At the Chinese Communist Party's 16th National Congress
held last November, President Jiang Zemin told the new
generation of leaders, ``We need to respect and protect all
work that is good for the people and society and improve the
legal system for protecting private property.'' That capitalist
sentiment is from China's
predominate leader.
Jiang's rhetoric should be taken seriously, I believe.
Chinese citizens can now own their own businesses, buy shares
of stock, travel widely, hold long-term land use rights, own
their own homes, and work for nonstate firms. Although the
depoliticalization of economic life is far from complete, the
reforms thus far have created new mindsets, expanded individual
choices, and given rebirth to China's civil society. Anybody
that has been to China recently can see that.
Real reform, however, will require more than ``revitalizing
or recapitalizing'' state-owned enterprises and state-owned
banks; it will require a firm commitment to widespread
privatization of state-owned assets. Until the government and
party are shut out of banks and enterprises, corruption will
continue and nonperforming loans will mount. What China really
needs is not pseudo capital markets under market socialism, but
real capital markets under market liberalism--markets in which
shares are freely transferable and liquid, and that individuals
trust.
Markets work best when property is fully protected by the
rule of law and people are free to choose. We should not forget
the words of James Madison, the chief architect of the U.S.
Constitution, who said, ``The personal right to acquire
property, which is a natural right, gives to property, when
acquired, a right to protection as a social right.''
China is beginning to recognize the right to private
property, but only as a right bestowed by the state, not as a
natural, inalienable right. Consequently, private property can
never be secure until there is a fundamental revolution in
political philosophy that places the individual, not the state,
at the center of the moral universe and limits the power of
government.
The great Chinese philosopher Lao Tzu was right when he
said, ``When taxes are too high, people go hungry. When
government is too intrusive, people lose their spirit. Act for
the people's benefit. Trust them. Leave them alone.'' China's
leaders and people can turn to the writings of Lao Tzu for
guidance in understanding the principle of nonintervention as
the basis for spontaneous economic and social order.
Recent changes are encouraging. In addition to the ones
already mentioned, the following are noteworthy: Qualified
foreign institutional investors will soon be allowed to buy
equity stakes in SOEs through the A-share--local currency--
stock exchanges in Shanghai and Shenzhen; strategic foreign
investors will be allowed, for the first time, to buy the
nontradeable shares of listed and unlisted SOEs; private
commercial banks are being established in rural areas; farmers
will have more secure land use rights as a result of the Rural
Land Contracting Law adopted in August 2002; and Shenzhen, the
first special economic zone in China, is embarking on a bold
political experiment with Beijing's approval to limit the power
of local cadres, introduce checks and balances, and cultivate
the rule of law. It is no coincidence that this political
reform would be introduced in one of the most marketized
provinces in China.
Those reforms and others are being driven by the need to be
competitive in an increasingly global economy. To attract and
retain capital in the future, China will have to continue to
improve its institutional infrastructure, not just its
buildings, highways, and airports.
As China liberalizes its financial sector, removes
remaining barriers to trade, and improves its legal structure,
the range of choice for millions of Chinese will improve. That
increase in economic freedom is sure to have a positive effect
on creating what Liu Junning, an independent scholar in
Beijing, has called, ``a constitutional order of freedom in
China.''
The United States can help transform China by continuing
the policy of engagement, by ensuring that China honors its WTO
commitments, as well as its bilateral trade agreement with the
United States, and by adopting a more liberal visa policy that
allows
Chinese students and scholars, especially those in law,
economics, and the humanities, to learn about and experience
firsthand a free society.
Thank you very much.
[The prepared statement of Mr. Dorn appears in the
appendix.]
Mr. Foarde. Thank you very much, Jim.
Our final panelist this afternoon is Mark Cohen, attorney-
advisor in the U.S. Patent and Trademark Office [USPTO] here in
Washington. As an attorney with the USPTO, Mark's
responsibilities
include training and consultations on standards for
intellectual property enforcement, especially with respect to
East Asia and South Asia. He has written extensively on Chinese
intellectual property law since 1984, and most recently edited
a volume entitled ``Chinese Intellectual Property Law and
Practice.'' Before joining the USPTO, Mark was a managing
partner of the Guangzhou, China, office of a U.S. law firm.
Mark, welcome and thanks for coming this afternoon.
STATEMENT OF MARK A. COHEN, ATTORNEY-ADVISOR, U.S. PATENT AND
TRADEMARK OFFICE, WASHINGTON, DC
Mr. Cohen. Thank you, John. It is a little bit humbling to
talk after ``dirt lawyers'' and capital lawyers about
intangible assets. I would like to thank the Commission for
inviting me. As my friends know, I am always happy to talk
about intellectual property rights [IPRs] in China, in any
venue.
In recognizing the Commission's role in monitoring
compliance with human rights and rule of law in its
implementing legislation, as well as its interest in WTO
matters, the focus of my brief 10 minutes will be on the
current state of protection of U.S. intellectual property
rights in China and intellectual property and the rule of law.
To a lesser extent, I will briefly highlight U.S. Government
efforts to promote IP protection and the rule of law in China.
I would like to say at the outset that these comments are
my own. They are not an official statement of U.S. Government
policy. I am not sure, in some instances, whether there is an
official U.S. Government policy on the relationship between
rule of law and IPR. However, they are issues that are of
longstanding interest to me, and they contrast with some of the
issues that you have just heard today. I am talking about
legally-created intangible assets, not tangible assets.
Unlike commercial property, IPRs have a well-defined, clear
WTO context. IPR is also unlike land, where the primary
constituency is China's own citizenry. It seems very often when
we talk about intellectual property, the primary, but not the
only constituent, may be foreigners: foreign investors, and
foreign holders of IPRs.
The protection of U.S. intellectual property in China was
outlined in some detail in the December 11, 2002, report of the
U.S. Trade Representative [USTR] to Congress on China's WTO
compliance. That report, and I think most of the people who
testified in preparation for it stated that a large number of
China's laws on the books are basically WTO compliant. These
laws basically meet the WTO minimum standard contained in the
Trade-Related Aspect of Intellectual Property [TRIPS]
agreement.
The clearest deficiency is enforcement. As explained by one
trade association, ``effective enforcement against IPR
infringement in China is universally recognized as the chief
concern of IPR rights-holders, as piracy rates in China in all
areas, including copyright, trademark and patents, continues to
be excessively high.''
One may wonder in looking at this current situation if this
is not a case of ``deja vu all over again.'' This year marks
the 100th anniversary of the first bilateral agreement between
the United States and China, which was the 1903 ``Treaty for
Extension of the
Commercial Relations Between China and the United States,''
concluded at the end of the Qing Dynasty. There have been a
succession of other agreements since then, including after
normalization of relations with the People's Republic of China
in 1979.
During the past few years, we have seen a quickening of
pace in China's march toward conforming its IPR system with
international standards. As noted, 20 years ago it may have
been illegal to operate a private enterprise. All that we had
at that time was a very rudimentary trademark law. Beginning
with the 1980s, we had a patent and a copyright law, and a host
of other legislation on board.
Since WTO accession, China has ambitiously promulgated,
revised, or annulled a very large corpus of legislation,
regulations, and rules. I sometimes say that a job I would have
least liked to have a year or two ago would be a legislator in
China, because the
number of revisions and changes was enormous. Yet, despite
these legislative efforts, U.S. industry is facing daunting
challenges in China's market to combat frequently illegal
operations.
U.S. copyright industries report they are, in general,
suffering a piracy rate of over 90 percent in the Chinese
market, across the range of copyrighted products, including
motion pictures, music, and software. Losses as reported in
2001 were in the range of $1.5 billion due to piracy.
Of course, this is easily verified by sight observations by
anyone who has been to China. At the Xiushui Market, near the
U.S. Embassy, or at Luowu Market on the border of Shenzhen,
pirated motion pictures, movies, and video games, and a range
of counterfeit products are freely available for sale,
sometimes to the exclusion of any legitimate product. In my
presentation, there is a slide from the Xiushui Market, where
you can see pirated products in full view of the authorities.
China's role as a manufacturer and consumer of pirated and
counterfeit goods not only affects the market in China for U.S.
products, it affects our own market, and it affects third-
country markets. In the 1990s, this was most evident when China
was a major exporter of pirated CD-ROMS. These exports have
since largely come under control.
In the United States, the most objective data we have is
the statistics of Custom seizures of counterfeit and pirated
goods. For 4 out of the past 5 years, mainland China has been
the leading supplier of seized goods, 49 percent last year. If
you aggregate it and compound it with Taiwan and Hong Kong, it
would be well over 50 percent. In the past 5 years, there was
only 1 year in which mainland China was not in the first place.
However, U.S. statistics do not document the full extent of
the harm caused by these exports. Industry experts and
consumers report the presence of Chinese exports of products
such as counterfeit aircraft parts, counterfeit car parts, even
whole counterfeit cars and motorcycles. Many of these cases are
multinational in nature. Some of them involve organized crime.
A few years back, in April 1987, there was a case involving
counterfeit bulk pharmaceuticals from China that were allegedly
responsible for as many as six toxic reactions in Denver.
I am not saying that China is solely responsible for all of
these things. In that case, a U.S. company, a distributor, was
repackaging them. There have been a number of other criminal
cases in the United States involving imports of Chinese
counterfeit and
pirated goods.
As IP crime extends beyond the national borders, it is
important to note that the cooperation of Chinese colleagues in
law enforcement and in IP protection is critical. This is not a
one-way street. For example, pirated content may be located on
a Chinese computer for which U.S. industry needs the
cooperation of Chinese
authorities, as one example of the need to obtain evidence in
multinational crimes.
In addition, IPR crimes have been linked in many cases to
terrorist activities. A recent article in the New Yorker
magazine noted that in Paraguay, the source of counterfeit
products sold by terrorist groups is largely Chinese in origin.
There have been other articles and anecdotal evidence.
Given this rather bleak situation, what does the future
hold? History shows us, of course, that China had a long
tradition before the Industrial Revolution of being a major
innovator of new technology. I have already mentioned that
China has committed significant efforts to reforming its laws
as well as establishing a full range of administrative
agencies. There are many signs that intellectual property is
becoming more important to China.
In 2002, for example, China became the leading country in
the world for receiving new trademark applications. In 2001,
there were nearly 10 times as many Chinese applications for
trademarks in China, compared to foreign applications. Although
imperial China lacked a tradition of protection of IPR, Taiwan
is the third largest foreign region applying for patents before
the USPTO, my own agency.
So, there is a lot of positive news. As noted by previous
speakers, there are also developing markets for intellectual
property rights, and the government has been actively
developing urban technology markets.
Among the other positive trends, criminal prosecutions,
although small, are increasing. China's leadership has also
indicated that intellectual property is of great concern. It is
important to note that open markets, which we all looked
forward to in WTO accession, do have an unfortunate side
effect. They create a greater opportunity for counterfeiters
and pirates to ply their wares.
Regarding rule of law, I believe intellectual property is
the most vulnerable to ineffective legal systems of all
property rights, as it is intangible. It is a right that is
completely defined by law. It is important to note that China
does not lack intellectual property laws. What China lacks
mostly is deterrent enforcement of those laws.
China has a vast and rather complicated administrative
apparatus for patents, trademarks, copyrights, semiconductor
layout
design, trade secrets, trade dress, defective products, illegal
use of the Internet, counterfeit tobacco, and counterfeit
drugs, all of which implicate intellectual property rights.
China has a specialized intellectual property court system.
A frequent issue in dealing with intellectual property rights
in China is determining which national or local law, rule,
regulation, interpretation, decree, or decision, applies and is
in actual effect.
In addition, because of the nature of the parallel system--
you have civil, criminal, and administrative sanctions--there
is also a question of which rule applies to which agency and to
what extent. On the enforcement side, the lion's share of
China's intellectual property enforcement is administrative,
where there are tens of thousands of cases, compared to perhaps
5,000 civil cases and perhaps 100 or so criminal cases. By
comparison, in the United States, we had about 1,200 criminal
cases for intellectual property rights on the Federal level
alone for the year 2000.
The relationship between IP and rule of law was recently
underscored at a roundtable in October 2002, where Ambassador
Randt indicated that the only effective enforcement in China is
going to come from overall legal reform. Some of those seeds
for legal reform, to a certain extent, are found in the TRIPS
agreement itself, which requires proportionality in criminal
punishments in the context of IP crimes, and transparency in
administrative and judicial decisionmaking, all of which have
an important rule of law context.
As we seek more effective enforcement of China's IPR laws,
civil, criminal and administrative, we should also be mindful
of other U.S. Government policies in promoting a legal system
that meets international standards of fairness. These goals are
complimentary, not inconsistent.
Effective law enforcement can be a double-edged sword. With
China's increase in domestic rights holders, including, for
example, trademark holders as I just mentioned, there is a
growing likelihood that U.S. companies will find themselves on
the wrong end of enforcement actions, frivolous or otherwise.
Thus, it is in the interest of the U.S. Government, as well as
U.S. companies, to
promote the development of a legal system in China that fairly
protects the rights of all parties and has reliable fact-
finding
processes.
The last thing I want to briefly mention is U.S. Government
efforts to promote intellectual property protection. One of the
two key issues that we are facing this year and the years ahead
is criminal enforcement. Because of the widespread deterrent
effect of criminal prosecution, and because of those TRIPS
obligations, and also because of the general lack of awareness
of IPR crimes by police officers and prosecutors in many
countries, training law enforcement officials is a worldwide
task and one that is very important for the U.S. Government to
develop.
The U.S. Sentencing Guidelines, in particular, have
elicited considerable interest from Chinese colleagues because
they provide a reasonable, fair, and proportional method for
determining sentences for IPR infringers, which is consistent
with international practices, and I believe also advances our
goals for the rule of law, including issues such as controlling
local protectionism. It is likely this year that there will be
increased training in China on IPR criminal issues.
Another emerging issue of some importance, is Internet
copyright. As we all know, Internet usage in China is
increasing
dramatically. By some statistics, the Chinese language will be
the predominant language on the Internet in the years ahead.
Copyright protection over the Internet, as well as other forms
of digital issues involving copyright, are increasingly
important internationally.
While China's recently revised copyright law and other
regulations and interpretations do consider the impact of the
Internet on copyright protection, the U.S. Government would
like China to accede to the most important recent treaties of
the Internet, the World Intellectual Property Organization
[WIPO] Internet Treaties, namely the WIPO Copyright Treaty, and
the WIPO Performance and Phonograms Treaty. We would also like
China to more vigorously coordinate and enforce copyright in
digital formats. More training in this area is also needed.
Thank you very much. I look forward to your questions.
[The prepared statement of Mr. Cohen appears in the
appendix.]
Mr. Foarde. Four fascinating presentations by four experts
on four different aspects of this important issue.
I would like to start out the questioning, because time is
short, and just ask one. I think this is for Pat Randolph, but
perhaps someone else would like to step up to it.
Pat, what type of registration system of the land rights
that are now available to Chinese citizens is in place, if any?
Mr. Randolph. Yes. The system of public records for Chinese
land rights is really quite well developed. It is called a
registration system. Basically, the registration of the
interest confirms the
validity and existence of the interest. And so, actually, it
gives far more protection of the rights to register than the
U.S. system or European system.
One of the frustrations in past years has been the lack of
access to registration records, particularly in outlying areas.
It is very difficult to have an active market system where no
one can figure out who owns the property or when only selected
beneficiaries of land use can get that information.
In response to that, and I think a very encouraging
response, in the last 6 months China has adopted national
policies that require public access to registration records
nationwide.
Mr. Foarde. Very good. We are going to be starting out over
here on the left side with my friend and colleague, Keith Hand.
Mr. Hand. Thank you all for your presentations.
Jim, you flagged China's financial crisis as the most
pressing issue in China at the moment. I am wondering if there
is any indication as to whether the government would consider
sale of full ownership rights over the land, in part, to deal
with this looming financial crisis. Or is that just too
problematic ideologically?
Mr. Dorn. Well, it is not really a question of ownership
rights over the land. I think they are moving in that
direction, as Brian pointed out. They expect to have fully
transferable rights and markets for those property rights in
the near future.
The real question for the state-owned enterprises,
particularly the large SOEs in the urban areas, is how to
expand private trading rights. Most of the stocks listed on the
exchanges in China are nontradeable shares. They are held by
asset management companies at different levels of government,
and their true value is really unknown.
As a result of the small number of tradeable shares, the A-
share market is highly overvalued. Placing nontradeable shares
on the market would lower prices, and that is why it has been
opposed.
Unless the Party and the government are divorced from
ownership in those enterprises and SOEs are privatized, the
incentive structure will not change. Managerial changes may
help, but they will not cure the real problem, which is to
value enterprises according to market criteria and to allow
shares to be fully transferable.
The real barrier to privatization is political, because
once SOEs are privatized Communism will be dead, and the Party
will lose much of its power. The Party is not homogeneous.
There are some leaders who really want substantial reform, but
they know privatization will be a death blow to the Party.
There is a real dilemma, because the dynamic sector has been
the nonstate sector, particularly foreign-funded enterprises
and private enterprises.
I think China's main challenge, in the very near future, is
how much privatization to allow. The leaders may not even call
it privatization; they may call it marketization or some other
term. So, one has to look at more subtle changes. And that is
why I think the announcement by Jiang Zemin at the 16th Party
Congress--that private property should be protected--is a very
strong signal that things are not going to stay the same. We
should welcome China's accession to the WTO because it will put
pressure on the large SOEs to get into shape and give China's
leaders a justification for further reform.
Mr. Randolph. I think that with respect to residential real
estate, it is widely anticipated in China that present 70-year-
old land use rights will be converted to ownership rights
before the end of the 70-year term. I think it is just a matter
of time as the population starts to develop an awareness that
they are investing in properties that they may not own for the
duration of their lives or duration of their investment lives;
that there will be pressure for this. And even today there is
some conceit among the scholars and intellectuals of China that
there is nothing inconsistent with socialist principles to
permit people to own their own homes.
With respect to development property, I think the land use
rights are shorter in this area, and I think potential
profitability of recent land use rights at the end of their
terms will prevent any conversion to ownership in the short
term.
Mr. Schwarzwalder. On the rural land issue, in the past,
essentially rural land was for agricultural purposes and has
been worthless on the market. The lack of market development is
one reason. Everyone now realizes that there is potential value
in rural land. The question is, who is going to capture that
value? Will it be the central government, the collective
owners, or the farmers themselves?
I think, both from the experience of urban land rights
reform and international experience, that I agree with
Professor Randolph that there is going to be increasing
pressure for privatization or extension of use rights.
There basically have been two proposals put forth by
Chinese researchers on that point. One is to nationalize rural
land, to take ownership away from the collective and give it
directly to the state, or essentially, to follow the urban land
system. The other is to fully privatize the land and sell it to
farmers at a very low price to allow them to eventually realize
the increased value on the market.
Both of those proposals basically, are in response to
concerns that it is going to be the collective land owner who
will capture the value of the land. There has been some
momentum for the idea of nationalizing land, but so far, the
idea of privatizing rural land really has not gained a lot of
momentum.
At the time that 30-year rights would be implemented under
the Land Management Law, which was adopted in 1998, President
Jiang made a statement that at the end of the 30-year term, he
saw no reason why they should not be extended for an additional
30-year term. My sense is that it is very likely that prior to
the end of this 30-year term, that it will be extended to 50 or
70 years, or perhaps perpetual use rights, potentially to full
private ownership. But the rural sector will not lead the way.
You won't get full private ownership of rural land until you
have the transition to full private ownership of urban
residential land that Professor Randolph was talking about.
Mr. Foarde. Thank you. And thank you, Keith.
In the interest of balance, we are going to go way down to
this end of table and recognize Jennifer Goedke, who represents
Congresswoman Marcy Kaptur, one of our Commission members.
Ms. Goedke. I have two brief questions. One is for Mr.
Cohen. You said that China does not lack for IPR rights. This
the same for worker rights or internationally-recognized human
rights. But implementation has always been a problem. Do you
still consider China a trustworthy trade partner, even though
they do not follow through with their own laws, let alone
bilateral, multilateral trade agreements? Not speaking for your
agency, of course, speaking for yourself.
Mr. Cohen. I do not know if the question is a matter of
trustworthy or not trustworthy, because there are so many laws
and rules and regulations on the books, that the sheer quantity
suggests somebody is thinking quite seriously about
intellectual property rights. I believe there are many people
in China who are thinking quite seriously. The battle is to
engage the right people on the right issues to advance our
interests and to make them realize it is in their interests as
well.
If you were to look at trustworthiness, for example, I
think the weakest segment of the enforcement of intellectual
property rights in China is copyright. And you could say that
the reason for that is that they have the least engagement on
that issue. The motion picture industry is suffering. Software
is dominated by Microsoft and other U.S. makers. And also the
music industry, although there is a native music industry, a
lot of it is also imported and could have come from America.
So there seems to be the least strength in that segment.
And that may be one of the reasons we have very tepid criminal
enforcement to deal with widespread piracy in China. But, that
being said, there are also some positive signs. And by the fact
that the Chinese, themselves, are filing for separate forms of
rights and trying to enforce them, hopefully, they will be
enforced with full regard for national treatment, for Americans
and foreigners being treated the same as Chinese. Those are all
positive prospects.
Mr. Randolph. I would like to make a comment also. With
respect to China's attractiveness as a trading partner and the
question of corporate laws, I think that it is very important--
again, to keep in mind that where you wish to point your
finger--I think there is concern, even in the economic area
about uniform enforcement of laws. However, I do not think that
is due to the lack of national policy concerning transparency
of the legal system and
enforceable rights in the commercial area.
I think the concern is breaking down the resistance to that
kind of policy that might arise because of local interests. And
I think that the United States and China both cooperate in
addressing that problem by attempting to produce and disperse
legal expertise both among the lawyers and judges across China.
I think one of the problems we have is that Chinese law
schools today are ginning out the lawyers by the fistful, but
they are all staying in Beijing, Shanghai, Shenzhen, and
Guangzhou. That is where the profits are to be made, they
perceive. And there is very little dispersal of legal expertise
across the country. Furthermore, how much of the judiciary is
poorly educated. And because they are poorly educated and
because there are no lawyers presenting legal arguments to them
about what the law really is, they are really very much more
exposed to pressure from local government
enterprises.
Ms. Goedke. But, if a lawyer were to speak in opposition--
we find so many people afraid to do so, fearful of additional
attention, shall we say, from the government--is there an
environment for a lawyer to take a different path?
Mr. Randolph. I think there is certainly an environment for
a lawyer to advocate economic interests of his or her clients.
And I think that increasing activity in generating awareness of
the existence of the laws and the national government support
for them across China would be very helpful. I think there are
too many seminars in Beijing and not enough seminars in the
outlying areas.
I think we are at somewhat cross-purposes, because I am not
going to argue with you about the issue of criminal justice or
the issue of rights of free speech, or the disaffected Chinese
who wish speak out in criticism of the government in rural
areas. I do not think that it is a good place to be a
dissident, nor is it a good place to get in trouble, but I do
not think that is true with respect to advocacy of the economic
interests of people or the economic system in China. I think
that they are almost two systems existing
parallel.
Mr. Foarde. We will go back over to this side. Susan
Roosevelt Weld is the general counsel of the Commission.
Ms. Weld. Thanks, John. I guess there is one thing that I
have been thinking of while listening to all of you speak,
actually two things: one is equity, and the other corruption.
Brian, in the rural context, I wonder what your surveys tell us
about whether this rule about women really raises the status of
women in the land-use system in the rural area. How about
minorities that might live in these villages? Are they getting
the land-use rights just like everybody else, under the
allocation made by the local collective? And where might they
take their claims if they have a claim of lack of equity? So,
that is the first part.
Mr. Schwarzwalder. We have not done detailed field work
comparing rights that are given to minorities, as opposed to
rights that are allocated to Han Chinese in individual
villages, but we have done some field work, and our surveys did
include some minority villages. And we have not discovered any
lack of equity in that work. Essentially, the Household
Responsibility System was one of the few reforms that really
did reach all of China, including its heavily ethnic minority
areas of northern Yunnan Province where we have done field
work.
Traditional tenure arrangements still existed for grassland
and forest land, but on agricultural land the 30-year right
system had largely been implemented. In terms of women's
rights, it is an issue that under the new law is going to
require a good deal of attention in the future. There is the
potential for women who leave their original village and take
up residence with their husband's village, to essentially
become landless. But what the law does is it preserves their
right to a proportionate share of land in their original
household until they are granted a share of land in their
husband's household.
So, I think there are several steps that really are going
to need to be taken to make that a valuable right. One is that
we need to have a more detailed explanation in implementing
rules of how that right is going to be asserted. And then you
are going to need to educate women on how they can assert that
right. And they are going to need to come up with a framework
for asserting the right that works at the village level.
The development of markets is going to be very important in
terms of women's rights, because I think the most likely
outcome, and perhaps the most favorable outcome, will be the
development of markets where the woman, at the time of leaving
her original household, can realize the value of her
proportionate share by transferring it, by separating it and
transferring it from her original household, taking that wealth
into her new household.
It is going to be a long-term process, the development of
effective ways of asserting that right. But it is an area in
which we have seen increasing awareness and increasing
attention among legislatures and policymakers in Beijing.
Mr. Randolph. I would like to address the issue. Well,
actually, it is a separate issue.
As I indicated in my paper, ask any Beijing taxi driver
what the number one problem is in China today, and he will tell
you it is corruption. I asked that question 10 years ago, and
they told me it was too many people. I asked it 5 years ago,
and they said the environment is too polluted.
I think that is probably true in almost any urban area in
China. People are sick and tired of corrupt public officials.
And they want a change.
Now, this gives me encouragement, because if the average
person on the street believes that they can speak out and say,
``I am tired of corruption, and I want change,'' I think that
is the first step for China moving in the area of effective
change.
First, because the way these people find out about
corruption is because of public notoriety about bases of
corruption. The Chinese Government is permitting the population
to become aware of corruption, because, at least at the
national level, there is an attitude toward correcting this
problem.
Second, I think that American policies that have permitted
China, and Chinese policies that have permitted the people of
China, to develop personal wealth and hope of improving their
personal situation. They accepted the conclusion that if a
person is getting a benefit because of a corrupt action, that
is a benefit that I might have, or that my children might have.
And it makes me mad.
Whereas, 20 years ago, someone would say, ``Well more power
to you. I could not have that anyway.'' So, I think that the
upward mobility of the average Chinese leads to a far lesser
tolerance of corrupt bureaucracy. I am not saying the problem
is going to change overnight. It is very difficult to correct
corruption and at the same time allow public access to
information. I think the two issues are closely correlated. But
I think there is a will in China to address the problem of
corruption.
Mr. Foarde. We will go way down to the other end of the
table and recognize Selene Ko, our colleague who is senior
counsel for commercial rule of law on the Commission staff.
Ms. Ko. I have a quick question for Mark, about your
comments that the beneficiaries of strong intellectual property
protection go to, for the most part, foreign investors and
foreign interests. You mentioned that there is at least growing
awareness by the Chinese Government that there is a benefit to
stronger intellectual property protection within China to
Chinese citizens.
I was wondering if you would comment on the awareness among
the Chinese public at large about the importance of
intellectual property protection and whether there are domestic
groups putting any sort of pressure on Chinese authorities to
improve intellectual property protection?
Mr. Cohen. That is a very good question. There certainly
are
domestic Chinese constituencies or intellectual property
protection organizations. The preeminent group consists mostly
of foreign-
invested companies. There is also a Chinese software group,
Chinese musicians, and Chinese consumer groups, which are
certainly advocates that the government listens to.
I think it is sometimes too much to expect of the average
citizen in any country to know a great deal about intellectual
property rights. They do know when they are being ripped off.
They know when they are buying a shoddy product or a
counterfeit product. I would like to see police in China
knowing more about protection of property rights. Most
policemen are, however, preoccupied with other types of crimes.
There is so much of it in China, they should have more of a
leading role. There is also Consumers' Day, which is coming up,
I believe, March 14, or 15. There are activities involving
counterfeit and shoddy goods. And we would like to see more
advance notice of Chinese rules, with an opportunity to
comment. I found that in telling Chinese about transparency,
they recognize that it is very important in order to
disseminate rules and inform the public. It is not the fact
that they would be soliciting comments, but by publishing rules
in advance, the public would be more aware of the rules and
regulations. I think most of the local and national IP
authorities are very much aware of their responsibility to
disseminate their rules, so that certainly lower-level
officials know, but also that the population knows that they
should be concerned with those rules. It is a very important
part of their
responsibility.
You can frequently see this in training sessions. When we
are conducting programs in the provinces, we find someone who
is, obviously, quite skilled in talking about the law, because
it is more or less his job to train and inform the public.
Ms. Ko. Thank you.
Mr. Foarde. Let me continue with a question to Jim Dorn.
You said a moment ago that among the positive factors that
you were talking about are the changes that have gone on in
China recently, where the entrepreneurs have been admitted to
the Chinese Communist Party for the first time, and that you
thought their entry and activity in the Party would change the
status quo.
May I ask you to speculate a little bit about how that will
happen? What is the dynamic of that?
Mr. Dorn. Well, again, officially, capitalists were just
admitted to the Party, but, unofficially, capitalists have been
members of the Party for quite some time.
It is another good example of how things are changing in
China spontaneously and, only later, are officially sanctioned.
I think it is an admission by the leadership that the private
sector is so important that they cannot afford to leave
entrepreneurs out of the Party.
So, this is a victory for capitalism, or what I prefer to
call market liberalism, because capitalism seems to be a
politically loaded term in various countries these days. Of
course, without a transparent legal system in China,
individuals cannot make a lot of money in the private sector
unless they ``buy influence'' along the way. Still, markets are
opening and, in the next five years, the financial markets are
going to open substantially. Moreover, with China's accession
to the WTO, foreign firms are going to have direct distribution
rights for the first time, which will be a tremendous advantage
for those firms.
And this is going to force the state-owned enterprises in
China to become efficient or possibly face bankruptcy. There is
really no bankruptcy law in China at this point, but experts
are working on it now. And when they start allowing a few of
the large SOEs to actually fail, that will be another step
toward a real market economy.
So, I think more and more private entrepreneurs will become
members of the National People's Congress in the next decade.
And the market-oriented coastal areas are going to have more
and more influence in Beijing. As this happens, it is going to
drive an increasing wedge in the Party between the old
conservatives and the more reform-minded politicians.
So, I think this is a good thing.
Mr. Foarde. Thank you, Jim. Let us go on to Andrea Worden,
who has not yet spoken.
Ms. Worden. Thank you, John. I also have a question for Mr.
Dorn. You mentioned that China is currently considering a new
draft civil code. I am wondering if you have any specifics
about the provisions that will enhance protection for private
property rights, and also if you know what the time line is for
the NPC's consideration of this new draft?
Mr. Dorn. Right. That is a very good question.
I think the draft civil code is extremely important. It is
the first new civil code since 1986. The 1986 general
principles of civil law provide no effective protection to
private property.
The new draft civil code has 9 sections, is about 216
pages, and has 1,200 clauses. It has an entire section on
private property rights. The fact that, in the world's largest
Communist country, there is a new draft civil code on private
property rights is extremely important. Of course, we do not
know whether the code will be enacted as drafted; most likely
it will not. But, as entrepreneurs become Party members, they
are going to push for better protection, so there is a good
chance that in the next several years private property rights
will become more secure, as will other civil rights. The 1999
amendment to article 11 in the PRC Constitution states that the
private sector is important in the socialist market economy but
does not give it equal protection.
The fact that the draft civil code would give private firms
equal protection and redress in the courts is revolutionary.
Moreover, there would be a property rights registration system.
Once people have clear title to their property, they can get
mortgages. A capital market will develop, and new wealth
created. And people will be empowered.
The case for protecting private property rights is even
found in the Chinese press. Recently, there was a very good
article in the China Daily on the civil code, and it talked
about establishing basic rules of a market economy. That is
what needs to be done. The
Chinese recognize this.
Better protection of private property rights will increase
human rights. The draft civil code, if enacted, would afford
greater security for personal privacy--protecting one's
reputation and credit information, for example. And victims of
rights violations would be
compensated.
There is also a section on child labor. The draft code does
not try to outlaw child labor, but abuses will be punished.
Children under 16, for example, will not be able to work in
certain jobs, but they will still be able to help support their
families by working part-time.
A new civil code that affords equal protection and due
process for private owners will clarify the ``rules of the
game'' for the judiciary. There will be published laws that
people can actually point to, which will make it easier to
defend one's rights.
The first section of the draft civil code that is likely to
come before the National People's Congress, perhaps as early as
March, is the section on property rights. So, we should pay
close attention to this.
Mr. Randolph. I was attending a conference in Qinghua
University in June on the law of property that is to be part of
this code, and I provided you my translation of that. I did not
translate those portions dealing with the household
responsibility system, because, frankly, I do not understand
that system. Perhaps a colleague could translate that system.
But, I have to warn you that this is a scholar's draft. And
the politicians have not yet gotten a hold of it. And I cannot
guarantee that what you see is what you will get. I may have
much of what is likely to go into the civil code. Much of what
is in the property section of civil code is already part of
Chinese law. A good portion of the property code is extracted,
almost verbatim, from what is called the Security Law.
And in addition, I believe that it is anticipated that the
base contract law, almost verbatim, will go into the civil
code. So, it is just kind of an elevation of maybe lower-level
legislation into a more permanent and perhaps a more
significant legislation. But, it is not as if a lot of this is
new.
Mr. Cohen. If I could add one thing to that. Past
experience suggests that sometimes when these civil codes are
drafted there is a sacrifice of interest in IPR to general
principles. So, it may not all be to the good.
Mr. Schwarzwalder. Just to also add one thing with respect
to the rural issue. We also commented within the property law
that there is a specific section on rural land rights. And,
again, there is very little in that section that will differ
from what is incorporated into the Rural Land Contracting Law.
The property laws are the next level up, representing
broader principles, and then filled in with subsidiary
legislation, such as the Rural Land Contracting Law.
Mr. Foarde. To have the last word, because our time is
running out very quickly, let me recognize Keith Hand.
Mr. Hand. Jim, you mentioned during your presentation that
property rights are not viewed as a natural right in China, but
instead as a concession of the state. Obviously, this makes
them subject to state interest and third-party interests on an
ongoing basis. This will be a question to all of you on the
panel.
I am wondering if you have seen any evidence that the
Chinese Government, the academy, or even the public at large,
are beginning to talk about property rights as a natural right?
Or is that subject not even within the realm of discussion?
Mr. Dorn. Well, that is a good question.
Actually, I had cited Liu Junning, an independent scholar
in Beijing, who talks about the ``constitutional order of
freedom.'' He actually has a Web site that discusses the ideas
of John Locke and James Madison, who argued that the power of
government stems from the consent of the people, and the duty
of government is to protect life, liberty, and property. These
ideas are being discussed in China, but not without personal
risk.
There is a journal, ``Res Publica,'' published in China
that has numerous articles on political philosophy from a
classical-liberal perspective. So, market-liberal ideas are
being discussed and, actually, one scholar who received his
Ph.D. at Peking University--I won't mention his name--wrote his
thesis on the idea of spontaneous order and F.A. Hayek, a
recipient of the Medal of Freedom and author of ``The
Constitution of Liberty,'' which has been translated into
Chinese. The Unirule Institute in Beijing, one of the first
private think tanks in China, actually held a seminar to
discuss Hayek's work, which was written about in the Wall
Street Journal. So, Chinese scholars are being allowed to work
in these areas, but there are risks.
Recently, I wrote an article about privatization for
Caijing, a leading business magazine in China. I was pleased to
learn that the editor had already published several other
articles on privatization by leading Chinese scholars. So, she
has the support of certain people within the government who are
allowing her to do this. Other people would like to see her go
out of business, but there is this split. We should not think
the Communist Party is homogeneous; there are those who favor
reform and those who oppose it.
Mr. Foarde. Well, with that, my friends, I think we have
far from exhausted the topic, but exhausted everyone here. And
so I would thank our panelists, Jim Dorn, Mark Cohen, Pat
Randolph, who has already gone off to catch his airplane, and
Brian Schwarzwalder for joining us and sharing these insights
into these very important issues with us.
This concludes our issues roundtable for today. We hope to
have another at the end of the month. So, please watch our Web
site and sign up for our distribution list, if you want to get
information about it. We should have more information available
in a couple of days. Thank you all for coming. Good afternoon.
(Whereupon, at 4:33 p.m., the roundtable was concluded.)
A P P E N D I X
=======================================================================
Prepared Statements
----------
Prepared Statement of Patrick A. Randolph, Jr.
february 3, 2002
I am an American academic and lawyer specializing in real estate
law, including leasing, finance, development and title issues. I have
served in the leadership of the American Bar Association Section on
Real Property, Probate and Trust Law for many years and have published
eight books and scores of articles on American real estate issues.
Ten years ago I was invited to teach Real Estate Law at Peking
University, and thus began an interest in the development of Chinese
real estate law that I observed in its beginning stage at that time.
Since then, I have traveled to China frequently and have invited
Chinese scholars to collaborate with me in America. I have co-authored
a book and a number of articles on Chinese Real Estate Law and have
lectured on real estate topics at most of the major Chinese law
schools. I have established academic programs for Chinese students in
America and for American students in China. Recently, I have
participated in the Center on Chinese Land Law and Policy at Peking
University, which will develop a central source of information in
English and Chinese, regarding developments in Chinese Real Estate Law,
and to provide a resource of American expertise on real estate matters
for Chinese practitioners and policymakers. I will serve as co-Director
of the Center.
My book, Chinese Real Estate Law, published by Kluwer International
Law Publishers, is the only book length treatment of this topic in
English written by someone with background in real estate law practice.
I attempt to synthesize the various sources of Chinese law to suggest
the way Chinese law would address problems of concern to persons
involved in market real estate transactions.
I do not speak or read Chinese, and my expertise is based upon
collaboration with Chinese lawyers and academics who speak English.
Although this necessarily is a limitation on my development of any true
expertise, I can say that at the elite Chinese law schools I have been
able to interact with students and academics from every part of China,
have obtained insights that one might not obtain from government or
business organs.
1. Overview of Chinese Real Estate System
1.1. introduction
Until 1988, there was one simple law of real estate in China--the
government owns everything. Although the government divided its control
of the land resources in China into different compartments and vested
various governmental elements with responsibility and control, there
were no individual rights in land and any
arrangements that had been made could be unmade by government fiat.
In 1988, China amended its Constitution to provide for the
recognition of privately owned transferable rights in land. Although
the Chinese Constitution does not have the same force of law that the
American Constitution does, this change was an important symbolic step,
and presaged an array of changes in governmental statutes and
regulations that implemented a system of private ownership and exchange
of real estate. The developmental process was slowed by political
unrest in China occurring also in 1988, and when I arrived in 1992,
China was just beginning to act on the development opportunities
offered by the legal changes.
Since 1992, there has been real estate activity in China's cities
on a scale perhaps unequaled in human history. Certainly the legal
system that has been developed since 1988 has been a critical element
in accomplishing this real estate activity, but the physical
development has surged far beyond the legal development.
China has some law in place, and there certainly is recognition and
protection of ownership. Private bargains can be struck with some
degree of assurance that the law will enforce them. Lenders have some
clarity of right to reach security given for loans. But there is little
certainty, on a nationwide basis, that the rights technically
recognized in the Chinese laws will be fully recognized by those who
administer the Chinese legal system, although there is steady
improvement in this area.
Perhaps more important is the fact that the Chinese real estate
system has yet to undergo the test that will come when the ``first
bubble bursts''--when China's real estate market experiences the
inevitable economic correction that must come as part of the cycle of
economic activity. It is only then that we will know how well the
rights and expectations created by the system will stand up to the
pressures of political expediency. We have had the same ``test of
fire'' of the legal system in this country a number of times during our
history, and each time we have identified weakness that needed
correction.
In short, the existence of a ``rule of law'' cannot be proclaimed.
It must be experienced. It must be measured again and again as new
pressures arise to test its stability. No social system is immune from
such tests, and no legal system responds to these tests perfectly.
Since the system of private rights was first established, China has yet
to experience its first real test.
1.2. basic characteristics of the system
The basic building block of the U.S. real estate economy is
perpetual and relatively comprehensive ownership. The ``fee simple
absolute'' is an ownership interest in land that can be transferred and
inherited indefinitely into the future. It cannot be said to be
``absolute ownership'' because land rights in America are subject to
rather extensive government regulation. But that which is not regulated
or limited by the rights of other landowners is owned outright. This
basic concept permits enormous flexibility in the American economic
system. Those who hold such rights can divide and redivide these
interests in thousands of ways, and our complex private economy attests
to the inventiveness of American property owners to find the highest
and best use of various aspects of land ownership.
By contrast, the basic element of ownership of Chinese land is far
more limited. The ``granted land use right'' is given for an identified
period--40 to 70 years depending upon the purpose for the grant.
Although, theoretically, there are some renewal rights, the time for
renewal of any such rights is still well in the future, and the terms
of renewal remain uncertain. The right is given by government only for
purposes of implementing a particular use, and permission must be
obtained to change the use. It should be noted, however, that in most
cases these use restrictions are no different than use restrictions
typically imposed in America through zoning and land use laws. A more
important limitation is that speculation in raw land is restricted
through the requirement that the user commence the required use within
2 years. If the property is not developed, it cannot be transferred and
in fact it may be forfeited back to the government.
In addition, it should be noted that the land use right in China
does not carry with it the extended package of rights to subsurface and
above surface activities that American ownership typically has
included. The Chinese government continues to control all mineral
resources and air rights. Over time, the U.S. has moved to a
significant restriction of these rights in American property as well,
however.
The granted land use right is similar in some ways to the long-term
ground lease that is commonly used in America to develop commercial
sites. The difference is that the Chinese right is obtained from, and
reverts to, the government, rather than a private owner, and the
consideration for the right is paid ``up front,'' and is forfeitable if
the property is not developed.
Chinese granted land use rights are protected from expropriation
without
compensation.
China has a reasonably reliable system of registration of land use
rights that permits identification of the owners. In an important
recent development, China has established that there shall be
unrestricted public access to these land records nationwide--an
important development that western investors have been seeking for some
time.
Since the land use right can be transferred, China has developed a
system of rules governing the leasing, mortgaging and sale of these
rights. The rights can also be inherited and there are rules concerning
division of the rights upon divorce. Generally speaking, the various
legal rules that have been developed reflect the Chinese predilection
to favor control and guidance from government over individual freedom
of choice. Leases cannot be for more than 20 years. Lenders are
strictly controlled as to how much they can lend against the value of
the land.
Although the relatively new Basic Law of Contract proclaims that
the parties are free to contract as they please and that their bargains
will be upheld, it remains to be seen whether bargains will be upheld
that create interests that are inconsistent with the many regulations
of the Bureau of Land Administration or the Ministry of Construction.
For instance, one Chinese mortgage rule requires that all leases
continue to exist following a foreclosure of the landlord's interest.
In America, by contrast, there is extensive bargaining among lender,
landlord and tenant with respect to the possible impact of foreclosure
on the tenant's rights, and a wide variety of outcomes are possible.
Another rule gives lessees a ``right of first refusal'' to renew at the
end of the lease term or to buy if the landlord should sell the
underlying ownership of the land. It is unclear whether this right can
be ``bought out'' in advance, although clearly many Chinese
transactions attempt to do this.
The Chinese legal system still does not recognize formally many
concepts that apparently are being developed within the transaction
system. There is no clear
``easement in gross,'' for instance, so it is unclear under what rights
parties can
extend pipelines or power lines. Although hundreds of millions of
Chinese have moved into condominium residences in the last 5 years,
there is no clearly developed condominium law spelling out their rights
and responsibilities toward one another.
There is a proposal to include a section on property rights
(``rights in rem'') in the new Chinese Civil Code that is expected to
be considered for adoption this year. There have also been proposals
made by high Chinese leaders to amend the Constitution to provide
better protection for property interests, but the nature of these new
changes remains uncertain.
1.3. other property rights and expectations
1.3.1. Homestead rights
There are some rights to ``homestead properties'' that have been
recognized as traditional interests virtually since the establishment
of the People's Republic. These properties exist both in urban and
rural areas. The nature and basis of the rights has always been
somewhat uncertain, as has been their number. Homestead rights,
however, have never been viewed as granted land use rights, and it is
unlikely that they have much protection against appropriation by
government. Some people with homestead rights have been able to convert
them to granted land use rights and now have a protectable interest.
Others lack the sophistication or resources to carry out such
conversions, and their interests remain vulnerable.
1.3.2. Occupancy expectations
After the Cultural Revolution, many people found themselves
residing in or using properties as to which there were no clear rights
of occupancy. Records had either been destroyed or never produced. As
development has progressed, many of these occupants have been forced to
relocate. The granting of land use rights on property that has been
occupied in this way usually has required that the grantee pay for the
relocation of those on the land, whether or not they had any formal
right to be there. Twenty years ago, these persons were given quite a
lot of informal protection through the negotiation of the granted land
use rights.
In recent years, the sale of granted land use rights has become an
important source of revenue for local and provincial governments, and
there appears to be less solicitude for ``undocumented'' occupants of
property that is part of a granted land use right. Although in theory
the government can require the grantee to pay the cost of relocation, I
have heard that the bargains over such relocation have led to less
generous settlements.
1.3.3. Household Responsibility System--Agricultural Land
The system of granted land use rights has been used primarily in
urban areas and for industrial and commercial development in the
countryside. Agricultural property in the countryside has been under
the control of agricultural collectives who have reallocated the
property under their control to individual peasants under a system
known as the ``household responsibility system.'' Peasants live and
work on their allocated farm plots and have some autonomy in the
management of their agricultural enterprises. We have heard stories
recently of the wholesale breakdown of this system in the countryside
as opportunities have arisen to consolidate land for purposes of
corporate farming or industrial or commercial development. It appears
that the individual peasants may in many cases be relinquishing their
household responsibility ownership voluntarily for these purposes, but
we have heard many reports that they do thereafter receive benefit from
the reapplication of the property to other purposes that one would have
expected them to enjoy as members of the Collective.
This problem may be a problem of failure to enforce legal rights
and it may be a problem of simple fraud and sharp dealing by leaders in
these countryside Collectives. Reports are, however, that the
phenomenon is widespread in rural China.
A very recent new statute addressing some of these issues has been
passed, and is discussed by another panelist. It remains to be seen
whether the statute will be effective to slow down what appears to be a
widespread movement.
2.0. Problems with enforcement of legal rights
2.1. the problem of diffusion of legal power
It is important to recognize that legal power in China is widely
distributed. The popular U.S. image of the all-powerful monolithic
central government is not an accurate picture of China in the area of
economic rights. It is true that there is a tradition of overbearing
government control in China, and consequently when central government
and local government interests coincide, or at least do not conflict,
it would appear that the Central Government has the power to effect
strong controls over the population.
But in the area of division and management of economic resources
such as land, there often are conflicts between the Central Government
and provincial and local authorities. The Central Government lacks the
political and social strength to prevail in many of these conflicts.
Thus, even when the Central Government proposes a system of legal
rights and expectations that may be sufficient to form a basis for a
successful market system, it is up to the Provincial and local
governments to provide effective enforcement mechanisms to insure that
the system really works. In Guangzhou, Shanghai, Beijing, and other
important commercial centers, there is recognition that a transparent
legal system is vital to attracting investment capital and encouraging
economic risk taking. Consequently, the legal system tends to follow
the dictates of the Central Government rules, although extensive
additional local control over real estate practices is commonplace.
Often the local regulation in these areas, in fact, is benevolent, and
assists in promoting effective market transactions by ``filling in the
gaps'' of national rules.
This happy story of cooperation, however, is not repeated in many
other areas. Local, County and Provincial governments control large
sections of the taxing
system and control the payrolls and other benefits that support courts
and other agencies that are nominally organs of the Central Government.
Consequently, when conflicts arise between local government interests
and the interest of stability and predictability in the legal system,
judges and administrators find themselves often under intolerable
pressure. We have heard many tales of foreclosure proceedings delayed
into exhaustion, of transfers of land use rights without regard to
government-required plans and pursuant to special negotiations that
might be viewed as inconsistent with concepts of fair opportunity.
If anything, the current frenzy of land development in China has
increased the motive and opportunity for local leaders to ignore the
rules in the name of expediency. Often this situation provides a
breeding ground for corruption, and even more often individual property
rights are frustrated by such activities. We saw similar abuses
occurring during ``boom time'' periods in the development of our own
country, and I suggest we should be neither surprised nor too dismayed
that such things are now happening in China. Ultimately, as we have
seen in the larger cities, a recognition is likely to develop that
orderly process and clear rules will lead to greater economic
prosperity. Egregious examples of corruption are periodically
identified and dealt with, although cynics might argue that such
activities are really ways of disposing of the most difficult political
enemies rather than the most troublesome thieves.
2.2. addressing the problems
As I have suggested, to a certain extent, the problems observed in
China are ``boom time'' problems that will disappear over time. But
certainly an important factor in these problems is the lack of
adequately trained lawyers and judges. Often departures from the
national system of property management and destruction of property
rights occur because no one in the local area really understands what
the legal rules are.
Although there are a large number of Chinese judges, many of them
lack formal law training and, unlike in America, even those with formal
law training lack much experience in law practice. Further, there are
few lawyers in many areas capable of insuring that their clients'
interests are protected by law. The concept of the rule of law has only
lately arrived in many Chinese provinces, and established lawyers have
been successful by paying more attention to cultivating friends rather
than
advocating legal principles.
There is a need to educate lawyers in many areas of China as to the
nationally mandated rules and procedures involved in the creation,
transfer and protection of property rights. There is a similar need to
provide such education for judges. Further, there is a need to
encourage capable graduates of China's law schools (which have grown
exponentially in recent years) to move into the outlying areas of China
and to avoid the existing concentration in the major financial centers.
2.3. special needs in the housing market
In a recent meeting with leaders in China's housing industry, there
was general agreement on the need for several social or legal
developments to occur to facilitate the continued growth and prosperity
of private property exchange in China:
A national system of reliable credit analysis and
review.
Development of autonomous and responsible owners
associations in Chinese housing complexes.
Development of an industry for the resale of
residential property (now most Chinese housing is still
occupied by the original owner.)
Development of real estate specialization among
lawyers, who now are poorly prepared to address real estate
problems in the residential marketplace.
Resolution of the many conflicting provisions of
Chinese real estate law and greater contractual autonomy in the
commercial marketplace.
Meaningful consumer protection in the housing
development, finance, and resale markets.
Clear rules regarding bankruptcy.
As discussed above--adherence to national laws and
enforcement of those laws by courts and administrators.
2.4. the special problem of corruption
China needs to continue to be vigilant in the suppression of
corruption. In my years in China, public concern about corruption has
become the single greatest complaint from the Chinese citizens I meet.
Ask any Beijing taxi driver!!
Land use rights are sold and regulated by local officials. As
public land now passes into private hands, there are enormous
opportunities for profiteering on two fronts. First, Chinese officials
who generate revenues from the sale of the land have power to allocate
those revenues. In many cases, these revenues may be used to finance
joint venture investments by which individuals make great profits
through the exploitation of these government funds. Although a 1998 law
requires that proceeds from the sale of arable land be reinvested in
the development of more arable land, there is widespread belief that
this law is being ignored in favor of diversion of monies into other
enterprises of more direct interest to the specific public officials
who control the sale of land use rights.
A second means of corrupt practice in the creation of land use
rights, of course, is in the identification and regulation of those who
receive land use rights. In some areas, concerns about corrupt
practices in the awarding of land use rights to favored persons at low
prices reached such a pitch that sale by auction was required. But
almost as soon as the auction requirement was enacted, exceptions to
the rules crept in that preserved the options of local officials in
``special cases.''
In some cases, the creation of a ``political machine'' may have the
short run benefit of insuring stability where law may not accomplish
that result. For instance, there is little question that most housing
development is being carried out by favored developers who have the
inside track on obtaining land use rights for these purposes. But the
fact that they are on the ``A list'' may lead these developers to be
extra cautious to insure that they actual produce the housing that is
called for and that no scandals result in terms of shoddy housing or
sharp practices that may jeopardize their ability to continue in their
favored position. Indeed, we hear
remarkably few complaints about consumer housing considering the size
of the
market.
Inconsistent regulation of land use development also can be a
problem. Since the power of forfeiture for failure to develop is so
draconian, it is likely that there is some extortion going on where the
possibility of forfeiture exists. The Chinese likely would be wise to
consider less drastic interim measures to cope with problems of slow
development in order to ease the friction at this point in the system.
A country that lacks a free press is particularly vulnerable to
corruption. Perhaps China's greatest challenge in the economic arena is
to secure the confidence of its population in the fairness and openness
of its system of economic regulation, and China's concern that
unrestricted freedom of the press endangers stability in other areas
makes the achievement of such confidence far more difficult.
3.0. The significance of property rights and human rights
It should be noted at the outset that the recognition of property
rights in China has occurred for economic reasons--to encourage
individual responsibility for economic decisions that will fuel an
effective marketplace and an adequate distribution of resources. China
wants its population to have a better physical standard of living, and
believes that market principles may achieve that result. In short, it
can be said that the Chinese value individual property because this is
in the best interests of the collective.
Although these considerations also are present in our political
system, the recognition of property rights in America is more
fundamental, and reflects a social and philosophical balance that is
not necessarily a part of Chinese political philosophy. We tend to view
our citizens as deserving of individual liberty and autonomy, and the
recognition of private property is an important part of that personal
autonomy. Consequently we view individual property rights as a distinct
objective, and may sacrifice the interests of the collective in some
circumstances in order to protect such rights.
In evaluating the progress of individual property rights in China,
we should maintain our focus on why China is promoting these rights,
and not expect more from China than it is reasonable to expect.
On the other hand, I believe that the development a greater degree
of individual autonomy that inevitably results from the protection of
property rights will lead, ultimately, to stronger individual rights in
other areas of Chinese life as well. Those who have something to
protect and preserve often seek a greater voice in government. Chinese
government is not closed to the voices of the people. It is not as
responsive to those voices as might be the case in a democracy, but
neither is the Chinese government a despotic and uncaring parasite. But
at present many Chinese citizens are ``apolitical.'' As citizens in
China increasingly become aware that governmental policies will have a
direct result on their opportunity to keep what they have and obtain
what they want, they will demand a greater voice in government, and
will demand that government respect their autonomy.
A significant problem in this development, of course, is the fact
that the Chinese government's second great goal, concurrent with
economic development, is political stability. The development of
greater citizen participation in government threatens those with
entrenched power, and it is only a short step from perception of a
challenge to ones power to the conclusion that government stability is
in danger. But the development of individual property interests is so
much a part of the economic system at present that it does seem
unlikely that Chinese officials will take significant steps to
frustrate such expectations. Accommodation of political change,
therefore, is possible and it is likely that the change will be in
favor of greater levels of individual autonomy.
Other institutions in the society that serve to promote the market
economy--such as the development of trained lawyers and other social
advocates, private trade
associations such as brokers groups and owners groups, and the free
exchange of information that necessarily flows through a market
economy, will lead to social
expectation of greater power and gradual reform.
Consequently, U.S. policy in the area of Chinese real estate ought
to be to recognize that a healthy system of exchange of private real
estate interests is likely to lead ultimately to demand for and
realization of a greater individual autonomy and citizen voice in
government in China, both goals that are critical to the greater
development of human rights.
______
Prepared Statement of Brian Schwarzwalder
february 3, 2003
Although it has attracted scarce attention from American media,
policymakers, and academics, in recent years China has undertaken a
series of policy and legal reforms designed to fundamentally transform
the nature of the agricultural land rights held by rural households.
Because agriculture remains a primary source of income for most rural
households, and land represents their most important asset, the success
or failure of these reforms will have dramatic implications for the
economic, social and political future of the more than 800 million
people that reside in rural China.
a brief overview of rural land rights in modern china
The question of who possesses which rights to rural land has been a
central issue in China's development over the past 50 plus years.
Peasant support for the Communists and against wealthy landlords was an
important factor in Mao's victory over the Nationalists in 1949. An
early attempt at land reform, in which previous tenant farmers were
given full private ownership, was swept aside by large-scale
collectivization beginning in the early 1950s. The 30 million deaths
resulting from the Great Leap Forward famines of the late 1950s proved
that, without access to their own plot of land and the right to reap
the profits from its cultivation, Chinese farmers lacked the incentives
necessary to produce enough to feed the country's vast population on
its modest arable land base--China has over 20 percent of the world's
population but less than 9 percent of the world's arable land.
Perhaps because of these challenges, China was the first Communist
State to break up its collective farms. A decollectivization program
known as the Household Responsibility System [HRS], which was
implemented throughout China in the late 1970s and early 1980s, clearly
demonstrated that giving farmers individualized family holdings
resulted in increased productivity, higher incomes, better diets, and a
narrowing of the gap between urban and rural incomes. Under the HRS,
ownership of the land remained with the village or township, while farm
households were granted rights to cultivate the land and retain any
production above and beyond a contracted quota. Such ``collective
ownership,'' with use rights allocated to households, remains the
dominant form of land tenure throughout rural China.
My organization, the Rural Development Institute of Seattle,
Washington [RDI], has conducted detailed field research on rural land
tenure issues in China since 1987. In the past 15 years, RDI
researchers, all of whom are attorneys, have directly interviewed over
800 farmers in more than 20 Chinese provinces. RDI has also cooperated
with Chinese researchers in the design and analysis of two large-scale,
random-sample surveys of farm households concerning their land rights.
The goal of RDI's research has been to provide the Chinese leadership
with detailed, accurate information and recommendations for legal and
policy reforms in the system of agricultural land rights.
RDI's initial research in China confirmed that the HRS reforms, by
giving farmers individualized parcels from which they would reap the
benefits, allowed them to undertake a series of short-term farming
improvements--things like more effective weeding than had occurred on
the collectives, more attentive application of fertilizer, and more
concerted planning with respect to the timing of planting and
harvesting. But farmers' use rights, while individual, suffered greatly
from the fact that village officials could frequently and unpredictably
``readjust'' those rights into entirely new patterns, taking away and
granting land parcels on the basis of changes in household size.
Because of these readjustments, farmers could never be certain of their
tenure on any individual piece of land. They were therefore unwilling
to make
productivity-enhancing investments that required several years to
recover, such as irrigation, drainage, or land terracing.
the new rural land contracting law: strengthening farmers' rights to
land
A series of recent legal and policy reforms has taken positive
steps toward providing farmers with the long-term land tenure security
they have previously lacked. The most significant of these reforms is
the adoption of the Rural Land Contracting Law [RLCL] on August 29,
2002. This new law represents a breakthrough in three major areas:
Basic land tenure security
Although the RLCL stops short of providing rural households with
full private ownership of their land, the rights it creates embody many
of the characteristics of private property rights. The new law
reaffirms in a very detailed way and in formal law what began as a
broad policy pronouncement in 1993, that farmers are entitled to 30-
year (one generation) land rights. Thirty-year rights are long enough
to recover the value of nearly every kind of agricultural investment,
and, depending on the discount factor employed, such 30-year rights
represent somewhere between 75 percent-95 percent of the economic value
of full private ownership. The law further requires that rights to
rural land must be backed by written contracts and use right
certificates that contain certain core provisions reflecting national
laws and policies.
Most importantly, under RLCL Article 27, land readjustments are
permitted only in extreme cases, such as when contracted land has been
seriously damaged as the result of a natural disaster. Moreover, before
a land readjustment can be conducted under Article 27, a series of
procedural requirements designed to further limit the impact of
readjustments rights must be satisfied. Research conducted by RDI and
others, including the World Bank, has shown that the majority of
farmers would welcome an end to land readjustments, and that farmers in
the small minority of Chinese villages that have never employed land
readjustments are strongly in favor of a no-readjustment rule.
For the first time in any law or policy related to rural land
rights, the RLCL specifically addresses the issue of women's rights to
land. Because rural Chinese women typically leave their parents'
village upon marriage to establish residence in their husband's
village, they will be particularly vulnerable to losing land under a
no-readjustment rule. Previously, women could expect to receive an
allocation of land in their husband's village in the first readjustment
following their arrival. By contrast, under the new rule, women will
not be entitled to receive land in their husband's village through the
process of land readjustment. They may, however, be able to obtain land
in their husband's village in the form of wasteland (uncultivated land)
or flexible land (a small proportion of land reserved by the village to
compensate for additional population), if such land resources are
available. The RLCL's solution to this problem is to provide, in
Article 30, that a woman receives a share of land in her husband's
village, she retains the right to a proportionate share of her parents'
land under the concept of joint share property.
The legal framework for transactions involving rural land use rights
In many of China's cities, burgeoning markets for 50 and 70-year
use rights to commercial and residential land have already developed.
In places like Beijing, Shanghai, Shenzhen, and Guangdong, these rights
are also highly valuable. However, the same cannot be true for use
rights to rural land.
RLCL Articles 32-43 provide the most comprehensive set of rules to
date
governing transactions in rural land use rights, creating a legal
framework for the development of markets for such rights. Transfers of
rural land use rights were theoretically permitted under prior law, but
the insecure nature of the rights meant that few farmers were willing
to pay to acquire them for more than one season or 1 year at a time.
The RLCL explicitly authorizes ``transfer, lease, exchange, and
assignment'' of rural land use rights (Article 32). Right holders
transferring less than the full remaining use term are not required to
obtain the approval of the collective landowner; however, such approval
is required for assignments of the full remaining term. A written
contract must be entered into for any transaction of longer than 1
year, and basic requirements for the content of such transaction
contracts is set forth by the law. In all transactions, members of the
collective economic entity in which the land is located possess a
priority right, though the law is unclear as to how this right will be
exercised.
Functioning markets for long-term rural land use rights will
accomplish two important goals. They will allow voluntary, gradual re-
allocation of land rights to the most efficient farm households. They
will further allow farmers to realize the value of ``dead capital'' (to
use Hernando de Soto's phrase) currently tied up in the land. Markets
for agricultural land in comparable Asian settings suggest that the 135
million hectares of rural land in China should eventually attain a
total value of $500 to $600 billion US dollars--an average of between
$3,500-4,500 per hectare. The combination of higher productivity and
new wealth in the hands of farmers holds the potential to significantly
accelerate rural economic development, which has lagged in recent
years.
Strengthening the rule of law in China's countryside
The RLCL holds the potential to accomplish this through a series of
very clear and strong rules prohibiting violations of farmers' land use
rights by local officials. It also imposes strict civil penalties on
any such violations, including monetary damages and restitution, and
equitable remedies to forestall or reverse the illegal action. In the
past, farmers had no legal recourse when such violations occurred. It
is also important that the new law allows farmers to choose between a
variety of dispute resolution options, including consultation,
mediation, arbitration by a specialized land contract arbitration body,
or directly filing suit in the People's Court.
implementing the new law: challenges and prospects
As with any major legislative reform in China, adoption of a new
law is merely the first step in the process. Implementation of the
Rural Land Contracting Law in hundreds of thousands of rural villages
represents a formidable challenge. However, very recent statements by
new President Hu Jintao, Premier-to-be Wen Jiabao, and NPC Chairman Li
Peng appear to indicate an increased emphasis on rural and agricultural
issues generally, and a commitment to effective implementation of the
Rural Land Contracting Law in particular.\1\ These strong expressions
of support by the central government will be an important factor in
achieving implementation of the RLCL, but significant obstacles to
implementation persist at local levels. Many township and village
cadres will be reluctant to loosen their grip on land by providing
farmers the new rights created by the law. In some areas, farmers will
be reluctant to embrace changes to the rural land system. The
experience with implementation of previous rural land policies and
laws, both successful and unsuccessful, indicates that the following
eight steps can and should be taken in order to increase the prospects
of timely and effective implementation of the Rural Land Contracting
Law:
---------------------------------------------------------------------------
\1\ Both Hu Jintao and Wen Jiabao delivered speeches at the Central
Rural Work Conference, held in Beijing on January 7-8, 2003, in which
they emphasized the importance of increasing farmer incomes, expanding
demand and consumption by farmers, and coordinating urban and rural
development. Four priority areas for rural work were identified at the
conference, the first of which was the need to ``respect the status of
farmer households as the main players on the market; implement the land
policy and the Rural Land Contracting Law; and give farmers long-term
and guaranteed rights to use land.'' See ``Chinese Leaders Address
Central Rural Work Conference,'' (Jan. 9, 2003), Xinhua News Agency,
available in LEXIS-NEXIS online data base, BBC Worldwide Monitoring
Library.
---------------------------------------------------------------------------
1. Formulate and issue implementing regulations
Implementing regulations will be necessary to further interpret
several provisions of the RLCL. The most important step will be to
unambiguously and narrowly define the ``other special circumstances''
under which land readjustments can be conducted (Article 27).
Clarification of provisions governing inheritance, priority rights to
transfer for collective members, and women's rights, will also be
necessary. RLCL Article 64 states that ``[T]he Standing Committee of
the People's Congress of each province, autonomous region and province-
level municipality may promulgate implementing regulations in
accordance with this law and the practical situation in its
administrative jurisdiction.'' Legislative departments at the province
level should act quickly to promulgate such rules.
2. Conduct a comprehensive publicity campaign
It is vital that the law's adoption be followed by a detailed,
repetitive publicity campaign targeted at educating both local
officials and farmers regarding the new rules. A variety of media
should be used, but the two 17-province surveys on the implementation
of 30-year land use rights under the LML indicate that television is
the most effective medium for communicating to farmers. The subjects
covered by the publicity campaign should include rules concerning land
readjustments, the newly detailed rights to conduct transaction, the
existence of the law's vital provisions on dispute resolution and
methods for employing them, and the nature of women's rights.
3. Monitor implementation
A comprehensive program should be established to monitor
implementation of the new rules, including both direct field interviews
with farm households (using Rapid Rural Appraisal methods) and an
updated random sample questionnaire survey to be conducted using
methodology that provides a highly detailed and accurate picture of
implementation nationwide. The results should be quickly conveyed to
policymakers at both the provincial and national levels, to provide
them with information concerning the extent and nature of
implementation of the new law, and to help them in developing targeted
solutions to problems relating to implementation that are discovered as
a result of monitoring efforts.
4. Establish telephone hotlines to receive and process farmer
complaints
Closely related to the monitoring function, the central government
should establish a system for receiving and processing farmers
complaints related to illegal land readjustments and other violations
of farmers' land-use rights. The establishment of telephone hotlines at
the province level would be a simple, low-cost, yet effective way to
meet this objective. Such hotlines have been widely employed in urban
areas of China, and effective models could easily be adapted for use in
the countryside.
5. Improve dispute resolution mechanisms
The RLCL provides an extensive set of tools to ensure that farmers
in fact will enjoy long-term and secure land-use rights, and that the
rule of law with respect to rural land issues will be effectively
implemented in the countryside. Initially, the content of these
provisions should be widely publicized to farmers. Then, as experience
is gathered in the early months of actual implementation, TV programs
may be used to publicize the most common kinds of violations found, and
actual cases where the law's provisions concerning penalties and
remedies have been enforced. The establishment of new dispute
resolution mechanisms, such as the specialized land contract
arbitration body envisioned in RLCL Article 51, and the improvement of
existing judicial and administrative dispute resolution mechanisms can
only be viewed as a long-term objective, but will be crucial to the
success of these reforms and the development of the rule of law in
rural China.
6. Provide legal aid services to farmers
At least pilot projects should be developed to provide legal-aid
services to farmers in order to protect and vindicate their land-use
rights under the RLCL. The functions of legal-aid personnel should
include representing farmers before the Peoples' Court or before an
arbitration body, as well as in consultation or mediation efforts that
may precede litigation or arbitration where the farmer so desires (see
Article 51). Legal-aid personnel can also serve as a source of
publicity and information as to farmers' rights which may be more
detailed than that provided through TV or other general media.
7. Improve registration of land-use rights and transfers
Another subject on which at least pilot projects should probably be
undertaken is the registration of land-use right certificates and of
the transfers of such land use rights for periods of 1 year or more.
Currently, land use right contracts issued to farm households are only
registered at the time of their issuance (if at all), with no
subsequent updating of records upon transfer, death of household
members, land readjustment, or other changes. Both significant
financial outlays and extensive training of personnel will be required
to meet the long-term goal of developing an effective rural land right
registration system. Initial pilot projects related to
registration should be focused in locations where there has been strong
implementation of farmers' land-use rights, and the preconditions for
reliable longer-term transfers of such use rights from one farm
household to another farm household have therefore been established.
8. Train local officials
Many of the measures and activities described above involve the
need to train
personnel and local officials with respect to the provisions of the
RLCL and their implementation. Such training will be needed for ``front
line'' officials engaged in implementation both in the collective
entity and at levels above the collective, and for specialized
officials who may play a particular role in implementation, including
hotline operators, Peoples' Court judges, arbitrators, legal-aid
providers, and
registration officials.
implications for u.s. policy
Land reforms that provided secure, individual tenure rights for
small family farmers were part of the U.S. policy agenda in post-war
Asia. In Japan, Taiwan, and South Korea, these land reforms played a
crucial role in achieving grass-roots development and the stabilization
or evolution of democratic institutions. They were also a vital part of
the economic transformations that made these three societies strong and
reliable economic and political partners of the United States.
The adoption of the Rural Land Contracting Law presents a new
opportunity for U.S. policy to engage with China to promote the
importance of the respect for private property and the rule of law in
China's development process. Among other
initiatives, the U.S. Government should provide continuing and
increased support for rule of law programs in China that may not
necessarily be directly linked to rural land reforms, but will help to
ensure their long-term success. These programs include exchanges
between U.S. and Chinese legislators and legal scholars, training for
Chinese judicial and administrative personnel, and funding for the
establishment of legal aid services in China.
______
Prepared Statement of James A. Dorn
february 3, 2003
Good afternoon. Thank you for the opportunity to address the issue
of property rights in China, especially the pace of enterprise
privatization, capital-market liberalization, and the implications of
ownership reform for human rights and civil
society.
The primary goal of the fourth generation of leaders in China is to
maintain strong economic growth and increase prosperity throughout
China. To do so, they will have to confront a number of serious
problems, particularly the debt-ridden financial system and the
inefficiency of state-owned enterprises (SOEs). China's big four state-
owned banks are technically insolvent, with nonperforming loans (NPLs)
estimated to range from 25 to 40 percent or more of outstanding loans.
SOEs account for more than two-thirds of all bank loans but produce
less than one-third of the total value of industrial output. That
massive waste of capital under China's
socialist market economy cannot be stopped without fundamental reform--
in particular, privatization and the rule of law.
Pumping more funds into state-owned banks to keep them afloat will
only postpone the day of reckoning and increase the overall cost of
reform. Likewise, turning SOEs into shareholding enterprises, with
government as the major owner and with most shares being nontradeable,
will not transform those firms into profitable entities. History has
taught us that without private ownership and the threat of bankruptcy,
there is little incentive to reallocate capital to its most highly
valued uses. Until State banks and enterprises are fully privatized and
effective limits are placed on the power of government, waste and
corruption will continue.
China's largest SOEs remain under firm control of the government,
but many medium- and small-sized SOEs have been restructured. Moreover,
since 1978, Beijing has allowed experimentation with different forms of
ownership, and there are now more than 20 types of ownership, including
private firms, collective firms (e.g., township and village
enterprises, many of which are private), joint stock companies, and
foreign-funded enterprises. The exact scope of the private sector is
difficult to calculate because private firms often ``wear a red hat''
and conceal their true identity in order to gain access to State bank
loans at subsidized interest rates and other government favors. A
reasonable estimate is that the private sector now
accounts for about 33 percent of GDP.
The great success of private and cooperative enterprises over the
past 25 years--they now account for more than two-thirds of the value
of industrial output--has resulted in official recognition of the
importance of the nonstate sector as an engine of economic growth.
Article 11 of the Chinese Constitution, amended in 1999, now reads:
``Individual, private and other non-public economies that exist within
the
limits prescribed by law are major components of the socialist market
economy.''
Private firms were illegal in 1978, and SOEs dominated the economic
landscape. Today there are nearly 2 million private enterprises
employing more than 24 million workers, and the number of private
enterprises is growing by more than 30 percent per year. In Shanghai
and other coastal cities, SOEs are becoming small islands in a sea of
private enterprise. Much of the growth of the private sector has been
spontaneous, in the sense that privatization took place without central
direction as opportunities for trade increased, especially in the
special economic zones (SEZs). Local jurisdictions were allowed to
experiment with new ownership forms, and, when they were successful,
others sought to imitate that success. Only later did the central
authorities put their stamp of approval on the institutional
innovations.
The growth of private enterprise has occurred despite the lack of
transparent legal title and restrictions on access to State bank
credit. Informal private capital markets have evolved to fund the
private sector, and overseas Chinese have been an important source of
investment funds. The strong performance of provinces with greater
economic freedom, such as Fujian, Guangdong, and Zhejiang, has created
a new middle class and a demand for better government and more secure
property rights.
Capitalists are now free to join the Chinese Communist Party, and
several well-known private entrepreneurs are already members of the
National People's Congress. As more entrepreneurs join the party, there
will be mounting pressure to change the status quo. At the 16th
National Congress of the CCP in November 2002, President Jiang Zemin
gave a clear signal that the private sector is an important part of
China's future. He said, ``We need to respect and protect all work that
is good for the people and society and improve the legal system for
protecting private property.'' The party charter now includes ``The
Three Represents''--a doctrine that commits the party to embrace ``the
fundamental interests of the majority of the people,'' not just the
proletariat.
Chinese citizens can now own their own businesses, buy shares of
stock, travel widely, hold long-term land use rights, own their homes,
and work for nonstate firms. The depoliticization of economic life is
far from complete, but the changes thus far have created new mindsets
and expanded individual choice. The many restrictions and human rights
violations that remain should not detract from the progress China has
made since 1978 in raising the standard of living for millions of
people and giving rebirth to civil society.
China's accession to the World Trade Organization, in December
2001, has
resulted in a long-term commitment to economic liberalization and legal
reform. The policy of engagement is working to change China's legal
system and to better protect property rights and, hence, human rights.
At the 16th party congress, Jiang called for improving markets
(including ``the capital market'' and ``markets for property rights''),
abolishing ``trade monopolies and regional blockades,'' and
deregulating interest rates. The outgoing leader of the world's largest
communist party told the new leaders, ``We must give full scope to the
important role of the non-public
sector.''
That rhetoric should be taken seriously. The nonstate sector is
providing a safety net for unemployed workers from SOEs. As
restructuring takes place, China will need a rapidly growing private
sector to maintain strong economic growth. Strengthening the private
market sector will require a clear commitment by the national
government to giving equal protection to private property rights and to
liberalizing capital markets so that entrepreneurs have access to
domestic capital that is now locked up in inefficient SOEs. Real
reform, however, will require more than ``revitalizing'' SOEs and
``recapitalizing'' state-owned banks; it will require a firm commitment
to widespread privatization of state-owned assets. Until the government
and party are shut out of banks and enterprises by privatization,
corruption will continue and NPLs will mount. What China needs is real,
not pseudo, capital markets with freely tradeable shares, liquidity,
and trust.
Markets work best when property is fully protected by the rule of
law and people are free to choose. We should not forget the words of
James Madison, the chief architect of the U.S. Constitution: ``The
personal right to acquire property, which is a natural right, gives to
property, when acquired, a right to protection as a social right.''
China is beginning to recognize the right to private property, but only
as a right bestowed by the State not as a natural (inalienable) right.
Consequently, private property can never be secure until there is a
fundamental revolution in political philosophy that places the
individual, not the state, at the center of the moral universe and
limits the power of government.
Recent changes, however, are encouraging:
Qualified foreign institutional investors will be
allowed to buy equity stakes in SOEs through the A-share (local
currency) stock exchanges in Shanghai and Shenzhen;
Strategic foreign investors will be allowed for the
first time to buy the nontradeable shares of listed and
unlisted SOEs;
Foreign joint-venture investment funds will begin
operation;
Private commercial banks are being established in
rural areas;
China's first civil code has been drafted, including
an entire chapter dedicated to the protection of private
property rights;
China's top judge, Xiao Yang, president of the Supreme
People's Court, has called for safeguarding private property
rights and told a national conference in Beijing: ``Efforts
should be made to enhance awareness of the need for equal
protection of all subjects in the marketplace.''
Farmers will have more secure land-use rights as a
result of the Rural Land Contracting Law adopted in August
2002;
Shenzhen, the first SEZ in China, is embarking on a
bold political experiment, with Beijing's approval, to limit
the power of the local cadres, introduce checks and balances,
and cultivate the rule of law.
A new think tank devoted to studying political reform
is planned for the Central Party School in Beijing;
Numerous rules and regulations not in conformity with
WTO norms are being scrapped and there are plans to streamline
the central government's complex bureaucracy.
All those reforms are being driven by the need to be competitive in
an increasingly global economy. To attract and retain capital in the
future, China will have to continue to improve its institutional
infrastructure.
As China liberalizes its financial sector, removes remaining
barriers to trade, and improves its legal structure, the range of
choice for millions of Chinese will increase. That increase in economic
freedom is sure to have a positive effect on creating what Liu Junning,
an independent scholar in Beijing, has called ``a constitutional order
of freedom in China.''
The United States can help transform China by continuing the policy
of engagement, ensuring that China honors its WTO commitments as well
as its bilateral trade agreement with the United States, and adopting a
more liberal visa policy that permits Chinese students and scholars--
especially those in law, economics, and the humanities--to learn about
and experience firsthand a free society.
recommended readings
Business Weekly (2002) ``State-Owned Firms Open Up.'' November 19-
25: 3. (Published by China Daily.)
Carpenter, T. G., and Dorn, J. A. (2003) ``Relations with China.''
In Cato Handbook for Congress: 108th Congress, 577-85. Washington: Cato
Institute.
Dorn, J. A. (2002) ``Liberalizing China's Financial Sector.''
Commentary, ChinaOnline (www.chinaonline.com/commentary--analysis/
C02120636.asp).
--(2002) ``The Need to Engage China.'' Asian Wall Street Journal, 9
October: A11.
--(2003) ``The Primacy of Property in a Liberal Constitutional
Order: Lessons for China.'' The Independent Review 7(4) (Spring): 485-
501 (forthcoming).
Jefferson, G. H., and Rawski, T. G. (1995) ``How Industrial Reform
Worked in China: The Role of Innovation, Competition, and Property
Rights.'' In Proceeding of the World Bank Annual Conference on
Development Economics, 129-70. Washington: World Bank.
Jiang, Z. (2002) ``Full Text of Jiang Zemin's Report at the 16th
Party Congress.'' 16th National Congress of the Communist Party of
China, 2002 (www.china.org.cn/english/features/49007.htm).
Kynge, J. (2003) ``Bank Reform May Give China's Farmers Their Place
in the Sun.'' Financial Times, 10 January.
--(2003) ``Chinese Politics.'' Financial Times, 13 January: 9.
McGuckin, R. H., and Dougherty, S. M. (2002) ``Restructuring
Chinese Enterprises: The Effects of federalism and Privatization
Initiatives on Business Performance.'' Research Report R-1311-02-RR.
New York: The Conference Board.
Meng, Y., and Shao, Z. (2002) ``Private Property Owners Win with
Reform.'' China Daily, 24 December: 3.
Oi, J. C., and Walder, A. G., eds. (1999) Property Rights and
Economic Reform in China. Stanford, Calif.: Stanford University Press.
People's Daily (2002) ``Chinese Private Economy Seeking Wider
Development Space.'' 7 April.
Pilon, R. (1998) ``A Constitution of Liberty for China.'' In J. A.
Dorn (ed.) China in the New Millennium: Market Reforms and Social
Development, 333-53. Washington: Cato Institute.
Restall, H. (2002) ``After the Party.'' Wall Street Journal, 19
November: A24.
Shao, Z. (2002) ``Justice for All: State and Private.'' China
Daily, 23 December: 1.
Slater, D. (2002) ``Opening the Gate.'' FinanceAsia (November): 34-
37.
Tsai, K. S. (2002) Back-Alley Banking: Private Entrepreneurs in
China. Ithaca, N.Y.: Cornell University Press.
______
Prepared Statement of Mark Allen Cohen
Thank you for inviting me here today to address the issue of
intellectual property protection in China, particularly its status as a
form of ``property right.''
Recognizing the Commission's role in monitoring compliance with
human rights and rule of law in its implementing legislation, as well
as its continued interested in WTO matters, the focus of my brief
presentation will be on three topics: (a) the current State of
protection of U.S. intellectual property rights (IPR) in China; (b)
intellectual property (IP) and the rule of law in China; and (c) U.S.
Government
efforts to promote IP protection and rule of law in China.
I would like to say at the outset, that the comments I am providing
today represent my own opinion on these important issues. They should
not be considered as an official statement of U.S. Government policy.
Some of the issues, such as the relationship between intellectual
property rights in China and human rights or rule of law, are matters
of long standing personal interest to me.
i. protection of u.s. intellectual property rights in china
The Office of the U.S. Trade Representative (USTR) noted in its
December 11, 2002 Report to Congress on China's WTO Compliance (the
Report), that apart from certain systemic issues, IP was one of three
issues that ``generated significant problems and warranted continuing
scrutiny''. The Report further stated:
China did make significant improvements to its framework of
laws and regulations. However, the lack of effective IPR
enforcement remained a major challenge. If significant
improvements are to be achieved on this front, China will have
to devote considerable resources and political will to this
problem, and there will continue to be a need for sustained
efforts from the United States and other WTO members.
A key challenge for IP in China remains enforcement. USTR also
noted:
Although China has revised its IPR laws and regulations to
strengthen administrative enforcement, civil remedies and
criminal penalties, IPR violations are still rampant. IPR
enforcement is hampered by lack of coordination among Chinese
government ministries and agencies, local protectionism and
corruption, high thresholds for criminal prosecution, lack of
training and weak punishments. As explained by one trade
association, ``[e]ffective enforcement against [IPR]
infringement in China is universally recognized as the chief
concern of [IPR] rights-holders, as piracy rates in China in
all areas, including copyright, trademark and patents,
continues to be excessively high.''
One may legitimately wonder if this isn't ``deja vu all over
again.'' This year in fact marks the 100th anniversary of the first
bilateral agreement regarding protection for intellectual property
rights, the ``Treaty for Extension of the Commercial
Relations Between China and the United States'', (reprinted in Treaties
and Agreements With and Concerning China 1894-1919 (J.V.A. MacMurray
ed., 1921)). This treaty granted copyright, patent, and trademark
protection to Americans in return for reciprocal protection to the
Chinese. Despite the 1903 treaty, China did not introduce a substantive
copyright law until 1910, a substantive patent law until 1912, and a
substantive trademark law until 1923. Moreover, although these laws
appeared on paper, they offered foreigners very limited intellectual
property protection, and IPR issues continued to persist into the end
of the Qing Dynasty, into the Republican period, in later dealings with
Taiwan, and later in our recognition of the PRC.
During the past few years, we have seen a quickening of the pace in
China toward conformity of its IPR system with international standards.
Since WTO accession, China has ambitiously promulgated, revised or
annulled a large corpus of legislation, regulations, rules, etc. Yet
despite these legislative efforts, U.S. industry is
currently facing daunting challenges in China's market to combat these
illegal
operations.
U.S. copyright industries report that they face piracy rates of
over 90 percent in the Chinese market. They are suffering losses of
approximately four million USD per day due to piracy. The International
Intellectual Property Alliance details some of these piracy rates for
2001 in its Section 301 submission to USTR as 88 percent in motion
pictures; 90 percent in sound recordings/musical compositions, 93
percent in computer software, and 92 percent in entertainment software,
for total losses of $1,506.6 million.
Economic analysis can be easily supported by sight observations.
Counterfeit and pirated goods continue to be omnipresent in China. They
are sold at the Xiushui Market, near the U.S. embassy, in the Luowu
market in Shenzhen, and other prominent venues, frequently in view of
local authorities. Some industry officials
estimate that 15-20 percent of the products sold under their labels are
counterfeit. For certain products, it may be difficult in local markets
to purchase legitimate goods. Pirated music, movies, motion pictures,
video games and books have displaced legitimate sales, frequently
before the legitimate product can achieve legal entry into the Chinese
market. Pictured below is such a street near the Xiushui market, where
a street dealer in DVDs and CDs may frequently be seen.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
China's role as a manufacturer and consumer of pirated and
counterfeit goods not only poisons the Chinese market for U.S.
products. It affects our own market and third country markets. This was
most evident in the mid-1990s, when China's exports of CD-ROMs of music
and software were displacing U.S. exports, especially in Asia. After
extensive bilateral discussions and agreements on intellectual property
rights, China reduced its exports of pirate CD-ROMs.
For 4 out of the past 5 years, mainland China (not including Taiwan
or Hong Kong) has been the top exporter of pirated and counterfeit
goods to the United States, as measured by U.S. Customs statistics. The
following are Fiscal Year 2002 seizure statistics from U.S. Customs:
------------------------------------------------------------------------
Domestic Value
Trading Partner (USD) Percent of Total
------------------------------------------------------------------------
China........................... 48,622,997 49.
Taiwan.......................... 26,507,356 27.
Hong Kong....................... 3,959,258 4.
Pakistan........................ 2,362,130 2.
Korea........................... 1,825,265 2.
Indonesia....................... 1,361,101 1.
Switzerland..................... 1,274,645 1.
France.......................... 836,111 Less than 1.
Malaysia........................ 721,979 Less than 1.
Kazakhstan...................... 671,900 Less than 1.
All other countries............. 10,847,599 11.
Total FY02 Domestic Value....... 98,990,341
Number of Seizures.............. 5,793
------------------------------------------------------------------------
According to 2002 data, China accounted for 26 percent of U.S.
Customs seizures and 49 percent of the value. Compared to fiscal year
2001, the domestic value of goods coming from China increased by 83
percent and the number of seizures increased by 84 percent. In only 1
year of the past five, China slipped to the number 2 position in U.S.
seizures.
U.S. statistics however do not document the full extent of harm
caused by Chinese exports. Counterfeit goods in particular are exported
throughout the world, depriving U.S. exporters of their legitimate
markets. Chinese counterfeits and pirates are also a leading source of
seizures in the European Union, Japan and many other countries.
Industry reports that Chinese exporters have produced counterfeit
aircraft parts, counterfeit car parts, and indeed whole counterfeit
cars and motorcycles. Occasionally Chinese products may also be
repackaged and sold by illegitimate distributors. Many of these cases
are multinational in nature and can implicate U.S. companies or
individuals. For example, in one major case prosecuted by the U.S.
Department of Justice, the U.S. distributors of Long March
Pharmaceuticals (Shanghai) had repackaged a bulk pharmaceutical
product, gentomicin sulfate, not approved for the U.S. market for
distribution in the United States. In April 1997, the distributor was
fined a total of $925,000, and its owner was sentenced to 2 years in
prison and fined a total of $75,000 for illegally importing counterfeit
pharmaceuticals from China and laundering money in a kickback scheme.
According to
testimony before the House Commerce Committee, six patients in Denver
alone suffered toxic reactions. See, e.g., statement of Statement of
Patricia L. Maher, Deputy Assistant Attorney General, Civil Division,
U.S. Department of Justice Before the Subcommittee on Oversight and
Investigations of the Committee on Commerce, U.S. House of
Representatives, at http://usinfo.state.gov/regional/ea/iprcn/
20001003.htm; see also http://www.usdoj.gov/opa/pr/1997/April97/
146civ.htm; http://energycommerce.house.gov/107/hearings/
06072001Hearing267/print.htm (Hearing Before the Subcommittee on
Oversight and Investigations of the Committee on Energy and Commerce,
House of Representatives One Hundred Seventh Congress, First Session,
June 7, 2001, Serial No. 107-30).
The challenges are indeed enormous. As IP crime extends beyond
national borders, the cooperation of Chinese colleagues in law
enforcement and in IP protection is critical. Not only are the
commercial losses unsustainable in an era of WTO accession and mounting
trade imbalances, but IPR crimes also feed organized crime and can
support terrorist elements. As recently documented by Jeffrey Goldberg
in ``Party of God'' in the New Yorker (October 28, 2002), in some
countries, such as Paraguay, Chinese counterfeit goods appear to be
marketed through Hezbollah and other groups. See also Rosyln A. Mazer,
``From T-Shirts to Terrorism--That Fake Nike Swoosh May Be Helping to
Fund Bin Laden's Network'' Washington Post,
September 30, 2001, at page Page B2.
What does the future hold? History shows us that China has a long
tradition of being a major innovator of new technologies, such as
gunpowder, the compass, irrigation techniques, and movable type.
Chinese inventiveness was well documented by former British Consul in
Chongqing, Prof. Joseph Needham, in his monumental Science and
Civilization in China. Looking to the future, China has indeed
committed significant resources to revamping its laws, establishing a
specialized IP court system, implementing specialized administrative
agencies with power to fine infringers, and enacting and publicizing
laws or measures that may extend beyond TRIPS minima.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
There are many signs that intellectual property is becoming more
important to China. In 2002, for example, China became the leading
country in the world for receiving new trademark applications. In 2001,
there were nearly 10 times as many Chinese applications for trademarks
in China compared to foreign (229,775/23,234). Markets for legitimate
applications of intellectual property are beginning to grow. Although
imperial China lacked a system of IPR, IP protection is not completely
anathema to Chinese culture. Taiwan, for example, was the third largest
foreign region applying for patents in the United States in 2001 (after
Japan and Germany).
The prospects are not, therefore, completely bleak. Although piracy
is an enormous challenge, Chinese and foreign companies are investing
in software and scientific development in China, frequently through
science and technology parks, such as those administered by China's
Ministry of Science and Technology. Chinese
authorities also recognized that they are being deprived of tax revenue
through
piracy and counterfeiting, and that these activities erode respect for
rule of law. Chinese consumers complain at least as bitterly as
American companies of fake and shoddy counterfeit goods. Criminal
prosecutions, although small, are also increasing. China's leadership
has also taken note of many of the problems, although the focus
primarily tends to be in counterfeiting and not in copyright where
Chinese industry has a smaller interest. Open markets and deregulation
have the unfortunate side effect of creating greater opportunities for
counterfeiters and pirates to ply their wares. They may respond more
quickly than police or government agencies that are not as well
prepared for these types of crimes.
To address wide scale piracy and counterfeiting, a multi-faceted
approach--including criminal law, civil law, government, business and
non-profit organizations, as well as public outreach and international
cooperation--is required. Piracy and counterfeiting are worldwide
problems and international cooperation remains critical.
ii. intellectual property and rule of law efforts
I believe that intellectual property is the most vulnerable to
ineffective legal systems of all such property rights. Being
intangible, it is a right that is defined by law and easily undermined
by lawlessness.
It is important to recognize that China does not lack for
intellectual property laws. What China mostly needs is deterrent
enforcement of its laws. China has a vast administrative apparatus
which levies fines for patent, trademark, copyright, semiconductor
layout design, trade secret, trade dress, defective products, illegal
use of the Internet, counterfeit tobacco, counterfeit drugs, etc., all
of which implicate IPRs. There are national and local laws, rules and
regulations on IPRs. Courts and the procuratorate may issue their own
interpretative rules. Agencies may issue their own guidance, sometimes
in conjunction with other agencies. A frequent issue in dealing with
IPRs in China is determining what national or local law, rule,
regulation, interpretation, decision, guidance, notice, decree, order,
interpretation etc.
applies and is in actual effect.
On the enforcement side, the lion's share of activity is conducted
by administrative agencies which have enforcement authority. According
to China's TRIPS Council submission, for example,
There were 41,163 trademark law violation cases in 2001.
Infringers were ordered to pay the right owners damages of RMB
3,343,400 in total and there were 86 cases transferred to
criminal procedures. In respect of enforcement of the Copyright
Law, in 2001 copyright administrative authorities accepted
4,416 cases in total, among which 4,306 cases have concluded
with rulings. Among those concluded, 3,607 cases ended with
imposing a fine upon the infringers; 633 cases ended with
mediation; and 66 cases were transferred to criminal
procedures.
By comparison, the actual number of civil cases was far smaller,
and civil cases involving foreigners was far smaller still. In fact
criminal IPR cases investigated under China's criminal copyright and
trademark provisions may be a smaller
number than those that are prosecuted in the United States, where
piracy and counterfeiting rates are less.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Respect for intellectual property rights, the most vulnerable of
property rights, promotes respect for rule of law and promotes
development of accountable administrative, civil and criminal legal
systems. While it may be theoretically possible to have a legal system
that does not recognize intellectual property rights, I do not believe
it is possible to adequately protect intellectual property rights in
the long run without an effective and fair legal system. In the past
certain U.S. efforts regarding intellectual property rights protection
were criticized by some academics, such as Prof. William Alford, as
``devot[ing] considerable diplomatic capital to secure concessions that
fail meaningful[ly] to speak to the chief impediments to the
development in China of respect for legality and, through it, of a
greater commitment to the
protection of intellectual property rights.'' (To Steal A Book Is An
Elegant Offense, p. 118). I believe such criticism is misguided.
The relationship between IP and rule of law was recently
underscored at a roundtable on intellectual property rights held at the
U.S. Embassy in Beijing in October 2002, where Ambassador Randt,
addressing industry concerns over national treatment and corruption in
China's IPR system, clearly stated that the issues are intertwined in
the Embassy's mission to promote both human rights and protect U.S.
intellectual property rights. Industry also recognizes that without
effective rule of law, intellectual property rights will not be
accorded the full protections they are due. As an industry spokesman
noted in hearings held by USTR in preparation of the December 11, 2002
Report:
[W]e all recognize that this is a process that will take time,
and patience. The institutional, legal, and regulatory changes
demanded of the Chinese are extraordinary, reaching in most
corners of their economy, and complicated further by a highly
decentralized administrative structure covering a vast, diverse
country.
The TRIPS agreement itself, as well as the Working Party Report of
China's WTO commitments, contains the seeds of these rule of law
issues, in such key issues as transparency of rulemaking and judicial
decisions, and in notions of proportionality of criminal offenses.
These issues in fact, are a key part of this Commission's mandate. See
P.L. 106-286, Sec. 302(c) 2-4, 6. Legal systems that administer light
administrative penalties against IP criminals, while imposing harsh
sentences on young people distributing DVDs on bicycles, corrode
respect for rule of law and for IPR. While campaigns against piracy can
result in focused gains for IPR, long-term systemic changes likely
depend on an effective legal system. Proportional penalties imposed
against violators by an independent judiciary, serve rule of law and
IPR needs. By addressing issues such as rights of accused in criminal
IPR cases, or the need for administrative transparency in rulemaking
and review of patent and trademark applications, both rule of law and
IPR protection objectives are served.
As we seek more effective enforcement of China's IPR laws, civil,
criminal or administrative, we must also be mindful of other U.S.
Government policy goals in
promoting a legal system that meets international standards of
fairness. These goals are complementary, not inconsistent. Effective
law enforcement can be a double-edged sword. With China's increase in
domestic rights holders, there is a growing likelihood that U.S.
companies may find themselves on the wrong end of
enforcement actions, frivolous or otherwise. Thus, it is in the
interest of the U.S. Government, as well as U.S. companies doing
business in China, to promote the development of a legal system in
China that fairly protects the rights of all parties and has reliable
fact-finding processes.
In discussing enforcement of intellectual property rights with
Chinese colleagues I have been especially heartened by their interest
in such matters as: sentencing guidelines for the proportionate and
predictable determining of criminal penalties; discovery and pre-trial
exchange of information; role of specialized courts in intellectual
property enforcement; authority of courts to implement international
obligations, such as the TRIPS agreement or to ``fill in the gaps'' in
administrative rulemaking; standards for issuing preliminary
injunctions or ex parte measures; protections against abuse of
intellectual property rights, or against abuse of civil or
administrative process; responsibility of lawyers to the judiciary; the
role of lawyers in protecting confidential information in patent or
trade secret cases; increasing technical legal exchange; the role of
intellectual property in promoting technology development and transfer;
protecting content over the Internet and protecting computers against
hacking; ensuring that local administrative agencies and their
enforcement efforts comply with national standards; and related issues.
I can also say on a personal note, that Chinese counterparts
respond favorably to constructive criticism of their IPR system, and
that we have an obligation on behalf of our rights holders and in the
interest of the Chinese people to constructively raise these important
issues at every relevant venue.
iii. usg efforts to promote intellectual property protection
Many industry representatives would like to see a more active U.S.
presence on intellectual property matters in China. There have been
many such efforts under way by both the private sector and the
government. All major U.S. IP trade associations are active in China to
some extent. Many NGOs which have a general rule of law orientation
have also recognized the intersection between IPR and rule of law
issues. Franklin Pierce Law School ran a summer institute on IPR with
some USG assistance at Tsinghua University this past summer. George
Washington University Law School and John Marshall Law School also have
extensive contacts with Chinese IPR students and experts. The Quality
Brands Protection Committee, the United Nations Development Program,
the copyright industries such as the Motion Pictures Association, and
others have also run successful IPR programs. There may be many other
programs of which I am not as aware. I have already mentioned
Ambassador Randt's very successful roundtable in which various industry
groups raised their concerns over China's IPR environment; the Embassy,
USTR and other agencies, are also involved in other efforts to enhance
the IPR position in bilateral discussion. The Embassy in Beijing has
also recently developed an action plan to help address IPR issues,
which should help to more successfully protect and promote US interests
in China.
Among recent U.S. Government programs, the USPTO, in conjunction
with the International Intellectual Property Institute, George
Washington University Law School and the Court of Appeals for the
Federal Circuit hosted a number of Chinese judges this past summer at a
conference on capacity building for specialized IP courts. The Commerce
Department ran two IPR training programs last year in China, as well as
a program on technology transfer, in addition to hosting Chinese
delegations on various matters, including several from the Shanghai WTO
Consulting Center or in meetings of the APEC/Intellectual Property
Experts Group or at WIPO. I was privileged to be the guest of the Japan
Patent Office this past
December as a speaker in an IPR enforcement program it ran in Beijing.
We are looking for further cooperation with other governments and
with China on such programs. Where circumstances have permitted, we
have also reached out to localities, to universities and educational
institutions, and to Chinese entrepreneurs. Last year, I participated
in a successful program led by Deputy Under Secretary of the Technology
Administration of the Department of Commerce Ben Wu on IPR with the
science and technology parks administered by the Ministry of Science
and Technology, which entailed reaching out to these groups.
We have the resources to deliver targeted and effective training
programs. There are a number of Chinese speaking IPR experts in the
U.S. Government and the
private sector who are familiar with China's legal system and I
believe, have been quite successful in building bridges by delivering
programs quite effectively in Chinese without interpretation or
translation. This approach also helps to instill greater confidence and
respect from Chinese colleagues.
The European Union and European Patent Office ran a well-organized,
well-funded multi-year IPR capacity building program in China which
ended in December 2001. A focus of many industry groups and government
organizations recently has been criminal enforcement of intellectual
property, including cooperation with
Chinese counterparts. Certain rule of law initiatives, such as those
involving rulemaking transparency by the Asia Foundation have the
potential for clear collateral benefits to IPR protection. Because the
TRIPS agreement itself has certain transparency obligations, these
programs may also fruitfully begin their analysis by looking at
international obligations and practices for transparency in an IPR
context.
Because of the widespread deterrent effect which criminal
prosecution has, as well as the general lack of awareness of police
officers and prosecutors in many countries of IPR crimes, training law
enforcement officials, including Customs officials, is of increasing
importance to addressing the deficiencies in China's IP system and in
advancing the rights of Chinese and Americans alike. The U.S.
Sentencing Guidelines, for example, have elicited considerable interest
from Chinese colleagues as they provide a reasonable, fair and
proportional method for determining sentences for IPR infringers, which
is consistent with international practices, and I believe also
advances our needs for rule of law. It is likely this year that there
will be in increased emphasis on IPR criminal issues through training
and consultations with our Chinese counterparts.
Another emerging issue of some importance is protection of
copyright over computer networks, especially the Internet. As we all
know Internet usage in China is increasing dramatically. Copyright
protection over the Internet, as well as other forms of digital issues
involving copyright are important international challenges which all
countries are forced to deal with, and which increasingly require
international cooperation and coordination. While China's recently
revised copyright law and other regulations and interpretations do
consider the impact of the Internet on copyright protection, the U.S.
Government would like China to fully accede to the WIPO Internet
Treaties (WIPO Copyright Treaty and WIPO Performances and Phonograms
Treaty) and more vigorously coordinate and enforce copyright in digital
formats. I believe that training in this area, conducted by various
U.S. agencies (such as USPTO, the Copyright Office, and the Department
of Commerce) and
private organizations is also of considerable importance.
Thank you and I look forward to your questions.
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